As filed with
the Securities and Exchange Commission on June __, 2006

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 20-F

|                                            |                                                                                                   
|------------------------------------------- | --------------------------------------------------------------------------------------------------
|o                                           | REGISTRATION
  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
  THE SECURITIES EXCHANGE ACT OF 1934
|                                            |                                                                                                   
|OR                                         
|                                           
|x                                           | ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934          
|                                            |                                                                                                   
|For the fiscal year ended December 31, 2005
|                                           
|OR                                         
|                                            |                                                                                                   
|o                                           | TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934      
|                                           
|OR                                         
|                                           
|o                                           | SHELL COMPANY
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934   

For
the transition period from __________ to __________

Commission
file number 0-30862

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

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Israel(Jurisdiction of incorporation or
organization)

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

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

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:
26,335,003 Ordinary Shares, NIS 0.01 par value.

Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No x

If this report
is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Yes o     No x

Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes x     No o

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

|                            |                     |                        
|--------------------------- | ------------------- | -----------------------
|Large
  accelerated filer  ̈ | Accelerated filer  ̈ | Non-accelerated filer x

Indicate by check mark which financial statement
item the registrant has elected to follow: Item 17 o Item 18 x

If this is an
annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes   ̈  No  x

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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 4A  |  | Unresolved Staff Comments                                                      |  | 29   | 
|ITEM 5.  |  | Operating and Financial Review and Prospects                                   |  | 29   | 
|ITEM 6.  |  | Directors, Senior Management and Employees                                     |  | 38   | 
|ITEM 7.  |  | Major Shareholders and Related Party Transactions                              |  | 51   | 
|ITEM 8.  |  | Financial Information                                                          |  | 53   | 
|ITEM 9.  |  | The Offer and Listing                                                          |  | 54   | 
|ITEM 10. |  | Additional Information                                                         |  | 56   | 
|ITEM 11. |  | Quantitative and Qualitative Disclosures About Market Risk                     |  | 63   | 
|ITEM 12. |  | Description of Securities Other than Equity Securities                         |  | 63   | 
|ITEM 13. |  | Defaults, Dividend Arrearages and Delinquencies                                |  | 63   | 
|ITEM 14. |  | Material Modifications to the Rights of Security Holders and Use of
  Proceeds |  | 63   | 
|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 Accountant Fees and Services                                         |  | 64   | 
|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                                                           |  | 65   | 
|ITEM 18. |  | Financial Statements                                                           |  | 65   | 
|ITEM 19. |  | Exhibits                                                                       |  | 65   | 

- i -

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INTRODUCTION

Definitions

In this annual
report, unless the context otherwise requires:

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

Cautionary Statement Regarding
Forward-Looking Statements

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

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

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

PART I

|                        |                                                      
|----------------------- | -----------------------------------------------------
|ITEM 1.                 | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|                        |                                                      
|Not
  applicable.      
|                       
|ITEM 2.                 | OFFER STATISTICS AND EXPECTED TIMETABLE              
|                        |                                                      
|Not
  applicable.      
|                       
|ITEM 3.                 | KEY INFORMATION                                      
|                        |                                                      
|Selected Financial Data

The
selected financial data set forth in the following table are derived from our
consolidated financial statements, which were prepared in U.S. dollars and in
accordance with United States Generally Accepted Accounting Principles (U.S.
GAAP) and cover each of the years in the five-year period ended December 31,
2005. The selected consolidated financial data set forth below should be read
in conjunction with Item 5 of this annual report entitled Operating and
Financial Review and Prospects and our consolidated financial statements and
the notes to those financial statements included elsewhere in this annual
report.

1

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|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|--------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | ---- | - | ---------- | - | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                                                                        |  | Year ended December 31,                         |           
|                                                                                        |  |                                                 |           
|                                                                                        |  | 2001                                            |            | 2002 |   | 2003       |   | 2004 |            | 2005 |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |  
|                                                                                        |  | (In thousands, except share and per share data) |           
|                                                                                        |  |                                                 |           
|Consolidated Statement of Operations
Data:                                              |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Revenues                                                                                |  | $                                               | 24,852     |      | $ | 18,394     |   | $    | 34,421     |      | $ | 54,831     |  | $ | 73,777     |  
|Cost of revenues                                                                        |  |                                                 | 45,682     |      |   | 13,005     |   |      | 20,755     |      |   | 32,227     |  |   | 52,487     |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Gross profit (loss)                                                                     |  |                                                 | (20,830    | )    |   | 5,389      |   |      | 13,666     |      |   | 22,604     |  |   | 21,290     |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Operating expenses:                                                                     |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                       
|Research and development                                                                |  |                                                 | 15,215     |      |   | 10,101     |   |      | 9,346      |      |   | 9,772      |  |   | 10,713     |  
|Less: grants and participations                                                         |  |                                                 | 2,660      |      |   | 1,870      |   |      | 1,976      |      |   | 2,293      |  |   | 1,752      |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Research and development,
net                                                           |  |                                                 | 12,555     |      |   | 8,231      |   |      | 7,370      |      |   | 7,479      |  |   | 8,961      |  
|                                                                                       
|Selling and marketing                                                                   |  |                                                 | 13,908     |      |   | 10,202     |   |      | 9,967      |      |   | 11,841     |  |   | 13,629     |  
|                                                                                       
|General and
administrative                                                              |  |                                                 | 7,569      |      |   | 2,761      |   |      | 2,482      |      |   | 2,485      |  |   | 3,200      |  
|Restructuring and non-recurring
income                                                  |  |                                                 | 4,750      |      |   | 83         |   |      | (704       | )    |   | --         |  |   | --         |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Total operating
expenses                                                                |  |                                                 | 38,782     |      |   | 21,277     |   |      | 19,115     |      |   | 21,805     |  |   | 25,790     |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Operating profit (loss)                                                                 |  |                                                 | (59,612    | )    |   | (15,888    | ) |      | (5,449     | )    |   | 799        |  |   | (4,500     | )
|Financing income, net                                                                   |  |                                                 | 2,769      |      |   | 1,528      |   |      | 1,159      |      |   | 674        |  |   | 607        |  
|Other financial expenses - non-cash charge
  relating to puttable warrant               |  |                                                 | --         |      |   | --         |   |      | (3,432     | )    |   | --         |  |   | --         |  
|                                                                                       
|Other income                                                                            |  |                                                 | --         |      |   | --         |   |      | --         |      |   | 141        |  |   | 66         |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Net income (loss)                                                                       |  |                                                 | (56,843    | )    |   | (14,360    | ) |      | (7,722     | )    |   | 1,614      |  |   | (3,827     | )
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Basic net earnings (loss) per share                                                     |  | $                                               | (2.69      | )    | $ | (0.64      | ) | $    | (0.33      | )    | $ | 0.06       |  |   | (0.15      | )
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Diluted net earnings (loss) per share                                                   |  | $                                               | (2.69      | )    | $ | (0.64      | ) | $    | (0.33      | )    | $ | 0.06       |  |   | (0.15      | )
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Weighted average number of shares used in
  computing basic earnings (loss) per share   |  |                                                 | 21,099,336 |      |   | 22,375,939 |   |      | 23,063,160 |      |   | 25,066,937 |  |   | 26,137,121 |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  
|Weighted average number of shares used in
  computing diluted earnings (loss) per share |  |                                                 | 21,099,336 |      |   | 22,375,939 |   |      | 23,063,160 |      |   | 28,069,844 |  |   | 26,137,121 |  
|                                                                                        |  |                                                 |            |      |   |            |   |      |            |      |   |            |  |   |            |  

Amortization
of deferred stock compensation presented in previous years was reclassified in
the relevant expense line.

All
outstanding share options have been excluded from the calculation of diluted
net loss per share because all these securities are antidilutive for the
periods presented.

2

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| |                                                                                                           |  |                 |        |      |   |        |  |      |        |      |  
| | --------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | -
| |                                                                                                           |  | At December 31, |       
| |                                                                                                           |  |                 |       
| |                                                                                                           |  | 2001            |        | 2002 |   | 2003   |  | 2004 |        | 2005 |  
| |                                                                                                           |  |                 |        |      |   |        |  |      |        |      |  
| |                                                                                                           |  | (In thousands)  |       
| |                                                                                                           |  |                 |       
| | Consolidated Balance Sheet
Data:                                                                          |  |                 |        |      |   |        |  |      |        |      |  
| | Cash and cash equivalents, short and long
  term bank deposits, short and long term marketable securities |  | $               | 53,721 |      | $ | 43,173 |  | $    | 39,046 |      | $
| | Working capital                                                                                           |  |                 | 55,361 |      |   | 30,386 |  |      | 30,481 |      |  
| | Total assets                                                                                              |  |                 | 72,086 |      |   | 61,640 |  |      | 62,428 |      |  
| | Total long term debt                                                                                      |  |                 | 1,511  |      |   | 1,825  |  |      | 2,451  |      |  
| | Shareholders equity                                                                                      |  |                 | 60,619 |      |   | 49,266 |  |      | 48,683 |      |  

Risk Factors

Risks Relating to
Our Business

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

Although
we reported a profit in 2004, we incurred operating and net losses in every
fiscal year from our inception through 2003 and in 2005, and we may incur
losses in the future. We reported net losses of $56.8 million for 2001, $14.4
million for 2002, $7.7 million for 2003 and $3.8 million for 2005. As of
December 31, 2005, our accumulated deficit was $128.2 million. In order to meet
expanding sales and operations requirements, our expenses may increase. As a
result, net cash outflows may continue for the near term, and we may again
incur net operating losses. If our sales do not increase or if our expenses
increase at a greater pace than our revenues, continuing profitability may not
be achieved. We may not be able to sustain or increase profitability on a
quarterly or annual basis.

Our 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. Since 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.

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

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

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

In
certain fiscal quarters, relatively few customers have accounted for a large
percentage of our revenues. 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.

3

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

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

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

We
outsource the majority of our manufacturing processes to contract
manufacturers. We do not have long-term contracts with all of these contract
manufacturers. We have experienced and may in the future experience delays in
shipments from these manufacturers. This could delay product shipments to our
customers. Our manufacturers may themselves in the future experience other
manufacturing problems, including inferior quality and insufficient quantities
of components. These delays, quality problems and shortages could result in delayed
deliveries, penalties, equipment replacement costs and possible cancellation of
orders. If our manufacturers experience financial, operational, manufacturing
capacity or other difficulties, our supply may be disrupted and we may be
required to seek alternate manufacturers. We may be unable to secure alternate
manufacturers that meet our needs. Moreover, qualifying new manufacturers and
commencing volume production is expensive and time consuming. If we are
required or choose to change manufacturers, our sales and our customer
relationships may suffer.

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

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

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

4

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Our business depends
in part on original equipment manufacturers.

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

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

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

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

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

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

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

| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | develop and market new products in a timely manner to keep pace with
  developments in technology;
| |   |                                                                                                   
| |  | meet evolving customer requirements;                                                              
| |   |                                                                                                   
| |  | enhance our current product offerings; and                                                        
| |   |                                                                                                   
| |  | deliver products through appropriate distribution channels.                                       

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

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

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

5

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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 through
which we market and sell our products on an original equipment manufacturer
(OEM) basis. As a result, our competitors may be able to respond more quickly
to evolving industry standards and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products than we can. We expect to face increasing competitive pressures from
both current and future competitors. In addition, current and potential
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to gain market share rapidly. We also expect that industry consolidation will
increase competition.

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

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

We
participate in a highly volatile industry that is characterized by vigorous
competition for market share and rapid technological development. These factors
have resulted in aggressive pricing practices and growing competition both from
start-up companies and from well-capitalized telecommunication systems
providers. Manufacturers of digital microwave telecommunications equipment are
experiencing price pressure, which has resulted in downward pricing pressure on
our products. Our future profitability is dependent upon our ability to improve
manufacturing efficiencies, reduce costs of materials used in our products, and
to continue to introduce new products and product enhancements. Pricing is
affected by other factors as well, including but not limited to the size of a
given transaction, the geographic location of the customer, the specific
application for which products are sold, the channel through which products are
sold, the competitive environment and the results of negotiation. Any inability
by us to effectively respond to price pressures may harm our business,
financial condition and results of operations.

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

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

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

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

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

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

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

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

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

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

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

Due to 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 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;
| |   |                                                                           

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| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | burden of complying with a variety of foreign laws;                                             
| |   |                                                                                                 
| |  | general economic and geopolitical conditions, including inflation and
  trade relationships; and
| |   |                                                                                                 
| |  | payment delays and uncertainties.                                                               
| |   |                                                                                                 
| |  | war and acts of terrorism                                                                       

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

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

| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | volume and timing of product orders received and delivered during the
  quarter;                           
| |   |                                                                                                            
| |  | our ability, and the ability of our contract manufacturers, to
  manufacture products on time;             
| |   |                                                                                                            
| |  | our ability and the ability of our key suppliers to respond to
  changes made by customers in their orders;
| |   |                                                                                                            
| |  | timing of new product introductions by us or our competitors;                                              
| |   |                                                                                                            
| |  | changes in the mix of products sold by us;                                                                 
| |   |                                                                                                            
| |  | cost and availability of components and subsystems;                                                        
| |   |                                                                                                            
| |  | downward pricing pressure on our products;                                                                 
| |   |                                                                                                            
| |  | adoption of new technologies and industry standards;                                                       
| |   |                                                                                                            
| |  | competitive factors, including pricing, availability and demand for
  competing products;                  
| |   |                                                                                                            
| |  | ability of our customers to obtain financing to enable their purchase
  of our products;                   
| |   |                                                                                                            
| |  | fluctuations in foreign currency exchange rates;                                                           
| |   |                                                                                                            
| |  | regulatory developments; and                                                                               
| |   |                                                                                                            
| |  | general
  economic conditions in the United States and internationally.                                    

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

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

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

Following the implementation of SFAS No.
123R, we are required to record a compensation expense in connection with share
based compensation, and, as a result, our profitability may be reduced
significantly.

On December 16, 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.
123 (revised 2004), Share-Based Payment (SFAS 123R), which is a revision of
SFAS No. 123 originally issued in 1995 (SFAS 123). Generally, the approach in SFAS 123R is
similar to the approach described in SFAS 123. However, SFAS 123 permitted, but did not
require, share-based payments to employees to be recognized as an expense while SFAS 123R
requires, as of the first quarter of 2006, all share-based payments to employees to be
recognized as a compensation expense based on their fair values. SFAS 123R also revises,
clarifies and expands guidance in several areas, including measuring fair value,
classifying an award as equity or as a liability and attributing compensation cost to
reporting periods. The impact of adoption of Statement 123(R) cannot be predicted because
it will depend on levels of share-based payments granted in the future. However, had we
adopted this standard in prior periods, we may have recorded a material amount as
compensation expense, which would have had a material adverse effect on our profitability. In
addition, if as a result of SFAS 123R we would stop or limit the use of stock options as
an incentive and retention tool, it could have a negative effect on our ability to recruit
and retain employees.

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

As
a public company, we will be spending an increased amount of management time
and resources to comply with changing laws, regulations and standards relating
to corporate governance and public disclosure, including the Sarbanes-Oxley Act
of 2002, new Securities and Exchange Commission regulations and Nasdaq National
Market rules. Particularly, as a foreign private issuer, we will need to comply
with the provisions of Section 404 of the Sarbanes-Oxley Act no later than the
filing of our annual report on Form 20-F for the fiscal year ending December
31, 2006. Section 404 requires managements annual review and evaluation of our
internal controls over financial reporting, and possibly attestation of the
effectiveness of our internal controls over financial reporting by management
and our independent public accounting firm in connection with the filing of our
annual report on Form 20-F for the fiscal year ending December 31, 2006, and
with each subsequently filed annual report on Form 20-F. As part of this
process, we will need to document and test our internal control systems and
procedures and make improvements in order for us to comply with the
requirements of Section 404. This process will result in additional accounting
and legal expenses. In addition, if we are unable to implement required changes
within the time limit imposed by Section 404, it could result in our being
unable to obtain an unqualified report on internal controls from our
independent auditors.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The
wireless telecommunications industry is characterized by vigorous protection
and pursuit of intellectual property rights, which has resulted in often
protracted and expensive litigation. We are involved in discussions regarding
the licensing of the intellectual property of another party, but we are not
able to estimate the outcome of such discussions. We may in the future be
notified that we are infringing certain patent or other intellectual property
rights of others. 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 prohibit these employees
from directly competing with us or working for our competitors. However, under
current law or possible changes in the law, we may not be able to enforce these
agreements to their fullest extent. If we are unable to enforce any of these
agreements, our competitors may employ our former employees and benefit from
the expertise our former employees gained while working for us.

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

As
of March 31, 2006, Yehuda and Zohar Zisapel, who are brothers that do not vote
as a group and who do not have a voting agreement, beneficially owned, directly
or through entities they control, 23.2% of the outstanding ordinary shares. As
a result, these shareholders may control the outcome of various actions that
require shareholder approval. For example, they may be able to elect our
directors, delay or prevent a transaction in which shareholders might receive a
premium over the prevailing market price for their shares or prevent changes in
control or management.

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

We
do not believe that during 2005 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, subcontractors 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, including acts of terrorism
or any other hostilities involving or threatening Israel, the interruption or
curtailment of trade between Israel and its trading partners, a significant
increase in inflation or a significant downturn in the economic or financial
condition of Israel. Since October 2000, there has been an increase in
hostilities between Israel and the Palestinians, which has strained Israels
relationship with its Arab citizens, Arab countries and, to some extent, with
other countries around the world. 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.

Certain
countries, as well as certain companies and organizations, continue to
participate in a boycott of Israeli firms and others doing business with Israel
and Israeli companies. Thus there have been sales opportunities that we could
not pursue and there may be such opportunities in the future from which we will
be precluded. We are also precluded from marketing our products to certain of
these countries due to U.S. and Israeli regulatory restrictions. We believe
that the boycott has not had a material adverse effect on us. However, the
boycott, restrictive laws, policies or practices directed towards Israel or
Israeli businesses could adversely affect us.

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

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

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

A
majority of our revenues are in U.S. dollars, while a portion of our expenses,
principally salaries and the related personnel expenses for Israeli employees
and consultants, local vendors and subcontractors, are in NIS. As a result, we
are exposed to the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the dollar or that the timing of
this devaluation lags behind inflation in Israel. 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.

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

We
currently receive grants from the Government of Israel through the Office of
the Chief Scientist of the Ministry of Industry, Trade and Labor (the OCS)
for the financing of a significant portion of our research and development
expenditures in Israel. In 2003, 2004 and 2005, we received or accrued OCS
grants totaling approximately $2.0 million, $2.3 million and $1.8 million,
representing approximately 22%, 24% and 16%, 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. If we fail to comply with any of the conditions imposed by the OCS,
we may be required to refund any payments previously received, together with
interest and penalties.

In
addition, the terms of the OCS grants limit our ability to manufacture products
or transfer technologies outside of Israel, if such products or technologies
were developed using know-how developed with or based upon OCS grants. If we
elect to transfer more than an insubstantial portion of our manufacturing
processes to contractors outside of Israel, we may be required to pay higher
royalties to the OCS. Any non-Israeli who becomes a direct holder of 5% or more
of our share capital is generally required to notify the OCS and to undertake
to observe the law governing the grant programs of the OCS, the principal
restrictions of which are the transferability limits described above in this
paragraph.

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

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

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.

13

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We may be required to pay stamp duty on
agreements executed by us on or after June 1, 2003 and until January 1, 2006.
This would increase our expenses.

The
Israeli Stamp Duty on Documents Law, 1961 (the Stamp Duty Law), provides that
most documents signed by Israeli companies are subject to a stamp duty,
generally at a rate of between 0.4% and 1.0% of the value of the subject matter
of such document. De facto, it has been common practice in Israel not to pay
such stamp duty unless a document is filed with a governmental authority or
with the courts. As a result of an amendment to the Stamp Duty Law that came
into effect on June 1, 2003, the Israeli tax authorities have approached many
companies in Israel, including Ceragon, and requested the disclosure of all
agreements signed by such companies after June 1, 2003 with the aim of
collecting stamp duty on such agreements. Based on advice from Israeli counsel,
we believe that we may only be required to pay stamp duty on documents signed
on or after August 2004. However, we cannot provide any assurance that the tax
authorities or the courts will accept such view. Although at this stage it is
not yet possible to evaluate the effect, if any, on our business operations of
the amendment to the Stamp Duty Law, it could adversely affect our results of
operations.

Under
an order published in December 2005, the said requirement to pay stamp duty was
cancelled with respect to documents signed on or after January 1, 2006.

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.

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

The
Companies Law generally provides that a merger be approved by the board of
directors and by the shareholders by means of a majority of the shares present
and voting on the proposed merger. The Companies Law has specific provisions
for determining the majority of the shareholder vote. Upon the request of any
creditor of a party to the proposed merger, a court may delay or prevent the
merger if it concludes that there is a reasonable concern that, as a result of
the merger, the surviving company will be unable to satisfy its obligations to
creditors. In general, a merger may not be completed until the passage of
certain time periods. In certain circumstances an acquisition of shares in a
public company must be made by means of a tender offer. Lastly, Israeli tax law
treats some acquisitions, such as stock-for-stock exchanges between an Israeli
company and a foreign company, less favorably than U.S. tax laws. These
provisions of Israeli corporate and tax law may have the effect of delaying,
preventing or making more difficult an acquisition of or merger with us, which
could depress our share price.

14

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

A. History and Development of the Company

We
were incorporated under the laws of the State of Israel on July 23, 1996 as
Giganet Ltd. We changed our name to Ceragon Networks Ltd. on September 6, 2000,
as part of the resolution of a dispute concerning the use of the word
Giganet. We operate under the Israeli Companies Law. Our registered office is
located at 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel and the telephone
number is 011-972-3-645-5733. Our world wide web address is www.ceragon.com.
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, 2005, 2004 and 2003, our capital expenditures
were $0.9 million, $0.7 million and $0.4 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 no current commitments for capital expenditures.

B. Business Overview

We
design, develop, manufacture and sell high-capacity, point-to-point wireless
backhaul solutions 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 multiple frequency bands of up to 60 GHz,
including frequencies that 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 and some that are unlicensed.

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 approximately 70 countries by
service providers and private customers, 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 and
original equipment manufacturers.

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

Products

Our
product consists of an outdoor unit, an indoor unit, a compact high-performance
antenna and our network management system. The antenna transmits and receives
microwave radio signals. The outdoor unit controls the power transmission,
converts IF signals to RF signals and vice versa, 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, tower 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 IF/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.                  

15

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

We
market our products under the trademark 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 and increased spectral efficiency. The FibeAir family includes
the following products:

FibeAir
1500P. The FibeAir 1500P system provides from 155 to
622 Mbps of transmission capacity for SDH/SONET interfaces. The 1500P transmits
over a 28/50/56 MHz channel using single or dual independent, hot swappable
carriers with optional cross-polar interference canceller (XPIC) mechanism.
Each carrier is equipped with a built-in software configurable modem,
allowing16, 32, 64, 128 or 256 QAM modulation schemes for improved spectrum
utilization.

FibeAir
IP-Max. The FibeAir IP-Max is the Companys new
wireless Native Ethernet solution. The system provides from 50 to 800 Mbps of
transmission capacity for Fast Ethernet and Gigabit-Ethernet interfaces
combined with scalable and dynamic bandwidth allocation of TDM interfaces. The
FibeAir IP-Max answers the need of operators for the higher capacities required
for providing enhanced IP-based services. It operates in the frequency range of
6-38 GHz and is equipped with built-in XPIC and software configurable
modulation allowing QPSK and 16 to 256 QAM. The FibeAir IP-MAX is available
with optional AES encryption capability.

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

FibeAir
3200T.The FibeAir 3200T provides wireless high
capacity data transmission over long distances, in a wide variety of network
capacities, frequencies and configurations. FibeAir 3200T operates in the
frequency range of 6-11 GHz and can be easily upgraded from 45 Mbps up to N+N x
155 Mbps. The system components are all indoor and installed in ETSI or
standard 19 inch rack.

FibeAir
10060.The FibeAir 10060 system provides full rate
Gigabit Ethernet (1.25 Gps) transmission capacity over a license-exempt, 60 GHz
channel. This system allows low-cost installation by avoiding spectrum
licensing processes and may be used for transmission over short distances of up
to 5000 feet

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

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CeraView® is Ceragons SNMP-based EMS
  (Element Management System) that enables the operator to perform element
  configuration, RF and SDH performance monitoring, remote diagnostics, alarm
  reports and more. CeraView integrates with different 3rd party NMS (Network Management
  System) platforms to provide end-to-end system management.                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | PolyView is Ceragons NMS server that
  includes CeraMap, its friendly yet powerful client graphical interface.
  PolyView can be used to update and monitor network topology status, provide
  statistical and inventory reports, define end-to-end traffic trails, download
  software and configure elements in the network. In addition, it can integrate
  with Northbound NMS platforms, to provide enhanced network management.

16

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Our
Solutions

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 50-800 Mbps
  with the licensed bands and speed of up to 1.25 Gbps with the unlicensed
  frequency bands. 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 has been estimated that digging costs for
  laying fiber optic lines in metropolitan areas are approximately $130
  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 if the customer needs a change.                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Rapid Deployment and Time to Market. 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
  management software. This feature simplifies the installation process and
  reduces installation time. Our products can be installed on rooftops, towers,
  or on the sides of buildings more quickly than fiber optic networks (the
  latter may require months or years to deploy). Rapid deployment enables
  service providers to roll out service to subscribers and generate revenues
  quickly.                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Spectral efficiency. With FibeAir platforms,
  traffic capacity throughput and spectral efficiency are optimized for the
  desired channel bandwidth. For maximum flexibility on the part of the user,
  channel bandwidths can be selected together with a wide range of modulations.
  High spectral efficiency is ensured by choosing the same bandwidth for double
  the capacity, via two carriers with vertical and horizontal polarizations.
  This feature is implemented by a built-in XPIC mechanism.                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Optimization for high capacity and long haul.Ceragons
  innovative long-haul products were designed as a wireless networking solution
  for end-to end, long distance connectivity allowing the deployment of voice
  and data services for fixed and mobile backhaul networks. Our long-haul
  products can be installed as split-mount radio to be truly or all-indoor
  radio installation. Ceragons unique embedded space diversity with dual
  receiver architecture, extremely high transmit power and IF combining
  algorithm guarantee superior performance and errorless transmission. For
  operators this means a reliable solution that can use less equipment and
  smaller antennas, providing substantial savings on initial investments and
  operating expenses.                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Multi-Protocol Options. Our products work
  with the most common transmission standards used in communications networks
  around the world, including Ethernet, IP, SONET/SDH and ATM protocols.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Variety of Frequency Bands. Service
  providers select the optimal available transmission frequency based on the
  rainfall intensity in the transmission area and the desired transmission
  range. Regulators grant licenses to operate and provide communication
  services in various frequency bands in each region, although in some cases, a
  customer may be able to operate in a band which is exempt from licensing
  processes. The regulated bands are allocated by government licensing
  authorities for high-capacity transmissions in the metropolitan area. Our
  products operate in the 6, 7, 8, 11, 13, 15, 18, 23, 26, 28, 29, 31, 32 and
  38 GHz frequency bands, the principal licensed bands currently available for
  commercial use throughout the world. In addition, some of our products are
  designed to operate in the 2.4 - 5.85 GHz and 60 GHz unlicensed frequency
  bands.

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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 service providers for compliance
  with European standards and vice versa. The international compatibility of
  our products makes them attractive to global service providers and equipment
  vendors that deploy communications networks in North American and
  international markets. Global 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 service providers to deploy them incrementally as demand
  for their services increases. This allows the 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 with fiber optic lines, and later expand the geographic coverage
  area of their networks and increase the number of points that can be served
  on their networks as subscriber demand increases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | High Reliability and Availability. We design
  our products to match the reliability standard required by service providers,
  including 99.999% 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 offer a
  built-in, AES-based encryption solution. Our user-friendly EncryptAir
  solution has been validated by the National Institute of Standards and
  Technology (NIST).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Multiple Modulation Schemes. The FibeAir
  product family utilizes multiple modulation schemes, including QPSK, 16, 32,
  64, 128, and 256 QAM enabling broadband wireless service providers to choose
  between increased range and increased spectral efficiency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extreme Weather Conditions.Our products may
  not operate optimally in certain extreme weather conditions, including severe
  rainfalls or hurricanes.                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Line-of-Sight Limitations. Since our
  products require a direct line-of-sight between antennas, service providers
  often install our products on cellular antenna towers, rooftops of buildings
  and on other tall structures. As a result, service providers must generally
  secure roof or other property rights from the owners of each building or
  other structure on which our products are installed. This may delay
  deployment and increase the installation cost of our products or cause
  service providers not to install broadband wireless equipment.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 designed for use in interconnected systems
of packet-switched communication systems and in use for private data and Metro
Ethernet networks for a variety of applications. Our products offer a native
Fast and Gigabit Ethernet wireless transmission with fiber-like quality. With
the highest available throughput on the market, this native Ethernet solution
with ultra-low latency is optimized for IP-based applications including
IP-DSLAM connectivity for voice over IP, Internet and video services, WiMAX
backhauling and any delay-sensitive application. Our carrier class products are
upgradeable, with capacities starting from 50 to 800 Mbps. Our products deliver
Gigabit Ethernet for ultra-high capacity IP connections in metropolitan rings,
high-speed access connections and private networks over 800 Mbps system and
deliver two Fast Ethernet channels over a single 200 Mbps system where dynamic
bandwidth allocation is used to share the overall capacity between the two Fast
Ethernet channels. Each Fast Ethernet channel can provide a separate, secure
connection to a business subscriber. With a built-in Layer 2 switch to provide
Fast Ethernet traffic aggregation, Quality of Service and multi-service
transport of data and voice interfaces over a single radio carrier, we
substantially reduce the service providers costs by eliminating the need to
purchase external equipment or double the links.

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.

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 are increasingly
engaged in projects in which we supply, either directly or through
subcontractors, the required installation, supervision and testing services. We
provide technical assistance and customer support 24 hours a day, 7 days a
week. We have the capability to remotely monitor the in-network performance of
our products and diagnose and address problems that may arise. We assist our
customers in utilizing our network management software within their own
internal network operations control centers.

Customers
and Markets

We
began selling our products commercially during the second half of 1998. Our
products are currently used by more than 150 customers in approximately 70
countries.

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

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 target three principal
applications for our products:

| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | providing
  cellular operators with flexible, high-capacity backhaul solutions that
  enable operators to expand their networks and offer advanced services;

19

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| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | providing
  independent local exchange carriers (ILECs) the means for providing voice
  over IP, Internet and video services and enabling fixed wireless operators to
  meet the demand for advanced IP solutions such as WiMAX/WiFi for mesh area
  networks; and         
| |   |                                                                                                                                                                                                                                                                            
| |  | providing
  the private networks market with systems that meet the high-capacity needs of
  data-rich applications and that can be rapidly deployed in a wide range of
  public and enterprise environments for public safety, disaster recovery and
  business continuity.

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

|                |  |      |    |      |  |      |    |   |  |  |    |   | 
|--------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | - | 
|Region          |  | 2003 |    | 2004 |  | 2005 |   
|                |  |      |    |      |  |      |   
|                |  |      | (% | )    |  |      | (% | ) |  |  | (% | ) | 
|North
  America |  |      | 27 |      |  |      | 30 |   |  |  | 27 |   | 
|EMEA*           |  |      | 59 |      |  |      | 40 |   |  |  | 49 |   | 
|Asia-Pacific    |  |      | 9  |      |  |      | 26 |   |  |  | 13 |   | 
|Latin
  America |  |      | 4  |      |  |      | 4  |   |  |  | 11 |   | 

* Europe, Middle East, and Africa

Distribution
Channels

In
2005, as in previous years, we sold our products through direct sales,
distributors, third-party integrators and original equipment manufacturers.

Our
international direct sales force is located in our offices around the world.
Our sales efforts are augmented in many cases by local agents and distributors.
We entered into a strategic alliance with Nokia Corporation as an OEM
distributor of our equipment, and we plan to invest additional efforts in the
development of such alliances in order to provide greater access to our target
markets.

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

Manufacturing
and Assembly

Our
manufacturing process consists of materials planning and procurement, assembly
of indoor units and outdoor units, final product assurance testing, quality
control and packaging and shipping. We employ an outsourced manufacturing
strategy that relies on contract manufacturers to manufacture and assemble
circuit boards and other components used in our products and to assemble and
test indoor units and outdoor units for us. We have outsourced the majority of
our manufacturing operations to contract manufacturers in Israel and the
Philippines. We have retained some manufacturing operations at our facilities
in Tel Aviv. During the second half of 2006, we expect to cease our
manufacturing operations in Tel Aviv together with the phase-out of our legacy
FibeAir 1500 products.

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

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

Our
activities in Europe require that we comply with European Union Directives with
respect to product quality assurance standards and environmental standards. The
RoHS Directive will take effect on July 1, 2006 and requires that certain of
our products be modified to meet this regulation. The WEEE Directive requires
produces of electrical and electronic equipment to register in different
European countries and provide collection and recycling facilities for used
products. If we fail to achieve compliance, we may be restricted from selling
our products in the European Union and this could adversely affect our results
of operations.

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Competition

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

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

| |   |                                                               
| | - | --------------------------------------------------------------
| |  | product performance, design, features and interoperability;   
| |   |                                                               
| |  | product quality and reliability;                              
| |   |                                                               
| |  | price;                                                        
| |   |                                                               
| |  | ability to deliver products on a timely basis; and            
| |   |                                                               
| |  | technical support and customer service.                       
| |   |                                                               
| |  | ability to carry out installation projects                    
| |   |                                                               
| |  | ability to offer or participate in offering complete solutions

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

Intellectual
Property

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

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

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

Conditions
in Israel

We
are incorporated under the laws of, 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
several countries, among them Japan. These preferences allow Israel to export
products covered by these programs either duty-free or at reduced tariffs.

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

Israeli
Tax Considerations and Government Programs

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

General
Corporate Tax Structure in Israel

Until
December 31, 2003, the regular tax rate applicable to income of companies
(which are not entitled to benefits due to investments in approved
enterprise, as described below) was 36%. In June 2004 and in July 2005, the
Knesset (Israeli parliament) passed amendments to the Income Tax Ordinance
(No. 140 and Temporary Provision), 2004 and (No. 147), 2005 respectively, which
determine, among other things, that the corporate tax rate is to be gradually
reduced to the following tax rates: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 -
29%, 2008 - 27%, 2009 - 26% and 2010 and thereafter - 25%.

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

The
Law for the Encouragement of Capital Investments, 1959

Tax
Benefits before the 2005 amendment

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

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

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

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

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

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

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

Tax
Benefits under the 2005 Amendment

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

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

The
amendment simplifies the approval process: according the amendment, only
Approved Enterprises receiving cash grants require the approval of the
Investment Center. The Investment Center will be entitled to approve such
programs only until December 31, 2007.

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

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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Similar to
  the currently available alternative route, exemption from corporate tax on
  undistributed income for a period of two to ten years, depending on the
  geographic location of the Benefited Enterprise within Israel, and a reduced
  corporate tax rate of 10% to 25% for the remainder of the benefits period,
  depending on the level of foreign investment in each year. Benefits may be
  granted for a term of seven to ten years, depending on the level of foreign
  investment in the company. If the company pays a dividend out of income
  derived from the Benefited Enterprise during the tax exemption period, such
  income will be subject to corporate tax at the applicable rate (10%-25%) in
  respect of the gross amount of the dividend that we may distribute. The
  company is required to withhold tax at the source at a rate of 15% from any
  dividends distributed from income derived from the Benefited Enterprise; and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | A special
  tax route, which enables companies owning facilities in certain geographical
  locations in Israel to pay corporate tax at the rate of 11.5% on income of
  the Benefited Enterprise. The benefits period is ten years. Upon payment of
  dividends, the company is required to withhold tax at source at a rate of 15%
  for Israeli residents and at a rate of 4% for foreign residents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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

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

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

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

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

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

In
June 2005, an amendment to the R&D Law came into effect, which intends to
make the R&D Law more compatible with the global business environment by,
among other things, relaxing restrictions on the transfer of manufacturing
rights outside Israel and on the transfer of OCS-funded know-how outside of
Israel, as further described below.

The
Israeli government is currently in the process of formulating a proposed
amendment to the royalty regulations promulgated under the R&D Law. The
amendment is expected to include changes to the royalty rates, which would vary
from company to company based on the amount of its revenues and approval date
of its program, up to a rate of 6%, and, as of 2006, to increase the rate of
interest accruing on grants by 1% per year. The amendment is expected to have
retroactive effect from January 1, 2006, although there is no assurance as to
whether and when it will be adopted.

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The
R&D Law generally requires that the product developed under a program be
manufactured in Israel. However, upon the approval of the 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 up to 300% of the
grant, depending on the portion of the total manufacturing volume that is
performed outside of Israel. The recent amendment to the R&D Law further
permits the OCS, among other things, to approve the transfer of manufacturing
rights outside Israel in exchange for an import of different manufacturing into
Israel as a substitute, in lieu of the increased royalties. The R&D Law
also allows for the approval of grants in cases in which the applicant declares
that part of the manufacturing will be performed outside of Israel or by
non-Israeli residents and the research committee is convinced that doing so is
essential for the execution of the program. This declaration will be a
significant factor in the determination of the OCS whether to approve a program
and the amount and other terms of benefits to be granted. For example, the
increased royalty rate and repayment amount will be required in such cases. If
we elect to transfer more than an insubstantial portion of our manufacturing
processes to contractors outside of Israel, we may be required to pay higher
royalties to the OCS.

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

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

The
funds available for OCS 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 if the R&D is for the promotion or
development of the company.

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

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

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

| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | deduction of
  purchases of know-how, patents and the right to use a patent over an
  eight-year period for tax purposes;                                                                                                        
| |   |                                                                                                                                                                                                                                  
| |  | deduction
  over a three-year period of specified expenses incurred with the issuance and
  listing of shares on the Tel Aviv Stock Exchange or, on 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.

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, linked to
  the Israeli consumer price index. The unused portion that was carried forward
  may be deductible in full in the following year.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | 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 (termed the inflation supplement). The inflation supplement
  will only be added to the corporate income but not to other types of income
  such as capital gains.                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Capital
  gains on certain traded securities, which are generally taxed at a reduced
  tax rates for individuals and are taxable at the corporate tax rate in
  specified circumstances. As of January 1, 2006, the relevant provisions
  governing taxation of companies on capital gains derived from the sale of
  traded securities are included in the Tax Ordinance, and the Adjustments Law
  no longer includes provisions in this regard.                                                                                                                                                                   

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

Stamp
Duty

The
Israeli Stamp Duty on Documents Law, 1961, or the Stamp Duty Law, provides that
any document (or part thereof) that is signed in Israel or that is signed
outside of Israel and refers to an asset or other thing in Israel or to an
action that is executed or will be executed in Israel, is subject to a stamp
duty, generally at a rate of between 0.4% and 1% of the value of the subject
matter of such document. De facto, it has been common practice in Israel not to
pay such stamp duty unless a document is filed with a governmental authority.
An amendment to the Stamp Duty Law that came into effect on June 1, 2003,
determines, among other things, that stamp duty on most agreements shall be
paid by the parties that signed such agreement, jointly or severally, or by the
party that undertook under such agreement to pay the stamp duty. As a result of
the aforementioned amendment to the Stamp Duty Law, the Israeli tax authorities
have approached many companies in Israel and requested disclosure of all
agreements signed by such companies after June 1, 2003, with the aim of
collecting stamp duty on such agreements.

Based
on advice from Israeli counsel, we believe that we may only be required to pay
stamp duty on documents signed on or after August 2004. However, we cannot
provide any assurance that the tax authorities or the courts will accept such
view.

Under
an order published in December 2005, the said requirement to pay stamp duty was
cancelled with respect to documents signed on or after January 1, 2006.

C. Organizational Structure

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

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

D. Property, Plants and Equipment

Our
corporate headquarters and principal administrative, finance, sales and
marketing, R&D and operations departments are located at a leased facility
of approximately 55,000 square feet in Tel Aviv, Israel. The leases for this
space are valid until May 2007, with an option to renew for an additional
one-year period.

28

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In
the United States, we lease approximately 5,100 square feet in Paramus, New
Jersey, for our North American headquarters. The lease in Paramus is valid
until September 2008. In the United Kingdom, we lease approximately 2,560
square feet in Birmingham expiring in March 2015. We also lease space for our
local subsidiaries to conduct sales and marketing activities in in their
respective regions.

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

Not
applicable.

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

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

Overview

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

A
majority of the revenues of the Company and certain of its subsidiaries are
generated in U.S. dollars. In addition, a substantial portion of the Companys
and certain of its subsidiaries costs is incurred in dollars. We use the
dollar as our functional currency. Transactions and balances in other
currencies are remeasured into dollars according to the principles in Financial
Accounting Standards Board Statement No. 52. Gains and losses arising from
conversion are recorded as financial income or expense, as applicable. Our
consolidated financial statements are prepared in dollars.

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

Revenues.
We generate revenues from the sale of our products, those of other parties and
services. We recognize revenues from the sale of our products in accordance
with SEC Staff Accounting Bulletin No. 104 and FASBs Emerging Issue Task Force
(EITF) Issue No. 00-21, Revenue Arrangements with Multiple Elements. We
price our products on a per unit basis according to a price list. However, the
final price to the customer may vary according to various factors, including
but not limited to the size of a given transaction, the geographic location of
the customer, the specific application for which products are sold, the channel
through which products are sold, the competitive environment and the results of
negotiation. We sell our products directly and through distribution channels
worldwide. In 2005, approximately 27% of our revenues were generated in North
America, 49% were generated in Europe, Middle East, and Africa, 13% were
generated in the Asia-Pacific region and 11% were generated in Latin America.

Cost
of Revenues. Our cost of revenues consists of the
prices we pay contract manufacturers for the products they manufacture for us,
component and material costs, labor costs, subcontractor fees, royalties,
estimated warranty costs, overhead related to manufacturing and depreciation of
manufacturing equipment, shipping and royalties to the Government of Israel in connection
with grants we received from the Chief Scientist. Our gross profit 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 promotional materials.

29

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

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

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

Results of Operations

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

|                                                                          |  |      |       |      |  |       |   |  |       |  
|------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ----- | - |  | ----- | -
|                                                                          |  | 2003 |       | 2004 |  | 2005  |  
|                                                                          |  |      |       |      |  |       |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|Revenues                                                                  |  |      | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|Cost of
  revenues                                                        |  |      | 60.3  |      |  | 58.8  |   |  | 71.1  |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|Gross profit
  (loss)                                                     |  |      | 39.7  |      |  | 41.2  |   |  | 28.9  |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|Operating
  expenses                                                      |  |      |       |      |  |       |   |  |       |  
|Research and development                                                  |  |      | 27.2  |      |  | 17.8  |   |  | 14.5  |  
|Less: Grants and participations                                           |  |      | 5.7   |      |  | 4.2   |   |  | 2.4   |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|Research and development, net                                             |  |      | 21.4  |      |  | 13.6  |   |  | 12.1  |  
|Selling and marketing                                                     |  |      | 29.0  |      |  | 21.6  |   |  | 18.5  |  
|General and administrative                                                |  |      | 7.2   |      |  | 4.5   |   |  | 4.3   |  
|Restructuring and non-recurring expenses
  (income), net                  |  |      | (2.0  | )    |  | --    |   |  | --    |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|Total
  operating expenses                                                |  |      | 55.5  |      |  | 39.8  |   |  | 35.0  |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|Operating
  income (loss)                                                 |  |      | (15.8 | )    |  | 1.5   |   |  | -6.1  |  
|Financial
  income, net                                                   |  |      | 3.4   |      |  | 1.2   |   |  | 0.8   |  
|Other
  financial expenses - non-cash charge relating to puttable warrant |  |      | (10.0 | )    |  | --    |   |  | --    |  
|                                                                         
|Other Income                                                              |  |      | --    |      |  | 0.3   |   |  | 0.1   |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|                                                                          |  |      |       |      |  |       |   |  |       |  
|Net income
  (loss)                                                       |  |      | (22.4 | )    |  | 2.9   |   |  | (5.2  | )
|                                                                          |  |      |       |      |  |       |   |  |       |  

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

Years Ended December 31, 2004 and 2005

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

30

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

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

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

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

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

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

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

Years Ended December 31, 2003 and 2004

Revenues.
Revenues increased from $34.4 million for the year ended December 31, 2003 to
$54.8 million for the year ended December 31, 2004, an increase of $20.4
million, or 59.3%. Quarterly revenues increased sequentially during 2004 from
$11.4 million in the first quarter to $15.9 million in the fourth quarter. This
increase was attributable primarily to increased sales to cellular and fixed
operators and private networks and enterprises in a growing number of
countries.

31

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Cost
of Revenues. Cost of revenues increased from $20.8
million for the year ended December 31, 2003 to $32.2 million for the year
ended December 31, 2004, an increase of $11.4 million, or 55.3%. This increase
was attributable primarily to increased materials consumed in connection with
our increased revenues. The Company has been utilizing part of the products
related to components which it wrote off in 2001. In 2003 and 2004,
approximately $1.5 million and $1.2 million, respectively, of inventory
previously written-off were used as components for products manufactured in the
Companys ordinary course of production and were sold as finished goods to
customers. The sales of these related manufactured products were reflected in
the Companys revenues without additional cost to the cost of revenues in the
period in which the inventory was utilized.

Gross
profit as a percentage of revenues increased from 39.7% for the year ended
December 31, 2003 to 41.2% for the year ended December 31, 2004.

Research
and Development Expenses, Net. Our gross research and
development expenses increased from $9.3 million for the year ended December
31, 2003 to $9.8 million for the year ended December 31, 2004, an increase of
$0.5 million, or 4.6%. The increase in our gross research and development
expenses was attributable primarily to the hiring of additional personnel.
During the year ended December 31, 2004, we recognized $2.3 million in research
and development grants from the OCS, compared to $2.0 million during the year
ended December 31, 2003. Our net research and development expenses increased
from $7.4 million for the year ended December 31, 2003 to $7.5 million for the
year ended December 31, 2004, an increase of $0.1 million or 1.5%.

Selling
and Marketing Expenses. Selling and marketing expenses
increased from $10.0 million for the year ended December 31, 2003 to $11.8
million for the year ended December 31, 2004, an increase of $1.8 million, or
18.8%. This increase was attributable primarily to the hiring of additional
personnel.

General
and Administrative Expenses. General and
administrative expenses remained the same at $2.5 million for the years ended
December 31, 2003 and 2004.

Financial
Income, Net. Financial income, net decreased from $1.2
million for the year ended December 31, 2003 to $0.7 million for the year ended
December 31, 2004, a decrease of $0.5 million or 41.8%. This decrease was
attributable primarily to the decrease of the interest income on marketable
securities and on bank deposits that in turn resulted from a shift of the
Companys funds to shorter-term investments.

Other
Financial Expenses - Non-Cash Charge Relating to
Puttable Warrant. In May 2003, the FASB issued Statement of Financial
Accounting Standards No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (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 in 2003 a non-cash
charge relating to a puttable warrant.

Net
Income. The Company recorded net income in 2004 of
$1.6 million as compared with a net loss of $7.7 million in 2003. The Companys
profitability in 2004 resulted from an increase of 64% in gross profit
accompanied by lower rates of increase in operating expenses and because net
income for 2003 included a non-cash charge for a puttable warrant in the amount
of $3.4 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.

32

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The
following table presents information about the rate of inflation in Israel and
the rate of devaluation (or in 2003 and 2004, appreciation) of the NIS against
the dollar:

|                        |  |                         |       |                                 |  |       | 
|----------------------- |  | ----------------------- | ----- | ------------------------------- |  | ----- | 
|Year ended December 31, |  | Israeli inflationrate % |       | NIS devaluation (appreciation)% | 
|                        |  |                         |       |                                 | 
|                        |  |                         |       |                                 |  |       | 
|2001                    |  |                         | 1.4   |                                 |  | 9.3   | 
|2002                    |  |                         | 6.5   |                                 |  | 7.3   | 
|2003                    |  |                         | (1.9) |                                 |  | (7.6) | 
|2004                    |  |                         | 1.2   |                                 |  | (1.6) | 
|2005                    |  |                         | 2.4   |                                 |  | 6.8   | 

A
devaluation of the NIS in relation to the dollar has the effect of reducing the
dollar amount of our expenses that are payable in NIS, unless those expenses or
payables are linked to the dollar. Conversely, any increase in the value of the
NIS in relation to the dollar has the effect of increasing the dollar value of
our unlinked NIS expenses. Part of our revenues and expenses in Europe are
received or incurred in Euros. We are exposed to the risk of an appreciation of
the Euro if our expenses in Euros exceed our sales in Euros. In addition, if
the Euro devaluates relative to the dollar and sales in Euros exceed expenses
incurred in Euros, our operating profit may be negatively affected as a result
of a decrease in the dollar value of our sales.

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

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

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

Liquidity and Capital Resources

Since
our initial public offering on the Nasdaq National Market in August 2000, we
have financed our operations primarily through the proceeds of that initial
public offering and through royalty-bearing grants from the Chief Scientist. In
the initial public offering, we raised $97.8 million; and through December 31,
2005, we received a total of $18.3 million from the Chief Scientist.

As
of December 31, 2005, we had approximately $33.0 million in cash and cash
equivalents, short and long-term bank deposits, and short and long-term
marketable securities.

Net
cash used in operating activities was approximately $4.3 million for the year
ended December 31, 2005, $1.7 million for the year ended December 31, 2004 and
$4.9 million for the year ended December 31, 2003.

Net
cash provided by investing activities was approximately $2.7 million for the
year ended December 31, 2005, $4.2 million for the year ended December 31, 2004
and $6.4 million for the year ended December 31, 2003.

Net
cash provided by financing activities was approximately $678 thousand for the
year ended December 31, 2005, $1.5 million for the year ended December 31, 2004
and $1.2 million for the year ended December 31, 2003.

As
of December 31, 2005, our principal commitments consisted of $3.0 million for
obligations outstanding under non-cancelable operating leases and $10.0 million
of royalties payable to the Government of Israel on revenues from product sales
and other related revenues generated from projects for which we received grants
from the OCS. The Company was committed to pay royalties to a subcontractor for
the development of a component and its integration into certain of the
Companys products. The agreed royalty rates were 4%, 3%, 2% and 1% for the
first, second, third and fourth years of revenues, respectively, and 1% for the
fifth to seventh year of revenues. The first year of such revenues was 1998. As
of December 31, 2005, the Company completed its seventh year of obligation under
the above-mentioned plan. The royalties were calculated as a rate of specific
sales collection of a specific product.

33

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In
2001, we entered into an agreement with a supplier pursuant to which the
Company was initially committed to purchase certain products. In 2002, we
entered into a supplementary arrangement with this supplier (the 2002
Agreement) 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 700,000 restricted
Ordinary Shares with an exercise price per ordinary share of $0.003, subject to
standard adjustments, with a cash conversion alternative (instead of the
exercise for shares) for $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.

As
part of the 2002 Agreement, the Company agreed to a new minimum annual purchase
commitment. As of December 31, 2005, the remaining amount of the commitment is
approximately $ 1.5 million for 2006.

As
of December 31, 2005, our cash investments are comprised of the following: 31%
consist of short term, highly liquid investments with original maturities of
less than three months, and 29% consist of short term deposits and marketable
securities with original maturities of up to 1 year, with a minimum 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. Substantially all of these
investments are in US dollars.

Our
capital requirements are dependent on many factors, including working capital
requirements to finance the growth of the Company, the level of our gross
profit and the allocation of resources to our research and development efforts,
as well as our marketing and sales activities.

We
believe that current cash and cash equivalent balances will be sufficient for
our requirements through at least the next 12 months.

Capital Expenditures

We
have no current material commitments for capital expenditures.

Research and Development

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

Our
research and development activities are conducted at our facilities in Tel
Aviv, Israel. As of December 31, 2005, our research and development staff
consisted of 105 employees. Our research and development team includes highly
specialized engineers and technicians with expertise in the fields of
millimeter wave design, modem and signal processing, data communications,
system management and networking solutions. Our technical expertise in these
fields results in a highly-optimized system design and a strong and reliable
system solution. Our extensive protocol knowledge and expertise has resulted in
highly-optimized solutions for various communications protocols.

34

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Intellectual Property

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

Trend Information

Beginning
in the second half of 2003, the telecommunications industry began to recover
from the downturn it experienced in the previous two years, and has shown signs
of moderate growth throughout 2004 and 2005. Growth in the cellular market has
created demand for high-capacity cellular backhaul infrastructure. In Europe,
this demand primarily comes from the buildup of 3-G (third generation) networks
which employ data-rich applications; in developing areas, it results from
increases in the number of subscribers and from the establishment of new
networks where none existed before (referred to as greenfield networks).

At
the same time, we are seeing pressure on our resale prices in light of
increased competition and an increase in the size of the transactions in which
we are involved, 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. Although our revenues increased sequentially quarter by
quarter during 2004 and 2005, we cannot be certain that the level of sequential
quarterly revenue growth will continue.

The
fixed wireless market is experiencing a strong demand for IP-based backhaul
solutions. This demand is due to several factors: (a) new wireless deployments
such as WiFi and WiMAX; (b) the lack of copper wire infrastructure or the cost
of expanding such infrastructure; and (c) the limited connection of office
buildings to fiber networks. New types of operators such as wireless Internet
service providers (WISPs) are emerging to fill this demand, and Ceragon
provides its IP solutions to these operators.

In
the U.S., demand for Ceragons solutions is being driven by the emergence of
new wholesale carriers that are introducing a viable, cost-effective
alternative to leased lines. These carriers base their business model on shared
backhaul where one tower serves several operators at the same time. These
wholesale providers carry the cost involved in building the backhaul
infrastructure which is then used by operators on a monthly fee basis. Ceragon
benefits from this emerging trend by providing the backhaul solution for these
carriers.

As
we continue to expand our geographic footprint, we are increasingly engaged in
supplying post-delivery services for our customers, often in developing
nations. We act as prime contractor and equipment supplier for these projects
and provide installation, supervision and testing 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 acceptance tests. If our products are damaged or
stolen, or if the products do not pass the acceptance tests, the customer could
refuse to pay us and we would incur substantial costs, including fees owed to
our subcontractors, increased insurance premiums, transportation costs, and
expenses related to repairing or manufacturing the products. Moreover, in such
a case, we may not be able to repossess the equipment, thus suffering
additional losses.

Off Balance Sheet Arrangements

Not
applicable.

Tabular Disclosure of Contractual Obligations

|                              |  |                          |            |                  |   |            |  |           |           |                   |   |         |  |   |         | 
|----------------------------- |  | ------------------------ | ---------- | ---------------- | - | ---------- |  | --------- | --------- | ----------------- | - | ------- |  | - | ------- | 
|                              |  | Payments
  due by period |           
|                              |  |                          |           
|Contractual Obligations       |  | Total                    |            | less than 1 year |   | 1-3 years  |  | 3-5 years |           | more than 5 years |  
|                              |  |                          |            |                  |   |            |  |           |           |                   |  
|Operating
  Lease Obligations |  | $                        | 3,046,000  |                  | $ | 1,666,000  |  | $         | 988,000   |                   | $ | 128,000 |  | $ | 264,000 | 
|                              |  |                          |            |                  |   |            |  |           |           |                   |  
|Purchase
  Obligations        |  | $                        | 18,093,045 |                  | $ | 17,549,173 |  | $         | 543,872   |                   |   | 0       |  |   | 0       | 
|                              |  |                          |            |                  |   |            |  |           |           |                   |  
|Total                         |  | $                        | 21,139,045 |                  | $ | 19,215,173 |  | $         | 1,531,872 |                   | $ | 64,000  |  | $ | 328,000 | 
|                              |  |                          |            |                  |   |            |  |           |           |                   |  

35

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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 create a provision for returns in accordance with
Statement of Financial Accounting Standards No. 48, Revenue Recognition when
Right of Return Exists. When sale arrangements include a customer acceptance
provision with respect to products, we do not recognize revenues before we have
demonstrated that the criteria specified in the acceptance provisions have been
satisfied or that the acceptance provision has lapsed. When we provide both
products and post-delivery installation services which are not essential to the
functionality of the equipment, we defer recognition of the fair value of the
installation services (but not less than the amount contingent upon completion
of installation or acceptance, if any) to the period in which such installation
occurs. Our typical product warranty is
between 12 to 36 months at no extra charge. We accrue for provision for
warranty costs based on our historical experience. To assess the
probability of collection for revenue recognition purposes, we determine
whether a customer meets any of the conditions set forth in Company guidelines.
On the basis of these criteria, we decide whether revenue recognition should be
deferred.

Revenue
from certain arrangements includes multiple elements which are sale of products
and post delivery installation services that are not essential to the
functionality of the equipment, within a single contract. 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.
When such arrangements exist, the Company considers the sale of equipment and
its installation to be two separate accounting units of the arrangement, since
installation is not essential to the functionality of the equipment, 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.

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.
We insure certain trade receivables under credit insurance policies.

36

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Inventory
valuation. At each
balance sheet date, we evaluate our inventory balance for excess quantities and
obsolescence. This evaluation includes an analysis of slow-moving items and
sales levels by product and projections of future demand. If needed, we write
off inventories that are considered obsolete or excessive. 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 revenues in the
period the revision is made.

Recently Issued
Accounting Standards

On
December 16, 2004, the FASB issued Statement of Financial Accounting Standard
No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123R supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and amends FASB
Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS
123R is similar to the approach described in SFAS 123. However, SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. Early adoption will
be permitted in periods in which financial statements have not yet been issued.
The new standard will be effective for the Company in the first interim period
beginning after January 1, 2006.

SFAS
123R permits public companies to adopt its requirements using one of two
methods, a modified prospective method or a modified retrospective method.
We adopted SFAS 123R using the modified prospective method.

As permitted by SFAS 123, we
currently account for share-based payments to employees using Opinion 25s intrinsic
value method and, as such, generally recognize no compensation cost for employee stock
options. In addition, non-compensatory plans under APB 25 will be considered compensatory
for SFAS 123R purposes. Accordingly, the adoption of SFAS 123Rs fair value method
will have a significant impact on the Companys results of operations, although it
will have no impact on the Companys overall financial position. The impact of
adoption of Statement 123(R) cannot be predicted because it will depend on levels of
share-based payments granted in the future. However, had we adopted SFAS 123R in prior
periods, the impact of that standard would have approximated the impact of SFAS 123. For
further information regarding this impact, see Note 2(q) to the consolidated financial
statements under Item 18.

In
March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share-Based
Payment (SAB 107). SAB 107 provides the SECs staff position regarding the
application of SFAS 123R and contains interpretive guidance relating to the
interaction between SFAS 123R and certain SEC rules and regulations, and also
provides the SEC staffs view regarding the valuation of share-based payment
arrangements for public companies. SAB 107 highlights the importance of
disclosures made relating to the accounting for share-based payment
transactions.We intend to follow the
interpretive guidance set forth in SAB 107 during the adoption of SFAS 123R.

37

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

Directors and Senior Management

The
following table lists our current directors and senior management:

|                   |  |    |     |                                                           |          | 
|------------------ |  | -- | --- | --------------------------------------------------------- | -------- | 
|Name               |  |    | Age |                                                           | Position | 
|                   |  |    |     |                                                           |          | 
|Zohar
  Zisapel    |  | 57 |     | Chairman of the Board of Directors                       
|Ira Palti          |  | 48 |     | President and Chief Executive Officer                    
|Naftali Idan       |  | 54 |     | Executive Vice President and Chief
  Financial Officer   
|Shlomo
  Tenenberg |  | 51 |     | Executive Vice President, Worldwide
  Marketing and Sales
|Hillik Rave        |  | 54 |     | Executive Vice President, Worldwide
  Operations         
|Sharon Ganot       |  | 37 |     | Vice President, Human Resources                          
|Udi Gordon         |  | 39 |     | Vice President, Research and
Development                 
|Yuval Ronen        |  | 35 |     | Vice President, Finance                                  
|Norman
  Kotler    |  | 54 |     | General Counsel and Corporate
Secretary                  
|Scott
  Sweetland  |  | 44 |     | President of our U.S. subsidiary                         
|Joseph
  Atsmon    |  | 57 |     | Director                                                 
|Zohar Gilon        |  | 59 |     | Director                                                 
|Yael Langer        |  | 41 |     | Director                                                 
|Shmuel Levy        |  | 52 |     | Director                                                 

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

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

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

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

38

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

Udi
Gordon
has served as our Vice President, Research and Development since July 2003.
From 1997 until June 2003, he served as a senior manager in our research and
development department. From 1990 until 1997, Mr. Gordon served in the
electronic research and development department in the Israeli Ministry of
Defense. Mr. Gordon received a B.Sc. in electrical engineering from the
Technion, Israel Institute of Technology (cum laude), and an M.B.A. from
Bar-Ilan University.

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

Yuval
Ronen has served as our Vice President, Finance since
October 2005. From 2000 to 2005, Mr. Ronen served as Corporate Controller for
the Company. Prior to joining Ceragon, Mr. Ronen was employed by the public
accounting firm of Strauss Lazar, specializing in publicly traded companies.
Mr. Ronen holds a B.A in accounting and economics and an M.B.A. (both cum
laude) from Tel Aviv University in Israel, and is a certified accountant in
Israel.

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

Scott
Sweetlandhas served as the President of Ceragon
Networks, Inc. since January 2006. From February 2000 through December 2005,
Mr. Sweetland was Vice President, Sales, US and Canada for our U.S. subsidiary.
Prior to joining Ceragon, Mr. Sweetland held senior sales, product marketing or
microwave systems engineering positions for DMC Stratex, Innova, California
Microwave/Microwave Radio Corporation, M/A-COM and Lockheed Sanders. Mr.
Sweetland received a B.Sc. in electrical engineering from the University of
Massachusetts and an M.B.A. from New Hampshire College.

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

Zohar
Gilonhas served as a director 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
and RIT Technologies Ltd. since September 1995. Between November 1993 and June
1995, Mr. Gilon served as president of W.S.P. Capital Holdings, an investment
firm traded on the Tel Aviv Stock Exchange. Mr. Gilon received a B.S.E.E. from
the Technion, Israel Institute of Technology, and an M.B.A. from Tel Aviv
University. Mr. Gilon is one of our external directors under Israeli law and is
one of our independent directors under the
Nasdaq Rules.

39

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

Shmuel
Levyhas served as a director 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 the Nasdaq Rules.

Compensation of Directors and Senior
Management

The
following table presents all compensation we paid to all of our directors and
senior management as a group for the year ended December 31, 2005. The table
does not include any amounts we paid to reimburse any of such persons for costs
incurred in providing us with services during this period.

|                                                                                  |  |                                          |           |                                                |   |         | 
|--------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | ---------------------------------------------- | - | ------- | 
|                                                                                  |  | Salaries, fees,
  commissionsand bonuses |           | Pension,
  retirement andother similarbenefits |  
|                                                                                  |  |                                          |           |                                                |  
|All directors and executive officers as a
  group, consisting of eighteen persons |  | $                                        | 1,550,000 |                                                | $ | 250,000 | 

During
2005, we granted to our directors and senior management options to purchase
869,000 ordinary shares, in the aggregate, range of exercise prices of $3.70 to
4.49 per share. The options expire 10 years after grant.

Other
than reimbursement for expenses, and the award of stock options, we do not
compensate our directors for serving on our board of directors. For more
information, please see 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 five members. The board retains all the powers in
running our company that are not specifically granted to the shareholders. The
board may make decisions to borrow money for our company, and may set aside
reserves out of our profits, for whatever purposes it thinks fit.

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

Terms of
Directors

Our
articles of association provide that directors, other than our external
directors described below, are elected at our annual general meeting of
shareholders by a vote of the holders of a majority of the voting power represented
at that meeting. Our external directors, as further described
below, each serve a three-year term. At the
annual general meeting of shareholders in September 2004 (the 2004 AGM), our
articles of association were amended to provide for a classified board of
directors. The board of directors is
now divided into two classes: Class I and Class II. Each director (other than
an external director), when and however elected, will be designated as a member
of a certain class of directors. The director (other than a director elected to
fill a vacancy in accordance with Article 41 of the Companys Articles of
Association) will serve for a term ending on the date of the third annual
general meeting following the annual general meeting at which such director was
elected, provided, that each initial director in Class I will serve for a term
ending on the date of the annual general meeting in 2005, and each initial
director in Class II will serve for a term ending on the date of the annual
general meeting in 2006.

40

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As a result
of the foregoing amendment and of the election of directors at the 2004 AGM,
Ms. Langer was elected to serve as a Class I director for an initial term
ending at the 2005 annual general meeting of shareholders and until their
respective successors are duly elected and qualified; and that Messrs. Zisapel
and Atsmon were elected to serve as Class II Directors for an initial term
ending at the 2006 annual general meeting of the shareholders and until their
respective successors are duly elected and qualified.

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

As a company organized in Israel
whose ordinary
shares are listed for quotation on the Nasdaq National Market, we are required
to comply with the rules of the U.S. Securities and Exchange Commission and the
Nasdaq Rules applicable to listed companies, as well as with the Companies Law
applicable to Israeli companies. Under the Nasdaq Rules, a majority of our
directors are required to be independent and, under the Israeli Companies Law,
we are required to appoint two external directors.

Independent
Directors

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

41

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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.

Pursuant
to an amendment to the Companies Law, effective as of April 19, 2006, (1) each
external director must have either accounting and financial expertise or
professional qualifications  (as such terms are defined in regulations
promulgated under the Companies Law) and (2) at least one of the external
directors must have accounting and financial expertise. These requirements
will apply to us upon the election of one or more external directors. However,
we believe we are already in compliance with such requirements, and have
determined that both Messrs. Gilon and Levy have the requisite accounting and
financial expertise required by the Companies Law.

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

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

Election of External
Directors

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

| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | at least one
  third of the shares of non-controlling shareholders voted at the meeting,
  vote in favor of the election; or                                 
| |   |                                                                                                                                                              
| |  | the total
  number of shares voted against the election of the external director does not
  exceed one percent of the aggregate voting rights in the company.

The
initial term of an external director is three years and 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.

Audit
Committee

Nasdaq
Requirements

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

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

42

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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 Rules and the
Companies Law requirements.

Approval
of Certain Transactions

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

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

Remuneration of Directors

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

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

Share Incentive
Committee

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

43

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Option
Committee

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

Fiduciary Duties of Office
Holders

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

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

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

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

Approval
of Specified Related Party Transactions under Israeli Law

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

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

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

44

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| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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                                                          
| |                                                                           |                                                                                                                                                                                                        
| |                                                                          | any corporation in which the office holder is a 5% or greater
  shareholder, director or general manager or in which he or she has the right
  to appoint at least one director or the general manager.
| |                                                                           |                                                                                                                                                                                                        
| | Under the Companies Law, an extraordinary transaction is a
  transaction:
| |                                                                           |                                                                                                                                                                                                        
| |                                                                          | other than
  in the ordinary course of business;                                                                                                                                                       
| |                                                                           |                                                                                                                                                                                                        
| |                                                                          | otherwise
  than on market terms; or                                                                                                                                                                   
| |                                                                           |                                                                                                                                                                                                        
| |                                                                          | that is likely to have a material impact on the companys
  profitability, assets or liabilities.                                                                                                      

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

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

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

Disclosure
of Personal Interests of a Controlling Shareholder

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

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

45

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In
addition, under the Companies Law, each shareholder has a duty to act in good
faith in exercising his rights and fulfilling his obligations toward the
company and other shareholders and to refrain from abusing his power in the
company, such as shareholder votes. Further, specified shareholders have a duty
of fairness toward the company. These shareholders include any controlling
shareholder, any shareholder who knows that he or she possesses the power to
determine the outcome of a 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 (except in connection with
distributions), provided that the articles of association allow it to do so.
Our articles of association allow us to exempt our office holders to the
fullest extent permitted by law.

Office
Holders Insurance

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

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

Exculpation
and Indemnification of Office Holders

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

| |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                        | a financial
  liability imposed on him or her in favor of another person by any judgment,
  including a settlement or an arbitration award approved by a court. Such
  indemnification may be approved (i) after the liability has been incurred or
  (ii) in advance, provided that our undertaking to indemnify is limited to
  events that our board of directors believes are foreseeable in light of our
  actual operations at the time of providing the undertaking and to a sum or
  criterion that our board of directors determines to be reasonable under the
  circumstances;                       
| |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                        | reasonable
  litigation expenses, including attorneys fees, expended by the office holder
  as a result of an investigation or proceeding instituted against him by a
  competent authority, provided that such investigation or proceeding concluded
  without the filing of an indictment against him and either (i) concluded
  without the imposition of any financial liability in lieu of criminal
  proceedings or (ii) concluded with the imposition of a financial liability in
  lieu of criminal proceedings but relates to a criminal offense that does not
  require proof of criminal intent; and
| |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                        | reasonable litigation expenses, including attorneys fees, expended
  by the office holder or charged to him or her by a court, resulting from the
  following: proceedings we institute against him or her or instituted on our
  behalf or by another person; a criminal indictment from which he or she was
  acquitted; or a criminal indictment in which he or she was convicted for a
  criminal offense that does not require proof of intent.                                                                                                                                                           
| |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Our articles of association also include the following:
| |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                        | we are
  authorized to grant in advance an undertaking to indemnify our office
  holders, provided that the undertaking is: limited to specified events which
  the board of directors determines to be anticipated; and limited to an amount
  determined by the board of directors to be reasonable under the circumstances.                                                                                                                                                                                                                                                                                  
| |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                        | we are authorized to indemnify retroactively our office holders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

46

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Limitations
on Insurance and Indemnification

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

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

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

We
indemnify our office holders to the fullest extent permitted under the
Companies Law. We currently hold directors and officers liability insurance for
the benefit of our office holders. This policy was approved by our board of
directors and by our shareholders. Insofar as indemnification for liabilities
arising under the United States Securities Act of 1933, as amended, may be
permitted to our directors, officers and controlling persons, we have been
advised that, in the opinion of the 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. For
purposes of the shareholder vote of each party, unless a court rules otherwise,
the merger will not be deemed approved if shares, representing a majority of
the voting power present at the shareholders meeting and which are not held by
the other party to the merger (or by any person who holds 25% or more of the
voting power or the right to appoint 25% or more of the directors of the other
party), vote against the merger. Upon the request of a creditor of either party
to the proposed merger, the court may delay or prevent the merger if it
concludes that there exists a reasonable concern that as a result of the merger
the surviving company will be unable to satisfy the obligations of any of the
parties to the merger. In addition, a merger may not be completed unless at
least (i) 50 days have passed from the time that the requisite proposals for
approval of the merger have been filed with the Israeli Registrar of Companies
by each merging company and (ii) 30 days have passed since the merger was
approved by the shareholders of each merging company.

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

47

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If,
as a result of an acquisition of shares, the acquirer will hold more than 90%
of a companys outstanding shares, the acquisition must be made by means of a
tender offer for all of the outstanding shares. If less than 5% of the
outstanding shares are not tendered in the tender offer, all the shares that the
acquirer offered to purchase will be transferred to it. The Companies Law
provides for appraisal rights if any shareholder files a request in court
within three months following the consummation of a full tender offer. If more
than 5% of the outstanding shares are not tendered in the tender offer, then
the acquiror may not acquire shares in the tender offer that will cause his
shareholding to exceed 90% of the outstanding shares.

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

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

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

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

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

48

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Share Ownership

The
following table sets forth certain information regarding the ordinary shares
owned, and stock options held, by our directors and senior management as of
March 31, 2006. The percentage of outstanding ordinary shares is based on
26,582,676 ordinary shares outstanding as of March 31, 2006.

|                                                                              |  |  |                             |  |                                                  |      |                                        |  |                                                              | 
|----------------------------------------------------------------------------- |  |  | --------------------------- |  | ------------------------------------------------ | ---- | -------------------------------------- |  | ------------------------------------------------------------ | 
|Name                                                                          |  |  | Number of
  Ordinary Shares |  | Percentage of
  Outstanding
  Ordinary 
  Shares |      | Number of 
  Stock Options 
  Held (1) |  | Range of 
  exercise prices 
  per share of 
  stock options | 
|                                                                              |  |  |                             |  |                                                  |      |                                        |  |                                                             
|                                                                              |  |  |                             |  |                                                  |      |                                        |  |                                                              | 
|Zohar Zisapel                                                                 |  |  | 3,080,220                   |  |                                                  | 11.6 |                                        |  | 340,000                                                      | 
|                                                                              |  |  |                             |  |                                                  |      |                                        |  |                                                              | 
|All directors and senior management as a
  group, consisting of 14 people (2) |  |  | 3,220,531                   |  |                                                  | 12.1 |                                        |  | 3,047,500                                                    | 

|    |                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Each stock
  option is exercisable into one ordinary share, and expires 10 years from the
  date of its grant.                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                    
|(2) | Each of the
  directors and senior managers other than Mr. Zohar Zisapel beneficially owns
  less than 1% of the outstanding ordinary shares as of March 31, 2006
  (including options held by each such person and which are vested or shall
  become vested within 60 days of March 31, 2006) and have therefore not been
  separately disclosed.

Stock Option Plans

Key Employee Share Incentive
Plan

In
August 1996, we adopted our key employee share incentive plan. We ceased
granting options under this plan as of December 31, 2002 in light of the
adoption of our 2003 share option plan and a change in applicable Israeli tax
laws, although options granted under this plan before December 31, 2002 are
still valid subject to the plan. Employees of our company and our subsidiaries
or affiliates belonging to the RAD-BYNET group are eligible to participate in
the plan. The share incentive committee of our board of directors administers
the plan. No options may be granted to any person serving on the share
incentive committee or to any
person who is or will become as a result of an option grant one of our
controlling shareholders. The options expire five to ten years from the date of
issuance. The following table presents option grant information for this plan
as of December 31, 2005:

|                                             |  |                     |  |                                   | 
|-------------------------------------------- |  | ------------------- |  | --------------------------------- | 
|Ordinary shares reserved
  for option grants |  | Options outstanding |  | Weighted average
  exercise price | 
|                                             |  |                     |  |                                   | 
|                                            
|2,142,439                                    |  | 2,142,439           |  | $2.97                             | 

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.

49

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This
restriction does not apply to employees who 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 or to any person who is or will
become as a result of an option grant one of our controlling shareholders. The
options expire five to ten years from the date of issuance. The following table
presents option grant information for this plan as of December 31, 2005:

|                                             |  |                     |  |                                   | 
|-------------------------------------------- |  | ------------------- |  | --------------------------------- | 
|Ordinary shares reserved
  for option grants |  | Options outstanding |  | Weighted average
  exercise price | 
|                                             |  |                     |  |                                   | 
|                                             |  |                     |  |                                   | 
|767,900                                      |  | 767,900             |  | $5.36                             | 

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. The following table presents option grant
information for this plan as of December 31, 2005:

|                                           |  |                     |  |                                    | 
|------------------------------------------ |  | ------------------- |  | ---------------------------------- | 
|Ordinary Shares Reserved for Option Grants |  | Options Outstanding |  | Weighted Average 
  Exercise Price | 
|                                           |  |                     |  |                                    | 
|                                          
|10,062,849                                 |  | 4,363,025           |  | $4.55                              | 

50

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

Major Shareholders

The
following table sets forth stock ownership information as of March 31, 2006
(unless otherwise noted below) with respect to each person who is known by us
to be the beneficial owner of more than 5% of our outstanding ordinary shares,
based on information provided to us by the holders or disclosed in public filings
with the SEC.

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

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

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

|                                                                               |  |  |                              |  |                                                 | 
|------------------------------------------------------------------------------ |  |  | ---------------------------- |  | ----------------------------------------------- | 
|Name                                                                           |  |  | Number of 
  Ordinary Shares |  | Percentage of 
  Outstanding
  Ordinary Shares1 | 
|                                                                               |  |  |                              |  |                                                 | 
|                                                                               |  |  |                              |  |                                                 | 
|Zohar Zisapel (2)                                                              |  |  | 3,390,220                    |  |                                                 | 
|Yehuda Zisapel (2)                                                             |  |  | 2,838,000                    |  |                                                 | 
|Kern Capital Management, LLC(3)                                                |  |  | 3,754,400                    |  |                                                 | 
|HarbourVest International Private Equity
  Partners III - Direct Fund, L.P.(4) |  |  | 1,409,175                    |  |                                                 | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on
  26,582,676 ordinary shares issued and outstanding as of March 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2) | Yehuda
  Zisapel and Zohar Zisapel are brothers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(3) | 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. The information is based on
  Kern Capital Managements Form 13-F filing made on May 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(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 7, 2006,
approximately 79% of our ordinary shares were held in the United States and
there were 48 record holders with addresses in the United States.

51

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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 March 31, 2006, together control 23.2% 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.                                        |  | RADVision
  Ltd.       
|Axerra
  Networks Inc.            |  | RAD-Bynet
  Properties and Services (1981) Ltd.     |  | RADWARE Ltd.           
|BYNET Data Communications Ltd.    |  | RADCOM Ltd.                                         |  | RADWIN Ltd.            
|BYNET
  Electronics Ltd.          |  | RAD Data
  Communications Ltd. and its subsidiaries |  | RIT
  Technologies Ltd.
|BYNET SEMECH
  (Outsourcing) Ltd. |  | RADLive Inc.                                        |  | SANRAD Inc.            
|BYNET
  Systems Applications Ltd. |  | RADView
  Software Ltd.                             |  | SILICOM Ltd.           
|Commex
  Technologies Inc.        |  |                                                     |  | WISAIR Inc.            

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

Mr.
Gilon, our director, also serves as a director of other companies in the
RAD-BYNET group, including RADCOM Ltd., and RIT Technologies Ltd. Mr. Ackerman,
the president of our U.S. subsidiary until December 31, 2005, 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 engage 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 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 $335 thousand in 2005.

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

Lease Arrangements

We
lease most of our office space for our current headquarters and principal
administrative, finance, marketing and sales operations from real estate
holding companies controlled by Yehuda and Zohar Zisapel. The leased facility
is approximately 51,500 square feet in size. The lease for this facility is
valid until May 2007, with an option to renew for an additional one-year
period. Additionally, we lease space for our U.S. headquarters from a real
estate holding company controlled by Yehuda Zisapel and Zohar Zisapel. This
facility is approximately 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 $0.8 million
in 2005.

52

---

---



Supply Arrangement

We
purchase components and products from RAD Data Communications Ltd., RADWIN Ltd.
and other members of the RAD-BYNET group which we integrate into our products
or product offerings. The aggregate purchase price of these components was
approximately $1.7 million for the year ended December 31, 2005.

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. The last expiry of these demand registration rights occurred during
2005. In addition, each of the shareholders has the right to have its ordinary
shares included in certain of our registration statements.

Interests of Experts and Counsel

Not
applicable.

|        |                      
|------- | ---------------------
|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
2005, 94% 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.

53

---

---



Corporate Taxes

As
of December 31, 2005, our net operating loss carry-forwards for Israeli income
tax purposes amounted to approximately $79.9 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, 2005, the net operating loss carry-forwards of our New Jersey
subsidiary for U.S. tax purposes amounted to approximately $8.9 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 2025.

Government Grants

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

For
the years ended December 31, 2004 and 2005, the Chief Scientist provided grants
for research and development expenditures of approximately $2.3 million and
$1.8 million, representing 24% and 16% of our total research and development
expenses in each of these respective periods.

Our
total obligation for royalties to the OCS for grants received or accrued plus
interest, net of royalties paid, or accrued, amounted to approximately $10.0
million as of December 31, 2005.

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

|                               |  |                           |  | 
|------------------------------ |  | ------------------------- |  | 
|                               |  | Royalties paid or accrued | 
|                               |  |                           | 
|                               |  | (In thousands of dollars) | 
|                               |  |                           |  | 
|Year ended
  December 31, 2003 |  | 1,165                     |  | 
|Year ended
  December 31, 2004 |  | 1,761                     |  | 
|Year ended
  December 31, 2005 |  | 2,153                     |  | 

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, 2005, we were obligated to
repay a total of approximately $89 thousand to the Government of Israel for grants
received from the marketing fund.

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

Offer and Listing Details

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

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

54

---

---



|                 |  |                 |       |     |  |      | 
|---------------- |  | --------------- | ----- | --- |  | ---- | 
|                 |  | Ordinary Shares |      
|                 |  |                 |      
|                 |  | High            |       | Low | 
|                 |  |                 |       |     | 
|                 |  |                 |       |     |  |      | 
|2001 (Annual)    |  |                 | 19.88 |     |  | 1.88 | 
|                 |  |                 |       |     |  |      | 
|2002 (Annual)    |  |                 | 4.80  |     |  | 0.88 | 
|                 |  |                 |       |     |  |      | 
|2003 (Annual)    |  |                 | 7.55  |     |  | 1.00 | 
|                 |  |                 |       |     |  |      | 
|2004 (Annual)    |  |                 | 8.74  |     |  | 3.70 | 
|                 |  |                 |       |     |  |      | 
|2005 (Annual)    |  |                 | 6.77  |     |  | 3.40 | 
|                 |  |                 |       |     |  |      | 
|2004             |  |                 |       |     |  |      | 
|First
  Quarter  |  |                 | 8.74  |     |  | 5.56 | 
|Second
  Quarter |  |                 | 7.52  |     |  | 4.66 | 
|Third
  Quarter  |  |                 | 5.99  |     |  | 3.70 | 
|Fourth
  Quarter |  |                 | 6.90  |     |  | 4.70 | 
|                 |  |                 |       |     |  |      | 
|2005             |  |                 |       |     |  |      | 
|First
  Quarter  |  |                 | 6.77  |     |  | 4.76 | 
|Second
  Quarter |  |                 | 5.20  |     |  | 4.20 | 
|Third
  Quarter  |  |                 | 5.12  |     |  | 4.30 | 
|Fourth
  Quarter |  |                 | 4.80  |     |  | 3.40 | 
|                 |  |                 |       |     |  |      | 
|2006             |  |                 |       |     |  |      | 
|First Quarter    |  |                 | 5.19  |     |  | 3.87 | 

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

|                |  |      |      |     |  |      | 
|--------------- |  | ---- | ---- | --- |  | ---- | 
|                |  | High |      | Low | 
|                |  |      |      |     | 
|                |  |      |      |     |  |      | 
|December
  2005 |  |      | 4.10 |     |  | 3.57 | 
|January 2006    |  |      | 4.88 |     |  | 3.87 | 
|February
  2006 |  |      | 4.97 |     |  | 4.35 | 
|March 2006      |  |      | 5.19 |     |  | 4.70 | 
|April 2006      |  |      | 5.59 |     |  | 4.76 | 
|May 2006        |  |      | 5.40 |     |  | 4.45 | 

The table
below sets forth for the periods indicated the high and low market prices for
our ordinary shares on the TASE from the inception of trading in September
2004. The translation from NIS into U.S. dollars for the following two tables
is based on representative rates of exchange published by the Bank of Israel.

|                 |  |      |      |     |  |      | 
|---------------- |  | ---- | ---- | --- |  | ---- | 
|                 |  | High |      | Low | 
|                 |  |      |      |     | 
|                 |  |      |      |     |  |      | 
|2005 (Annual)    |  |      | 6.67 |     |  | 3.46 | 
|                 |  |      |      |     |  |      | 
|2004             |  |      |      |     |  |      | 
|Third
  Quarter  |  |      | 4.90 |     |  | 4.35 | 
|Fourth
  Quarter |  |      | 6.36 |     |  | 4.79 | 
|                 |  |      |      |     |  |      | 
|2005             |  |      |      |     |  |      | 
|First
  Quarter  |  |      | 6.67 |     |  | 4.95 | 
|Second
  Quarter |  |      | 5.23 |     |  | 4.36 | 
|Third
  Quarter  |  |      | 5.02 |     |  | 4.36 | 
|Fourth
  Quarter |  |      | 4.62 |     |  | 3.46 | 
|                 |  |      |      |     |  |      | 
|2006             |  |      |      |     |  |      | 
|First
  Quarter  |  |      | 5.08 |     |  | 3.84 | 

55

---

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

|                |  |      |      |     |  |      | 
|--------------- |  | ---- | ---- | --- |  | ---- | 
|                |  | High |      | Low | 
|                |  |      |      |     | 
|                |  |      |      |     |  |      | 
|December
  2005 |  |      | 3.95 |     |  | 3.73 | 
|January 2006    |  |      | 4.85 |     |  | 3.84 | 
|February
  2006 |  |      | 4.89 |     |  | 4.44 | 
|March 2006      |  |      | 5.08 |     |  | 4.75 | 
|April 2006      |  |      | 5.49 |     |  | 4.73 | 
|May 2006        |  |      | 5.38 |     |  | 4.63 | 

Plan of Distribution

Not
applicable.

Markets

See Offer and
Listing Details above.

Selling Shareholders

Not
applicable.

Dilution

Not
applicable.

Expenses of the Issue

Not applicable.

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

Memorandum and Articles of Association

A
description of our memorandum and articles of association was previously
provided in our registration statement on Form F-1 (Registration Statement
333-12312) filed with the Securities and Exchange Commission on August 3, 2000,
and is incorporated herein by reference. The articles of association as amended
in August 2005 are included as Exhibit 1.2 to this annual report.

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.

56

---

---



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

Taxation

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

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

Israeli Capital Gains Tax on Sales of Shares

Israeli
law imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for
Israeli tax purposes, and on the sale of assets located in Israel,
including shares in Israeli companies, by 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.

Generally,
up until the 2006 tax year, capital gains tax was imposed on Israeli resident
individuals at a rate of 15% on real gains derived
on or after January 1, 2003, from the sale of shares in, among others, (i)
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, or (ii) companies dually
traded on both the TASE and Nasdaq or a recognized stock market outside of
Israel (such as Ceragon).
This tax rate was contingent upon, among others, 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 did not apply to:
(i) the sale of shares to a relative
(as defined in the Tax Ordinance); (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 were taxed at
corporate tax rates for corporations and at marginal tax rates of up to 49% for
individuals if the gain is considered ordinary income or at 25% if the gain is
considered capital gain).

As of
January 1, 2006, the tax rate applicable to capital gains derived from the sale
of shares, whether listed on a stock market or not, is 20% for Israeli
individuals, retroactive from January 1, 2003, unless such shareholder claims a
deduction for financing expenses in connection with such shares, in which case
the gain will generally be taxed at a rate of 25%. Additionally, if such
shareholder is considered a significant shareholder at any time during the 12-month
period preceding such sale (i.e. such shareholder holds directly or indirectly,
including jointly with others, at least 10% of any means of control in the
company) the tax rate will be 25%. Israeli companies are subject to the
corporate tax rate on capital gains derived from the sale of publicly-traded
shares, unless such companies were not subject to the Inflationary Adjustment
Law (or certain regulations) at the time of publication of the aforementioned
amendment to the Tax Ordinance, in which case the applicable tax rate is 25%.
However, the foregoing tax rates would not apply to dealers in securities and
shareholders who acquired their shares prior to an initial public offering.

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

57

---

---



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

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

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

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

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

Israeli Taxation of Non-Resident Holders of
Our Shares

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

|                                                                              |   |                                                                                                                                                                                               |      |                    |  |    |  
|----------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------ |  | -- | -
|                                                                              |   | Dividends not generated by an approved
  enterprise (or Benefited
  Enterprise                                                                                                                |      |                   
|                                                                              |   |                                                                                                                                                                                               |      |                   
|                                                                              |   |                                                                                                                                                                                               |      |                   
|Dividends generated by
  an approved enterprise
  (or Benefited
  Enterprise) |   | U.S. company holding 10% or more of our issued voting power during
  the part of the tax year which precedes the date of payment of the dividend
  and during the whole of its prior tax year |      | Other non-resident
|                                                                              |   |                                                                                                                                                                                               |      |                   
|                                                                              |   |                                                                                                                                                                                               |      |                   
|15                                                                            | % |                                                                                                                                                                                               | 12.5 | %                  |  | 25 | %

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,

58

---

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

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

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

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

In
addition, this discussion does not address any aspect of state, local or
non-U.S. tax laws, or 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.

59

---

---



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. Dividends that are received through the taxable year
ending December 31, 2008 by U.S. holders that are individuals, estates or
trusts generally will be taxed at the rate applicable to long-term capital
gains (a maximum rate of 15%), provided that such dividends meet the
requirements of qualified dividend income. Dividends that fail to meet such
requirements, and dividends received by corporate U.S. holders, are taxed at
ordinary income rates. No dividend received by a U.S. holder will be a
qualified dividend (1) if the U.S. holder held the ordinary share with respect
to which the dividend was paid for less than 61 days during the 121-day period
beginning on the date that is 60 days before the ex-dividend date with respect
to such dividend, excluding for this purpose, under the rules of Code section
246(c), any period during which the U.S. holder has an option to sell, is under
a contractual obligation to sell, has made and not closed a short sale of, is
the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or
has otherwise diminished its risk of loss by holding other positions with
respect to, such ordinary share (or substantially identical securities); or (2)
to the extent that the U.S. holder is under an obligation (pursuant to a short
sale or otherwise) to make related payments with respect to positions in
property substantially similar or related to the ordinary share with respect to
which the dividend is paid. If we were to be a passive foreign investment
company (as such term is defined in the Code) for any year, dividends paid on
our ordinary shares in such year or in the following year would not be
qualified dividends. In addition, a non-corporate U.S. holder will be able to
take a qualified dividend into account in determining its deductible investment
interest (which is generally limited to its net investment income) only if it
elects to do so; in such case the dividend will be taxed at ordinary income
rates. Corporate holders will not be allowed a deduction for dividends received
in respect of the ordinary shares.

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

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

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

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

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

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

60

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---



Taxation of the Disposition of Ordinary
Shares

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

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

Tax Consequences if We Are a Passive Foreign
Investment Company

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

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

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

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

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

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

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.

61

---

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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 2004, there can be no assurance that
the IRS will agree with that conclusion or that we will not become a PFIC in
2005 or in a subsequent year. The tests for determining PFIC status are applied
annually and it is difficult to make accurate predictions of future income and
assets, which are relevant to this determination. U.S. holders who hold
ordinary shares during a period when we are a PFIC will be subject to these
rules, even if we cease to be a PFIC, subject to specified exceptions for U.S.
holders who made a QEF election. U.S. holders are urged to consult their tax
advisors about the PFIC rules, including QEF and mark-to-market elections.

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

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

| |   |                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the item is
  effectively connected with the conduct by the non-U.S. holder of a trade or
  business in the United States and:                                                                                                       
| |   |                                                                                                                                                                                                                                      
| |  | (i) in the
  case of a resident of a country which has a treaty with the United States,
  the item is attributable to a permanent establishment; or                                                                                  
| |   |                                                                                                                                                                                                                                      
| |  | (ii) in the
  case of an individual, the item is attributable to a fixed place of business
  in the United States;                                                                                                                   
| |   |                                                                                                                                                                                                                                      
| |  | the non-U.S.
  holder is an individual who holds the ordinary shares as a capital asset and
  is present in the United States for 183 days or more in the taxable year of
  the disposition and does not qualify for an exemption; or
| |   |                                                                                                                                                                                                                                      
| |  | the non-U.S.
  holder is subject to tax under the provisions of U.S. tax law applicable to
  U.S. expatriates.                                                                                                                       

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 28% (for taxable years through 2010) 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 28% 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.

62

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Documents on Display

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

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

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

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

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

We
are exposed to financial market risk associated with changes in foreign
currency exchange rates. A majority of our revenue is generated, and a
substantial portion of our expenses is incurred, in dollars. A portion of our
expenses and revenues, however, are denominated in non-dollar currencies. Since
our financial results are reported in dollars, fluctuations in the rates of
exchange between the dollar and non-dollar currencies may have an effect on our
results of operations. In order to reduce such effect, we hedge a portion of
certain income and expense transactions denominated in non-dollar currencies as
well as a portion of certain monetary items in the balance sheet, such as trade
receivables and trade payables, denominated in non-dollar currencies. The
counter-parties to our hedging transactions are major financial institutions
with high credit ratings. As of December 31, 2005, we had forward contracts to
sell up to $7.1 million for a total amount of approximately NIS 32.9 million
(that would mature before September 30, 2006).

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

We
do not invest in interest rate derivative financial instruments.

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

Not
applicable.

PART II

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

None.

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

Use of Proceeds

As
of December 31, 2005, approximately 60% of the net offering proceeds from our
initial public offering were invested in short term investments. The remaining
40% of the net offering proceeds were invested in long term investments. During
fiscal year 2005 we used $0.9 million of the net offering proceeds on capital
expenditures, including manufacturing equipment, research equipment and
leasehold improvements.

63

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

(a) The
Company performed an evaluation of the effectiveness of its disclosure controls
and procedures that are designed to ensure that the material financial and
non-financial information required to be disclosed to the 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
were no changes in the Companys internal control over financial reporting that
occurred during the year ended December 31, 2005 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

|          |                                 
|--------- | --------------------------------
|ITEM 16.  | [RESERVED]                      
|          |                                 
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT

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

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

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

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

Fees Paid to Independent Auditors

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

|                  |  |                         |        |             |     |      |  |             |         |  |     |  | 
|----------------- |  | ----------------------- | ------ | ----------- | --- | ---- |  | ----------- | ------- |  | --- |  | 
|                  |  | Year Ended December 31, |       
|                  |  | 2004                    |        | 2005        |    
|                  |  |                         |        |             |    
|Services Rendered |  | Fees                    |        | Percentages |     | Fees |  | Percentages |        
|                  |  |                         |        |             |     |      |  |             |        
|Audit (1)         |  | $                       | 55,000 |             | 87  |      |  | $           | 75,000  |  | 68  |  | 
|Audit-related(2)  |  |                         |       |             |    |      |  |             | 20,000  |  | 18  |  | 
|Tax (3)           |  |                         | 8,150  |             | 13  |      |  |             | 15,000  |  | 14  |  | 
|                  |  |                         |        |             |     |      |  |             |         |  |     |  | 
|Total             |  | $                       | 63,150 |             | 100 |      |  | $           | 110,000 |  | 100 |  | 

|    |                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees
  consist of services that would normally be provided in connection with
  statutory and regulatory filings or engagements, including services that
  generally only the independent accountant can reasonably provide.            
|    |                                                                                                                                                                                                                                               
|(2) | Audit-related
  fees relate to assurance and associated services that traditionally are
  performed by the independent auditor, including: accounting consultation and
  consultation concerning financial accounting and reporting standards.
|    |                                                                                                                                                                                                                                               
|(3) | Tax fees
  relate to tax compliance, planning and advice.                                                                                                                                                                                     

64

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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.

PART III

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

Not
applicable.

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

The
Consolidated Financial Statements and related notes thereto required by this
item are contained on pages F-1 through F-35 hereof.

|                                             |                                                                                                      |      |    
|-------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ---- | ---
|Index to
  Consolidated Financial Statements |                                                                                                      | PAGE
|                                             |                                                                                                      |     
|                                             | Reports of Independent Auditors and
  Independent Public Accountants                                 |      | F-2
|                                             | Consolidated Balance Sheets at December 31,
  2005 and 2004                                          |      | F-3
|                                             | Consolidated Statements of Operations for
  the Years Ended December 31, 2005, 2004 and 2003         |      | F-5
|                                             | Statements of Changes in Shareholders
  Equity for the Years Ended December 31, 2005, 2004 and 2003 |      | F-6
|                                             | Consolidated Statements of Cash Flows for
  the Years Ended December 31, 2005, 2004 and 2003         |      | F-7
|                                             | Notes to Consolidated Financial Statements                                                           |      | F-8

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

|     |                                                                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1  | Memorandum
  of Association (English translation accompanied by Hebrew original)*                                                                                                                    
|1.2  | Articles of
  Association, as amended August 25, 2005                                                                                                                                                
|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                                                                                                                                                                    
|12.1 | Certification
  by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002                                                                                               
|12.2 | Certification
  by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002                                                                                               
|13.1 | Certification
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002                                                                           
|     |                                                                                                                                                                                                      
|*    | Previously
  filed as exhibit 3.1 in connection with the Companys Registration Statement
  on Form F-1 (Registration Statement 333-12312) on August 3, 2000 and
  incorporated herein by reference. 
|     |                                                                                                                                                                                                      
|**   | Previously
  filed as exhibit 10.3 in connection with the Companys Registration Statement
  on Form F-1 (Registration Statement 333-12312) on August 3, 2000 and
  incorporated herein by reference.

65

---

---

CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2005

IN U.S. DOLLARS

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

---

---



(ERNST & YOUNG LOGO)

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

CERAGON NETWORKS LTD.

We
have audited the accompanying consolidated balance sheets of Ceragon Networks
Ltd. (the Company) and its subsidiaries as of December 31, 2004 and 2005, 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, 2005. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to perform an audit of
the Companys internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purposes of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2004 and 2005, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005, in conformity with United
States generally accepted accounting principles.

|                   |                                 
|------------------ | --------------------------------
|Tel-Aviv, Israel   | KOST FORER GABBAY & KASIERER    
|February 6,
  2006 | A Member of Ernst & Young Global

F-2

---

---



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

|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | -------------- |  | ---- | ------ |  | - | ------ | 
|                                                                                                                              |  |      |   | December
  31, | 
|                                                                                                                              |  |      |   |                | 
|                                                                                                                              |  | Note |   | 2004           |  | 2005 |       
|                                                                                                                              |  |      |   |                |  |      |       
|ASSETS                                                                                                                        |  |      |   |                |  |      |        |  |   |        | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|CURRENT ASSETS:                                                                                                               |  |      |   |                |  |      |        |  |   |        | 
|Cash and cash equivalents                                                                                                     |  |      |   |                |  | $    | 11,234 |  | $ | 10,315 | 
|Short-term bank deposits                                                                                                      |  |      |   |                |  |      | 3,973  |  |   | 3,917  | 
|Short-term marketable securities                                                                                              |  |      | 3 |                |  |      | 11,101 |  |   | 5,654  | 
|Trade receivables (net of allowance for
  doubtful accounts of $ 575 and $ 518 at December 31, 2004 and 2005,
  respectively) |  |      |   |                |  |      | 6,939  |  |   | 15,079 | 
|Other accounts receivable and prepaid
  expenses                                                                              |  |      | 4 |                |  |      | 4,435  |  |   | 5,141  | 
|Inventories                                                                                                                   |  |      | 5 |                |  |      | 19,083 |  |   | 16,144 | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|Total current
  assets                                                                                                        |  |      |   |                |  |      | 56,765 |  |   | 56,250 | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|LONG-TERM ASSETS:                                                                                                             |  |      |   |                |  |      |        |  |   |        | 
|Long-term bank deposits                                                                                                       |  |      |   |                |  |      | 4,451  |  |   | 5,322  | 
|Long-term marketable securities                                                                                               |  |      | 3 |                |  |      | 7,042  |  |   | 7,814  | 
|Long-term receivables                                                                                                         |  |      |   |                |  |      | 390    |  |   | -      | 
|Severance pay fund                                                                                                            |  |      |   |                |  |      | 1,947  |  |   | 2,142  | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|Total long-term
  assets                                                                                                      |  |      |   |                |  |      | 13,830 |  |   | 15,278 | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|PROPERTY AND EQUIPMENT, NET                                                                                                   |  |      | 6 |                |  |      | 2,516  |  |   | 2,464  | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 
|Total assets                                                                                                                  |  |      |   |                |  | $    | 73,111 |  | $ | 73,992 | 
|                                                                                                                              |  |      |   |                |  |      |        |  |   |        | 

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

F-3

---

---



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

|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | ---- | -------------- | ---- | -------- | - | - | -------- | -
|                                                                                                                                                                      |  |      |   |      | December
  31, |     
|                                                                                                                                                                      |  |      |   |      |                |     
|                                                                                                                                                                      |  | Note |   | 2004 |                | 2005 |         
|                                                                                                                                                                      |  |      |   |      |                |      |         
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                  |  |      |   |      |                |      |          |   |   |          |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                  |  |      |   |      |                |      |          |   |   |          |  
|Trade payables                                                                                                                                                        |  |      |   |      |                | $    | 9,348    |   | $ | 12,382   |  
|Deferred revenues                                                                                                                                                     |  |      |   |      |                |      | 3,114    |   |   | 3,456    |  
|Other accounts payable and accrued
expenses                                                                                                                           |  |      | 7 |      |                |      | 5,476    |   |   | 5,541    |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|Total current
  liabilities                                                                                                                                           |  |      |   |      |                |      | 17,938   |   |   | 21,379   |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|ACCRUED SEVERANCE PAY                                                                                                                                                 |  |      |   |      |                |      | 2,986    |   |   | 3,424    |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|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, 2004 and 2005; Issued and outstanding: 25,853,421 and 26,335,003 shares
  at December 31, 2004 and 2005, respectively |  |      |   |      |                |      | 64       |   |   | 65       |  
|Additional paid-in capital                                                                                                                                            |  |      |   |      |                |      | 176,546  |   |   | 177,338  |  
|Deferred stock compensation                                                                                                                                           |  |      |   |      |                |      | (73      | ) |   | (26      | )
|Accumulated other comprehensive income                                                                                                                                |  |      |   |      |                |      | 62       |   |   | 51       |  
|Accumulated deficit                                                                                                                                                   |  |      |   |      |                |      | (124,412 | ) |   | (128,239 | )
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|Total
  shareholders equity                                                                                                                                          |  |      |   |      |                |      | 52,187   |   |   | 49,189   |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|Total liabilities
  and shareholders equity                                                                                                                          |  |      |   |      |                | $    | 73,111   |   | $ | 73,992   |  
|                                                                                                                                                                      |  |      |   |      |                |      |          |   |   |          |  
|                                                                                                                                                                      |  |      |   |      |               

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

|                        |  |                         |  |                        
|----------------------- |  | ----------------------- |  | -----------------------
|February
  6, 2006      |  | /s/ Tali Idan           |  | /s/ Ira Palti          
|                        |  |                         |  |                        
|Date of approval of the |  | Tali Idan               |  | Ira Palti              
|financial statements    |  | Chief Financial Officer |  | Chief Executive Officer

F-4

---

---



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

|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|------------------------------------------------------------------------- |  | ---- | ------ | ---- | ----------------------- | ------ | - | ---- | ------ |  | - | ------ | -
|                                                                          |  |      |        |      | Year ended December 31, |       
|                                                                          |  |      |        |      |                         |       
|                                                                          |  | Note |        | 2003 |                         | 2004   |   | 2005 |       
|                                                                          |  |      |        |      |                         |        |   |      |       
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|Revenues                                                                  |  |      | 12a    |      | $                       | 34,421 |   | $    | 54,831 |  | $ | 73,777 |  
|Cost of revenues                                                          |  |      |        |      |                         | 20,755 |   |      | 32,227 |  |   | 52,487 |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|                                                                         
|Gross profit                                                              |  |      |        |      |                         | 13,666 |   |      | 22,604 |  |   | 21,290 |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|Operating expenses:                                                       |  |      |        |      |                         |        |   |      |        |  |   |        |  
|Research and development                                                  |  |      |        |      |                         | 9,346  |   |      | 9,772  |  |   | 10,713 |  
|Less - grants and participations                                          |  |      |        |      |                         | 1,976  |   |      | 2,293  |  |   | 1,752  |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|                                                                         
|Research and development, net                                             |  |      |        |      |                         | 7,370  |   |      | 7,479  |  |   | 8,961  |  
|Selling and marketing                                                     |  |      |        |      |                         | 9,967  |   |      | 11,841 |  |   | 13,629 |  
|General and administrative                                                |  |      |        |      |                         | 2,482  |   |      | 2,485  |  |   | 3,200  |  
|Restructuring and non-recurring income                                    |  |      | 11     |      |                         | (704   | ) |      | -      |  |   | -      |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|Total operating
  expenses                                                |  |      |        |      |                         | 19,115 |   |      | 21,805 |  |   | 25,790 |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|Operating income (loss)                                                   |  |      |        |      |                         | (5,449 | ) |      | 799    |  |   | (4,500 | )
|Financial income, net                                                     |  |      | 12b    |      |                         | 1,159  |   |      | 674    |  |   | 607    |  
|Other financial expenses - non-cash charge relating to puttable
  warrant |  |      | 2v, 9c |      |                         | (3,432 | ) |      | -      |  |   | -      |  
|Other income                                                              |  |      |        |      |                         | -      |   |      | 141    |  |   | 66     |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|Net income (loss)                                                         |  |      |        |      | $                       | (7,722 | ) | $    | 1,614  |  | $ | (3,827 | )
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  
|Net earnings (loss) per share:                                            |  |      |        |      |                         |        |   |      |        |  |   |        |  
|Basic and diluted net earnings (loss) per
  Ordinary share                |  |      | 12c    |      | $                       | (0.33  | ) | $    | 0.06   |  | $ | (0.15  | )
|                                                                          |  |      |        |      |                         |        |   |      |        |  |   |        |  

Amortization of deferred stock compensation presented in previous years
was reclassified in the relevant expense lines.

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

F-5

---

---



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

|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|---------------------------------------------------------------------- |  | ------------ | ------ | ------------------------ | - | ------------------------- | - | ----------------------------------------------- | ------ | ------------------ | - | -------------------------------------------- | - | ------------------------------- | -------- | - | - | ------ | - | - | ------ | -
|                                                                       |  | Sharecapital |        | Additionalpaid-incapital |   | Deferredstockcompensation |   | Accumulated 
  other 
  comprehensive 
  income |        | Accumulateddeficit |   | Total other
  comprehensive 
  income (loss) |   | Total
  shareholders 
  equity |         
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |         
|Balance as of January 1, 2003                                          |  | $            | 56     |                          | $ | 169,286                   |   | $                                               | (1,772 | )                  | $ | -                                            |   | $                               | (118,304 | ) |   |        |   | $ | 49,266 |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Issuance of restricted shares to a lessor,
net                         |  |              | *)
  - |                          |   | 314                       |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 314    |  
|Stock-based compensation related to warrants
granted to consultants    |  |              | -      |                          |   | 7                         |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 7      |  
|Exercise of puttable warrant to supplier                               |  |              | 2      |                          |   | 4,305                     |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 4,307  |  
|Exercise of stock options                                              |  |              | 3      |                          |   | 1,154                     |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 1,157  |  
|Reversal of deferred stock compensation related to
forfeited options   |  |              | -      |                          |   | (23                       | ) |                                                 | 23     |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | -      |  
|Amortization of deferred stock
compensation                            |  |              | -      |                          |   | -                         |   |                                                 | 1,354  |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 1,354  |  
|Comprehensive loss:                                                    |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Income tax benefit derived from exercise of employee stock options(**) |  |              | -      |                          |   | -                         |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   | -      |   |   | -      |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Net loss                                                               |  |              | -      |                          |   | -                         |   |                                                 | -      |                    |   | -                                            |   |                                 | (7,722   | ) | $ | -      |   |   | (7,722 | )
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Total comprehensive loss                                               |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   | $ | -      |   |   |        |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Balance as of December 31, 2003                                        |  |              | 61     |                          |   | 175,043                   |   |                                                 | (395   | )                  |   | -                                            |   |                                 | (126,026 | ) |   |        |   |   | 48,683 |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Exercise of stock options                                              |  |              | 3      |                          |   | 1,451                     |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 1,454  |  
|Deferred stock compensation                                            |  |              | -      |                          |   | 60                        |   |                                                 | (60    | )                  |   | -                                            |   |                                 | -        |   |   |        |   |   | -      |  
|Reversal of deferred stock compensation related to
forfeited options   |  |              | -      |                          |   | (8                        | ) |                                                 | 8      |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | -      |  
|Amortization of deferred stock
compensation                            |  |              | -      |                          |   | -                         |   |                                                 | 374    |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 374    |  
|Comprehensive income:                                                  |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Income tax benefit derived from exercise of employee stock options **) |  |              | -      |                          |   | -                         |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   | -      |   |   | -      |  
|Unrealized gain from hedging activities                                |  |              | -      |                          |   | -                         |   |                                                 | -      |                    |   | 62                                           |   |                                 | -        |   | $ | 62     |   |   | 62     |  
|Net income                                                             |  |              | -      |                          |   | -                         |   |                                                 | -      |                    |   | -                                            |   |                                 | 1,614    |   |   | 1,614  |   |   | 1,614  |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Total comprehensive income                                             |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   | $ | 1,676  |   |   |        |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Balance as of December 31, 2004                                        |  |              | 64     |                          |   | 176,546                   |   |                                                 | (73    | )                  |   | 62                                           |   |                                 | (124,412 | ) |   |        |   |   | 52,187 |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Exercise of stock options                                              |  |              | 1      |                          |   | 677                       |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 678    |  
|Amortization of stock compensation related to
accelerated options      |  |              | -      |                          |   | 115                       |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 115    |  
|Amortization of deferred stock
compensation                            |  |              | -      |                          |   | -                         |   |                                                 | 47     |                    |   | -                                            |   |                                 | -        |   |   |        |   |   | 47     |  
|Comprehensive loss:                                                    |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Income tax benefit derived from exercise of employee stock options **) |  |              | -      |                          |   | -                         |   |                                                 | -      |                    |   | -                                            |   |                                 | -        |   |   | -      |   |   | -      |  
|Unrealized loss from hedging activities                                |  |              | -      |                          |   | -                         |   |                                                 | -      |                    |   | (11                                          | ) |                                 | -        |   | $ | (11    | ) |   | (11    | )
|Net loss                                                               |  |              | -      |                          |   | -                         |   |                                                 | -      |                    |   | -                                            |   |                                 | (3,827   | ) |   | (3,827 | ) |   | (3,827 | )
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Total comprehensive loss                                               |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   | $ | (3,838 | ) |   |        |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  
|Balance as of December 31, 2005                                        |  | $            | 65     |                          | $ | 177,338                   |   | $                                               | (26    | )                  | $ | 51                                           |   | $                               | (128,239 | ) |   |        |   | $ | 49,189 |  
|                                                                       |  |              |        |                          |   |                           |   |                                                 |        |                    |   |                                              |   |                                 |          |   |   |        |   |   |        |  

*)          Represents
an amount lower than $ 1.

**)          The
income tax benefit for the years ended  December 31, 2003,  2004 and 2005 were $ 738, $ 1,784 and
$ 168, respectively, for which a full valuation allowance was provided (see also Note 10e).

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

F-6

---

---



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

|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|----------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ------ | -
|                                                                                                |  | Year ended December 31, |        
|                                                                                                |  |                         |        
|                                                                                                |  | 2003                    |         | 2004 |   | 2005   |  
|                                                                                                |  |                         |         |      |   |        |  
|Cash flows from operating activities:                                                           |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Net income (loss)                                                                               |  | $                       | (7,722  | )    | $ | 1,614  |   | $ | (3,827 | )
|Adjustments required to reconcile net income (loss)
to net cash used
  in operating activities: |  |                         |         |      |   |        |   |   |        |  
|Depreciation                                                                                    |  |                         | 1,306   |      |   | 833    |   |   | 972    |  
|Amortization of deferred stock
compensation                                                     |  |                         | 1,354   |      |   | 374    |   |   | 47     |  
|Amortization of stock compensation related to
accelerated options                               |  |                         | -       |      |   | -      |   |   | 115    |  
|Stock-based compensation related to warrants
granted to consultants                             |  |                         | 7       |      |   | -      |   |   | -      |  
|Other financial expense - non-cash charge relating
to puttable warrant                          |  |                         | 3,432   |      |   | -      |   |   | -      |  
|Gain from sale of property and equipment                                                        |  |                         | (34     | )    |   | (4     | ) |   | (2     | )
|Accrued severance pay, net                                                                      |  |                         | 162     |      |   | 252    |   |   | 243    |  
|Decrease (increase) in accrued interest on bank
deposits                                        |  |                         | 212     |      |   | 20     |   |   | (42    | )
|Interest accrued and amortization of premium on
held-to-maturity
  marketable securities        |  |                         | (142    | )    |   | 298    |   |   | 269    |  
|Increase in trade receivables, net                                                              |  |                         | (727    | )    |   | (1,883 | ) |   | (8,140 | )
|Increase in other accounts receivable and prepaid
expenses                                      |  |                         | (1,624  | )    |   | (1,631 | ) |   | (717   | )
|Decrease (increase) in inventories                                                              |  |                         | (3,049  | )    |   | (7,980 | ) |   | 2,939  |  
|Decrease (increase) in long-term
receivables                                                    |  |                         | -       |      |   | (240   | ) |   | 390    |  
|Increase in trade payables                                                                      |  |                         | 163     |      |   | 3,686  |   |   | 3,034  |  
|Increase in deferred revenues                                                                   |  |                         | 1,211   |      |   | 1,256  |   |   | 342    |  
|Increase in other accounts payable and accrued
expenses                                         |  |                         | 560     |      |   | 1,702  |   |   | 65     |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Net cash used in operating activities                                                           |  |                         | (4,891  | )    |   | (1,703 | ) |   | (4,312 | )
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Cash flows from investing activities:                                                           |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Purchase of property and equipment                                                              |  |                         | (413    | )    |   | (711   | ) |   | (938   | )
|Proceeds from sale of property and
equipment                                                    |  |                         | 90      |      |   | 33     |   |   | 20     |  
|Short-term bank deposits, net                                                                   |  |                         | 4,290   |      |   | 6,998  |   |   | 2,563  |  
|Investment in long-term bank deposits                                                           |  |                         | (1,464  | )    |   | (3,413 | ) |   | (3,336 | )
|Investment in marketable securities                                                             |  |                         | (11,205 | )    |   | (9,420 | ) |   | (4,770 | )
|Proceeds from maturities of held-to-maturity
marketable securities                              |  |                         | 15,055  |      |   | 10,689 |   |   | 9,176  |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Net cash provided by investing activities                                                       |  |                         | 6,353   |      |   | 4,176  |   |   | 2,715  |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Cash flows from financing activities:                                                           |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Proceeds from exercise of stock options                                                         |  |                         | 1,157   |      |   | 1,454  |   |   | 678    |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Net cash provided by financing activities                                                       |  |                         | 1,157   |      |   | 1,454  |   |   | 678    |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Increase (decrease) in cash and cash equivalents                                                |  |                         | 2,619   |      |   | 3,927  |   |   | (919   | )
|Cash and cash equivalents at the beginning of the year                                          |  |                         | 4,688   |      |   | 7,307  |   |   | 11,234 |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Cash and cash equivalents at the end of the year                                                |  | $                       | 7,307   |      | $ | 11,234 |   | $ | 10,315 |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Supplemental disclosure of non-cash investing and financing
  activities:                       |  |                         |         |      |   |        |   |   |        |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Issuance of restricted shares to lessor                                                         |  | $                       | 314     |      | $ | -      |   | $ | -      |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  
|Exercise of puttable warrant                                                                    |  | $                       | 4,307   |      | $ | -      |   | $ | -      |  
|                                                                                                |  |                         |         |      |   |        |   |   |        |  

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

F-7

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1:    | GENERAL                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|            | Ceragon Networks Ltd. (the Company) designs, develops, manufactures
  and sells high-capacity wireless backhaul solutions for cellular operators,
  fixed operators and private networks and enterprises. The Company sells its
  products through a direct sales force, systems integrators, distributors and
  original equipment manufacturers.
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|            | The Company has nine wholly-owned subsidiaries in Brazil, France,
  Germany, Hong Kong, India, Mexico, the Philippines, United Kingdom and United
  States. The subsidiaries provide marketing, distribution, sales and technical
  support to the Companys customers worldwide. As of December 31, 2005,
  the German subsidiary was inactive.    
|            |                                                                                                                                                                                                                                                                                                                                                     
|            | As to principal markets and major customers, see Note 12.                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                     
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                                                                                                                                                                                                                                     
|            | a.                                                                                                                                                                                                                                                                                                                                                   | Basis of presentation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                      | The
  consolidated financial statements have been prepared in accordance with U.S
  generally accepted accounting principles (U.S. GAAP).                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|            | b.                                                                                                                                                                                                                                                                                                                                                   | Use of estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|            |                                                                                                                                                                                                                                                                                                                                                      | The preparation of financial statements in conformity with generally
  accepted accounting principles requires management to make estimates and
  assumptions that affect the amounts reported in the financial statements and
  accompanying notes. Actual results could differ from those estimates.                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | c.                                                                                                                                                                                                                                                                                                                                                   | Financial
  statements in U.S. dollars:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|            |                                                                                                                                                                                                                                                                                                                                                      | A majority
  of the revenues of the Company and certain of its subsidiaries are generated
  in U.S. dollars (dollars). In addition, a substantial portion of the
  Companys and certain of its subsidiaries costs is incurred in dollars.
  Since management believes that the dollar is the primary currency in the
  economic environment in which the Company and certain of its subsidiaries
  operate, the dollar is their functional and reporting currency. Accordingly,
  amounts in currencies other than U.S dollars have been translated as follows:
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                      | Monetary
  balances - at the exchange rate in effect on the balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                      | Costs - at
  the exchange rates in effect as of the date of recognition of the
  transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                      | All exchange
  gains and losses from the remeasurement mentioned above are reflected in the
  statement of operations in financial income, net.                                                                                                                                                                                                                                                                                                                                                                                                                    

F-8

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | Management
  considers the non-U.S. subsidiaries (except for Mexico) to be a direct,
  integral extension of the parent companys operations. Accordingly, the
  functional currency of these subsidiaries is the dollar.                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | For the
  Mexican subsidiary whose functional currency has been determined to be its
  local currency, assets and liabilities are translated at year-end exchange
  rates and statement of operations items are translated at average exchange
  rates prevailing during the year. Related translation adjustments were not recorded
  as a separate component of accumulated other comprehensive income (loss) in
  shareholders equity due to immateriality.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | d.                                      | Principles of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The
  consolidated financial statements include the accounts of the Company and its
  subsidiaries (the Group). Intercompany balances and transactions including
  profits from intercompany sales not yet realized outside the Group, have been
  eliminated upon consolidation.                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | e.                                      | Cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Cash equivalents include short-term, highly liquid investments that
  are readily convertible to cash with original maturities of three months or
  less.                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | f.                                      | Short-term and long-term bank deposits:                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Short-term bank deposits are deposits with maturities of more than
  three months and up to one year. The short-term bank deposits are in U.S.
  dollars and bear interest at an average rate of 2.64%. The short-term bank
  deposits are presented at their cost, including accrued interest.                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Long-term bank deposits are deposits with maturities of more than one
  year. The long-term deposits are in U.S. dollars and bear interest at an
  average rate of 4.03%. The long-term bank deposits are presented at their
  cost, including accrued interest.                                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | g.                                      | Marketable securities:                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|            |                                         | The Company accounts for investments in marketable securities in
  accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
  Equity Securities (SFAS 115).                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Management determines the appropriate classification of its
  investments in marketable debt securities at the time of purchase and
  reevaluates such determinations at each balance sheet date. Marketable
  securities are classified as held-to-maturity as the Company has the positive
  intent and ability to hold the securities to maturity. Such marketable
  securities are stated at amortized cost plus accrued interest.                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|            |                                         | During the years ended December 31, 2004 and 2005, all securities
  covered by SFAS 115 were designated by the Companys management as
  held-to-maturity.                                                                                                                                                                                                                                                                                                     

F-9

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                         |                                                                                                                                                                                       | 
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | Amortization
  of premium and accretion of discounts, as well as interest and decline in
  value judged to be other than temporary, are included in financial income,
  net.         
|            |                                         |                                                                                                                                                                                      
|            | h.                                      | Inventories:                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                      
|            |                                         | Inventories
  are stated at the lower of cost or market value.                                                                                                                       
|            |                                         |                                                                                                                                                                                      
|            |                                         | Cost is determined as follows:                                                                                                                                                       
|            |                                         |                                                                                                                                                                                      
|            |                                         | Raw materials - using the moving average cost method.                                                                                                                                
|            |                                         |                                                                                                                                                                                      
|            |                                         | Work in progress and finished products - recorded on the basis of
  direct manufacturing costs with the addition of allocable indirect
  manufacturing costs.                        
|            |                                         |                                                                                                                                                                                      
|            |                                         | The Company
  periodically assesses its inventory and writes down the value of inventory to
  cover risks arising from technological obsolescence or excess inventory.               
|            |                                         |                                                                                                                                                                                      
|            | i.                                      | Property and equipment:                                                                                                                                                              
|            |                                         |                                                                                                                                                                                      
|            |                                         | Property and
  equipment are stated at cost. Depreciation is calculated by the straight-line
  method over the estimated useful lives of the assets, at the following annual
  rates:

| |                                                     |                                                                   
| | --------------------------------------------------- | ------------------------------------------------------------------
| |                                                     | %                                                                 
| |                                                     |                                                                   
| | Computers,
  manufacturing and peripheral equipment | 15 - 33                                                           
| | Office
  furniture and equipment                    | 7                                                                 
| | Leasehold
  improvements                            | By the shorter of the term of
  the lease or the life of the asset

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | j. | Impairment of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The
  Companys and its subsidiaries long-lived assets are reviewed for impairment
  in accordance with Statement of Financial Accounting Standard No. 144
  Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144),
  whenever events or changes in circumstances indicate that the carrying amount
  of an asset may not be recoverable. Recoverability of assets to be held and
  used is measured by a comparison of the carrying amount of an asset to the
  future undiscounted cash flows expected to be generated by the asset. If an
  asset is considered to be impaired, the impairment to be recognized is
  measured by the amount by which the carrying amount of the asset exceeds its
  fair value. Assets to be disposed of are reported at the lower of the
  carrying amount or fair value less costs to sell. During 2003, 2004 and 2005,
  no impairment losses have been identified.

F-10

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | k.                                      | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | The Company
  and its subsidiaries account for income taxes using the liability method
  whereby deferred tax asset and liability account balances are determined based
  on differences between the financial reporting and tax bases of assets and
  liabilities and are measured using 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 the amounts that are more likely-than-not to be realized.                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|            | l.                                      | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | The Company
  and its subsidiaries generate their revenues from selling their products to
  end users, distributors, system integrators and original equipment
  manufacturers (OEM).                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | Revenues from product sales are recognized in accordance with SEC
  Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104),
  when delivery has occurred, persuasive evidence of an arrangement exists, the
  vendors fee is fixed or determinable, no future obligation exists and
  collectibility is probable.                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | The Company
  generally does not grant a right of return to its customers. When a right of
  return exists, the Company creates a provision for returns according to SFAS
  48, Revenue Recognition When Right of Return Exists.                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | When sale arrangements include customer acceptance provision with
  respect to products, revenue is not recognized before the Company has
  demonstrated that the criteria specified in the acceptance provisions have
  been satisfied, or that the acceptance provision has lapsed.                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | Revenue from certain arrangements includes multiple elements which
  are sale of products and post delivery installation services that are not
  essential to the functionality of the equipment, within a single contract.
  The Companys accounting policy complies with the requirements set forth in
  Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements
  with Multiple Deliverables (EITF 00-21) , relating to the separation of
  multiple deliverables into individual accounting units with determinable fair
  values and revenue from such arrangements is recognized under SAB 104.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | The Company also applies Emerging Issues Task Force (EITF) 99-19,
  Reporting Revenues Gross as a Principal versus Net as an Agent (EITF
  99-19), regarding arrangements where the Company also provides third party
  equipment and reports revenues gross as a principal.                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|            |                                         | In arrangements which include multiple elements, the Company
  considers the sale of equipment and its installation to be two separate units
  of accounting in the arrangement, since the installation is not essential to
  the functionality of the equipment and fair value of such services exits and
  defers the fair value of the installation service (but not less than the
  amount contingent upon completion of installation, if any) to the period in
  which such installation occurs.                                                                                                                       

F-11

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | Fair value for installation of the Companys products is determined
  based on available third-party evidence which is determined by using the
  price third-parties charge the Company.                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | Deferred revenues include amounts received from customers for which
  revenue has not been recognized.                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | m.                                      | Research and development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | Research and
  development costs, net of grants received, are charged to the statement of
  operations as incurred.                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | n.                                      | Royalty-bearing grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | Royalty-bearing
  grants from the Government of Israel for funding approved research and
  development projects are recognized at the time the Company is entitled to
  such grants, on the basis of the costs incurred and included as a deduction
  from research and development costs. Such grants are recorded as a reduction
  of research and development costs since when received it is not probable that
  the grants will be repaid (see also Notes 7 and 8).
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | o.                                      | Derivative instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | The Company has instituted a foreign currency cash flow hedging
  program using foreign currency forward and options (derivative instruments)
  in order to hedge the exposure to variability in expected future cash flows
  resulting from changes in related foreign currency exchange rates. These
  transactions are designated as cash flow hedges, as defined by SFAS No. 133,
  Accounting for Derivative Instruments and Hedging Activities (SFAS 133).  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | SFAS 133 requires companies to recognize all of their derivative
  instruments as either assets or liabilities in the statement of financial
  position at fair value. The accounting for changes in the fair value (i.e.,
  gains or losses) of a derivative instrument depends on whether it has been
  designated and qualifies as part of a hedging relationship and further, on
  the type of hedging relationship.                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | For those derivative instruments that are designated and qualify as
  hedging instruments, a company must designate the hedging instrument, based
  upon the exposure being hedged, as a fair value hedge, cash flow hedge or a
  hedge of a net investment in a foreign operation.                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | For derivative instruments that are designated and qualify as a cash
  flow hedge (i.e., hedging the exposure to variability in expected future cash
  flows that is attributable to a particular risk), the effective portion of
  the gain or loss on the derivative instrument is reported as a component of
  other comprehensive income (loss) and reclassified into earnings in the same
  period or periods during which the hedged transaction affects earnings.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | The Company
  recognized income from derivative instruments of $204 and a loss of $28
  during the years ended December 31, 2004 and 2005, respectively, which have
  been recorded in the statement of operations.                                                                                                                                                                                                                                                     

F-12

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | The balance in accumulated other comprehensive income (loss) related
  to derivative instruments as of December 31, 2005 is expected to be
  recognized in the statement of operations over the next nine months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | p.                                      | Concentrations of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | Financial instruments that potentially subject the Company and its
  subsidiaries to concentrations of credit risk consist principally of cash and
  cash equivalents, short-term and long-term bank deposits, marketable
  securities and trade receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | The majority of the Companys cash and cash equivalents and
  short-term and long-term bank deposits are invested in U.S. dollar
  instruments with major banks worldwide. Such cash and cash equivalents and
  deposits in the United States may be in excess of insured limits and are not
  insured in other jurisdictions. Management believes that the financial
  institutions that hold the Companys investments are financially sound and,
  accordingly, minimal credit risk exists with respect to these investments.                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | The Companys trade receivables are derived from sales to customers
  located in North America, Europe, the Middle East, Africa, Asia-Pacific and
  Latin America. The Company and its subsidiaries generally do not require
  collateral; however, in certain circumstances, the Company and its
  subsidiaries may require letters of credit, additional guarantees or advance
  payments. The Company and its subsidiaries perform ongoing credit evaluations
  of their customers and insure certain trade receivables under credit
  insurance policies. An allowance for doubtful accounts is determined with
  respect to general reserve and specific receivables of which the collection
  may be doubtful                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | The Companys marketable securities include investments in U.S
  government and agencies debentures of corporations. Corporate debentures are
  of corporations with investment-grade ratings and credit exposure to any
  given corporation is limited. Management believes that the financial
  institutions that hold the Companys investments are financially sound and
  that the portfolio is well diversified and, accordingly, minimal credit risk
  exists with respect to these marketable securities.                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | During the years ended December 31, 2004 and 2005, the Company
  entered into transactions for the sale of trade receivables and promissory
  notes to Israeli financial institutions (control and risk were fully
  transferred) in a total amount of $ 7,506 and $ 2,552, respectively and
  accounted for those transactions according to SFAS No. 140, Accounting for
  Transfers and Servicing of Financial Assets and Extinguishments of
  Liabilities (SFAS 140). As of December 31, 2004 and 2005, the remaining
  balance of these sale transactions was $ 6,677 and $ 265, respectively. These
  transactions included a recourse provision (which did not violate the legal
  isolation and control criteria) and represents an off-balance-sheet credit
  risk to the Company.

F-13

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | q.                                      | Accounting for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | The Company
  has elected to follow Accounting Principles Board Opinion No. 25, Accounting
  for Stock Issued to Employees (APB 25), and FASB Interpretation No. 44,
  Accounting for Certain Transactions Involving Stock Compensation (FASB
  44), in accounting for its employee stock option plans. According to APB 25,
  compensation expense is measured under the intrinsic value method, whereby
  compensation expense is equal to the excess, if any, of the quoted market
  price of the stock over the exercise price at the grant date of the award.       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | The Company adopted the disclosure provisions of SFAS No. 148,
  Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS
  148), which amended certain provisions of SFAS No. 123, Accounting for
  Stock-Based Compensation (SFAS 123) to provide alternative methods of
  transition for an entity that voluntarily changes to the fair value based
  method of accounting for stock-based employee compensation. The Company
  continues to apply the provisions of APB 25, in accounting for
  stock-based compensation.                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | The expenses (loss) related to stock-based employee compensation
  included in the determination of net income for 2003, 2004 and 2005 is less
  than that which would have been recognized if the fair value method had been
  applied to all awards granted after the original effective date of SFAS 123.
  If the Company and its subsidiaries had elected to adopt the fair value
  recognition provisions of SFAS 123 as of its original effective date, pro
  forma net income (loss) and pro forma basic and diluted net earnings (loss)
  per share would be as follows:

| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| | ---------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ------ | -
| |                                                                                                |  | Year ended December 31, |        
| |                                                                                                |  |                         |        
| |                                                                                                |  | 2003                    |         | 2004 |   | 2005   |  
| |                                                                                                |  |                         |         |      |   |        |  
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| | Net income (loss) as reported                                                                  |  | $                       | (7,722  | )    | $ | 1,614  |   | $ | (3,827 | )
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| | Add - stock-based compensation
  expenses determined under APB 25                              |  |                         | 1,354   |      |   | 374    |   |   | 162    |  
| | Deduct - stock-based
  compensation expenses determined under fair value method for all awards |  |                         | (4,442  | )    |   | (3,414 | ) |   | (1,884 | )
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| | Pro forma net loss                                                                             |  | $                       | (10,810 | )    | $ | (1,426 | ) | $ | (5,549 | )
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| | Pro forma basic net loss per
  share                                                           |  | $                       | (0.47   | )    | $ | (0.06  | ) | $ | (0.21  | )
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| | Pro forma diluted net loss per
  share                                                         |  | $                       | (0.47   | )    | $ | (0.06  | ) | $ | (0.21  | )
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  
| | Basic and diluted net earnings
  (loss) per share, as reported                                 |  | $                       | (0.33   | )    | $ | 0.06   |   | $ | (0.15  | )
| |                                                                                                |  |                         |         |      |   |        |   |   |        |  

F-14

---

---



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

|            |                                         |                                                                                                                                                                                                               
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | For purposes
  of the pro-forma disclosure, compensation expense is amortized over the
  options vesting period using the graded-vesting approach.                                                           
|            |                                         |                                                                                                                                                                                                               
|            |                                         | The fair
  value of stock options was estimated at the date of grant using a
  Black-Scholes option- pricing model with the following weighted-average
  assumptions for options granted during 2003 and 2004:

| |                           |  |      |      |      |  |  |      |   | 
| | ------------------------- |  | ---- | ---- | ---- |  |  | ---- | - | 
| |                           |  | 2003 |      | 2004 | 
| |                           |  |      |      |      | 
| |                           |  |      |      |      |  |  |      |   | 
| | Risk-free interest rate   |  |      | 2.00 | %    |  |  | 3.36 | % | 
| |                           |  |      |      |      |  |  |      |   | 
| | Expected dividend yield   |  |      | 0    | %    |  |  | 0    | % | 
| |                           |  |      |      |      |  |  |      |   | 
| | Expected volatility       |  |      | 60   | %    |  |  | 53.4 | % | 
| |                           |  |      |      |      |  |  |      |   | 
| | Expected lives (in years) |  |      | 2.5  |      |  |  | 2.5  |   | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Beginning
  January 1, 2005, the Company adopted the Binomial Model for
  options granted thereafter, with the following weighted-average assumptions
  for 2005: risk-free interest rates of 3.36%-5.13%; dividend yields of 0%,
  volatility of price of the Companys shares of 36.06%-61.73%, an early exercise
  multiple of 2.36 and 3.10 in 2005 and a forfeiture rate of 15% and 25%.                                                                                                                                                                                                                                                                                             
| |    | The Company
  believes that the Binomial method of stock-based valuation is preferable
  because it is more likely to produce a better estimate of fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The Company applies SFAS 123 and EITF No. 96-18, Accounting for
  Equity Instruments that are Issued to Other than Employees for Acquiring, or
  in Conjunction with Selling, Goods or Services (EITF 96-18) with respect
  to options issued to non-employees. SFAS 123 requires use of an option
  valuation model to measure the fair value of these options at the measurement
  date.                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | r. | Severance pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The
  Companys severance pay liability for its Israeli employees is calculated
  pursuant to the Israeli Severance Pay Laws based on the most recent salary of
  the employees multiplied by the number of years of employment, as of the
  balance sheet date. Employees are entitled to one months salary for each
  year of employment or a portion thereof. The Companys liability for all of
  its employees in Israel is fully covered by monthly deposits with pension
  funds, insurance policies and an accrual. The value of the funds deposited
  into pension funds and insurance policies is recorded as an asset - severance
  pay fund - in the Companys balance sheet.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The severance pay fund includes the deposited funds and accumulated
  adjustments to the Israeli Consumer Price Index up to the balance sheet date.
  The deposited funds may be withdrawn only upon the fulfillment of the
  obligation pursuant to the Israeli Severance Pay Law or labor agreements. The
  value of the deposited funds is based on the cash surrendered value of these
  policies, and includes profits.                                                                                                                                                                                                                                                              

F-15

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | Severance expenses for the years ended December 31, 2003, 2004 and
  2005, amounted to approximately $ 714, $ 771 and $ 824, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | s.                                      | Fair value of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The following methods and assumptions were used by the Company and
  its subsidiaries in estimating their fair value disclosures for financial
  instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The carrying amounts of cash and cash equivalents, short-term bank
  deposits, trade receivables, other accounts
  receivable, trade payables and other accounts payable approximate their fair
  values due to the short-term maturities of such instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The carrying amount of the Companys long-term bank deposits is
  estimated by discounting the future cash flows using the current interest
  rates for long-term bank deposit of similar terms and maturities. The
  carrying amount of the long-term bank deposit does not significantly differ
  from its fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The fair value of marketable securities is based on quoted market
  prices and does not differ significantly from the carrying amount, see Note
  3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | t.                                      | Warranty costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The Company generally offers a warranty period of 12 to 36 months for
  its products and provides a standard limited warranty, including parts and
  labor. The Company estimates the costs that may be incurred under its basic
  limited warranty and records a liability in the amount of such costs at the
  time product revenue is recognized. Factors that affect the Companys
  warranty liability include the number of installed units, historical and
  anticipated rates of warranty claims, and cost per claim. The Company
  periodically assesses the adequacy of its recorded warranty liabilities and
  adjusts the amounts as necessary. Warranty expenses for the years ended
  December 31, 2003, 2004 and 2005 were approximately $ 172, $ 308 and $ 267,
  respectively.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | u.                                      | Basic and diluted net earnings (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Basic net earnings (loss) per share is computed based on the weighted
  average number of Ordinary shares outstanding during each year. Diluted net
  earnings (loss) per share is computed based on the weighted average number of
  Ordinary shares outstanding during each year, plus dilutive potential Ordinary
  shares considered outstanding during the year, in accordance with Statement
  of Financial Accounting Standard No. 128, Earnings Per Share
  (SFAS 128).                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The total weighted average number of shares related to the
  outstanding options and warrants excluded from the calculations of diluted
  net earnings (loss) per share due to their anti-dilutive effect was
  5,419,906, 1,346,106 and 4,514,433 for the years ended December 31, 2003,
  2004 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-16

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | v.                                      | Adoption of SFAS 150, Accounting For Certain Financial Instruments
with Characteristics of Both Liabilities and Equity (SFAS 150):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | In May 2003, the FASB issued SFAS 150 which establishes standards for
  how an issuer of financial instruments classifies and measures certain
  financial instruments with characteristics of both liabilities and equity. It
  requires that an issuer classify a financial instrument that is within its
  scope as a liability (or an asset in some circumstances) if, at inception,
  the monetary value of the obligation is based solely or predominantly on a
  fixed monetary amount known at inception, variations in something other than
  the fair value of the issuers equity shares or variations inversely related
  to changes in the fair value of the issuers equity shares. This Statement is
  effective for financial instruments entered into or modified after May 31,
  2003, and otherwise is effective at the beginning of the first interim period
  beginning after June 15, 2003. The Company adopted SFAS 150 (see also Note
  9c) and as a result recorded, during the year 2003, a financial expense -
  non-cash charge - relating to puttable warrant in an amount of $ 3,432.                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | w.                                      | Reclassification:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | Certain amounts from prior year have been reclassified to conform to
  the current years presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | x.                                      | Impact of recently issued Accounting Standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | In November 2005, the FASB issued Financial Statement Position FSP
  115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
  Certain Investments (FSP 115-1). FSP 115-1 addresses the determination as
  to when an investment is considered impaired, whether that impairment is
  other than temporary, and the measurement of an impairment loss. FSP 115-1
  also includes accounting considerations subsequent to the recognition of
  other than-temporary impairment and requires certain disclosures about
  unrealized losses that have not been recognized as other-than-temporary
  impairments. The guidance in this FSP 115-1 amends SFAS 115. FSP 115-1
  replaces the impairment evaluation guidance of EITF Issue No. 03-1, The
  Meaning of Other-Than-Temporary Impairment and Its Application to Certain
  Investments (EITF 03-1), with references to the existing
  other-than-temporary impairment guidance. FSP 115-1 clarifies that an
  investor should recognize an impairment loss no later than when the
  impairment is deemed other-than-temporary, even if a decision to sell an
  impaired security has not been made. The guidance in this FSP is to be
  applied to reporting periods beginning after December 15, 2005. The Company
  does not expect that the adoption of the provisions of FSP 115-1 will have a
  material effect on its financial position or results of operation.

F-17

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | In May 2005,
  the FASB issued Statement of Financial Accounting Standard No. 154 (SFAS
  154), Accounting Changes and Error Corrections, a replacement of APB 20,
  Accounting Changes (APB 20) and SFAS No. 3, Reporting Accounting Changes
  in Interim Financial Statements (SFAS 3). SFAS 154 provides guidance on
  the accounting for and reporting of accounting changes and error corrections.
  APB 20 previously required that most voluntary changes in accounting
  principles be recognized by including in net income for the period of change
  the cumulative effect of changing to the new accounting principle. SFAS 154
  requires retroactive application to prior periods financial statements of a
  voluntary change in accounting principles unless it is impracticable. SFAS
  154 is effective for accounting changes and corrections of errors made in
  fiscal years beginning after December 15, 2005.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | On December
  16, 2004, the FASB issued Statement of Financial Accounting Standard No. 123
  (revised 2004), Share-Based Payment (SFAS 123R), which is a revision of
  FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS
  123). SFAS 123R supersedes APB 25, and amends FASB Statement No. 95,
  Statement of Cash Flows (SFAS 95). Generally, the approach in SFAS 123R
  is similar to the approach described in SFAS 123. However, SFAS 123R requires
  all share-based payments to employees, including grants of employee stock
  options, to be recognized in the income statement based on their fair values.
  Pro forma disclosure is no longer an alternative. Early adoption will be
  permitted in periods in which financial statements have not yet been issued.
  The new Standard will be effective for the Company in the first interim
  period beginning after January 1, 2006.              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | SFAS 123R
  permits public companies to adopt its requirements using one of two methods:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | A modified
  prospective method in which compensation cost is recognized beginning with
  the effective date (a) based on the requirements of SFAS 123R for all
  share-based payments granted after the effective date and (b) based on the
  requirements of SFAS 123 for all awards granted to employees prior to the
  effective date of SFAS 123R that remain unvested on the effective date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | A modified
  retrospective method which includes the requirements of the modified
  prospective method described above, but also permits entities to restate
  based on the amounts previously recognized under SFAS 123 for purposes of pro
  forma disclosures either (a) all prior periods presented or (b) prior interim
  periods of the year of adoption.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | The Company
  adopted SFAS 123R using the modified prospective method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-18

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As permitted by SFAS 123, the Company  currently  accounts for share-based  payments to employees using Opinion
25s intrinsic value method and, as such,  generally  recognizes no  compensation  cost for employee stock options.
In  addition,  non-compensatory  plans  under  APB 25 will be  considered  compensatory  for  SFAS  123R  purposes.
Accordingly,  the adoption of SFAS 123Rs fair value method will have a significant  impact on the Companys result
of  operations,  although  it will  have no impact on the  Companys  overall  financial  position.  The  impact of
adoption of Statement 123(R) cannot be predicted  because it will depend on levels of share-based  payments granted
in the future.  However,  had the Company  adopted SFAS 123R in prior  periods,  the impact of that standard  would
have  approximated  the  impact of SFAS 123 as  described  in the  disclosure  of pro forma net  income  (loss) and
earnings (loss) per share in Note 2q above.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In March
  2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share-Based
  Payment (SAB 107). SAB 107 provides the SECs staff position regarding the
  application of SFAS 123R and contains interpretive guidance relating to the
  interaction between SFAS 123R and certain SEC rules and regulations, and also
  provides the SEC staffs view regarding the valuation of share-based payment
  arrangements for public companies. SAB 107 highlights the importance of
  disclosures made relating to the accounting for share-based payment transactions.                                                                                                                                                                                                                                                                                                                                                                                                                       

|            |                                                             
|----------- | ------------------------------------------------------------
|NOTE 3:    | INVESTMENT IN MARKETABLE SECURITIES                         
|            |                                                             
|            | The
  following is a summary of held-to-maturity securities:

| |                                      |  |                  |        |                          |   |                           |  |                                |      |                  |   |                          |  |                           |        |                                |   |   |  |   |      |   |   |        | 
| | ------------------------------------ |  | ---------------- | ------ | ------------------------ | - | ------------------------- |  | ------------------------------ | ---- | ---------------- | - | ------------------------ |  | ------------------------- | ------ | ------------------------------ | - | - |  | - | ---- | - | - | ------ | 
| |                                      |  | December 31,     |       
| |                                      |  |                  |       
| |                                      |  | 2004             |        | 2005                     |  
| |                                      |  |                  |        |                          |  
| |                                      |  | Amortized
  cost |        | Gross unrealized
  gains |   | Gross unrealized
  losses |  | Estimated
  fairmarket
  value |      | Amortized
  cost |   | Gross unrealized
  gains |  | Gross unrealized
  losses |        | Estimated
  fairmarket
  value |  
| |                                      |  |                  |        |                          |   |                           |  |                                |      |                  |   |                          |  |                           |        |                                |  
| | Held-to-maturity:                    |  |                  |        |                          |   |                           |  |                                |      |                  |   |                          |  |                           |        |                                |   |   |  |   |      |   |   |        | 
| |                                      |  |                  |        |                          |   |                           |  |                                |      |                  |   |                          |  |                           |        |                                |   |   |  |   |      |   |   |        | 
| | U.S. Government and
  agencies debts |  | $                | 9,081  |                          | $ | -                         |  | $                              | (169 | )                | $ | 6,561                    |  | $                         | 9,252  |                                | $ | - |  | $ | (189 | ) | $ | 9,063  | 
| | Corporate
  debentures               |  |                  | 9,062  |                          |   | -                         |  |                                | (152 | )                |   | 13,022                   |  |                           | 4,216  |                                |   | - |  |   | (121 | ) |   | 4,095  | 
| |                                      |  |                  |        |                          |   |                           |  |                                |      |                  |   |                          |  |                           |        |                                |   |   |  |   |      |   |   |        | 
| |                                      |  |                  |        |                          |   |                           |  |                                |      |                  |   |                          |  |                           |        |                                |   |   |  |   |      |   |   |        | 
| |                                      |  | $                | 18,143 |                          | $ | -                         |  | $                              | (321 | )                | $ | 19,583                   |  | $                         | 13,468 |                                | $ | - |  | $ | (310 | ) | $ | 13,158 | 
| |                                      |  |                  |        |                          |   |                           |  |                                |      |                  |   |                          |  |                           |        |                                |   |   |  |   |      |   |   |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  unrealized losses in the Companys investments in held-to-maturity marketable
  securities were mainly caused by interest rate increases. The contractual
  cash flows of these investments are either guaranteed by the U.S. government
  or an agency of the U.S. government or were issued by highly rated
  corporations and other governments. Accordingly, it is expected that the
  securities would not be settled at a price less than the amortized cost of
  the Companys investment. Based on the immateriality of the impairments and
  intent of the Company to hold these investments until maturity, the bonds
  were not considered to be other than temporarily impaired at December 31,
  2005.

F-19

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                                                                                       
|----------- | ------------------------------------------------------------------------------------------------------
|NOTE 3:    | INVESTMENT IN MARKETABLE SECURITIES (Cont.)                                                           
|            |                                                                                                       
|            | Aggregate
  maturities of held-to-maturity securities for years subsequent to December
  31, 2005 are:

| |                                         |  |                   |        |                                 |   |        | 
| | --------------------------------------- |  | ----------------- | ------ | ------------------------------- | - | ------ | 
| |                                         |  | Amortized 
  cost |        | Estimated
  fair
  market value |  
| |                                         |  |                   |        |                                 |  
| | Held-to-maturity:                       |  |                   |        |                                 |   |        | 
| |                                         |  |                   |        |                                 |   |        | 
| | 2006 (short-term marketable securities) |  | $                 | 5,654  |                                 | $ | 5,452  | 
| | 2007                                    |  |                   | 3,770  |                                 |   | 3,704  | 
| | 2008                                    |  |                   | 4,044  |                                 |   | 4,002  | 
| |                                         |  |                   |        |                                 |   |        | 
| |                                         |  |                   |        |                                 |   |        | 
| |                                         |  | $                 | 13,468 |                                 | $ | 13,158 | 
| |                                         |  |                   |        |                                 |   |        | 

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

| |                                                    |  |                |       |      |   |       | 
| | -------------------------------------------------- |  | -------------- | ----- | ---- | - | ----- | 
| |                                                    |  | December
  31, |      
| |                                                    |  |                |      
| |                                                    |  | 2004           |       | 2005 |  
| |                                                    |  |                |       |      |  
| |                                                    |  |                |       |      |   |       | 
| | Government authorities                             |  | $              | 1,643 |      | $ | 1,259 | 
| | Prepaid expenses                                   |  |                | 909   |      |   | 784   | 
| | Receivables related to unrecognized sold inventory |  |                | 1,367 |      |   | 2,148 | 
| | Others                                             |  |                | 516   |      |   | 950   | 
| |                                                    |  |                |       |      |   |       | 
| |                                                    |  |                |       |      |   |       | 
| |                                                    |  | $              | 4,435 |      | $ | 5,141 | 
| |                                                    |  |                |       |      |   |       | 

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

| |                   |  |   |        |  |   |        | 
| | ----------------- |  | - | ------ |  | - | ------ | 
| | Raw materials     |  | $ | 5,251  |  | $ | 4,126  | 
| | Work in progress  |  |   | 6,060  |  |   | 4,289  | 
| | Finished products |  |   | 7,772  |  |   | 7,729  | 
| |                   |  |   |        |  |   |        | 
| |                   |  |   |        |  |   |        | 
| |                   |  | $ | 19,083 |  | $ | 16,144 | 
| |                   |  |   |        |  |   |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Finished
  goods include products shipped to customers for which revenues were not
  recognized during the period in accordance with the Companys revenue
  recognition policy (see also Note 2) in the aggregate amount of $ 3,411 at
  December 31, 2004 and $ 3,872 at December 31, 2005.                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | During the
  fourth quarter of 2005, the Company adopted a plan to terminate its legacy product
  line, close its in-house production facilities and transfer production
  activities to its contract manufacturers. Accordingly, it estimated the
  expected sales from such product line and the expected use of associated
  inventory and, as a consequence, it wrote off excess inventory in a total
  amount of $ 7,082.

F-20

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INVENTORIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | The Company
  has been utilizing part of the related products of its 2001 written-off
  components. In 2003, 2004 and 2005, approximately $ 1,500, $ 1,185 and $ 954,
  respectively, of inventory previously written-off were used as products
  components in the Companys ordinary production course and were sold as
  finished goods to customers. The sales of these related manufactured products
  were reflected in the Companys revenues without additional cost to the cost
  of sales in the period in which the inventory was utilized.

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

| |                                                     |  |                |       |      |   |        | 
| | --------------------------------------------------- |  | -------------- | ----- | ---- | - | ------ | 
| |                                                     |  | December
  31, |      
| |                                                     |  |                |      
| |                                                     |  | 2004           |       | 2005 |  
| |                                                     |  |                |       |      |  
| | Cost:                                               |  |                |       |      |   |        | 
| | Computers, manufacturing and
  peripheral equipment |  | $              | 7,982 |      | $ | 8,374  | 
| | Office furniture and equipment                      |  |                | 856   |      |   | 1,171  | 
| | Leasehold improvements                              |  |                | 510   |      |   | 514    | 
| |                                                     |  |                |       |      |   |        | 
| |                                                     |  |                |       |      |   |        | 
| |                                                     |  |                | 9,348 |      |   | 10,059 | 
| |                                                     |  |                |       |      |   |        | 
| | Accumulated depreciation:                           |  |                |       |      |   |        | 
| | Computers, manufacturing and
  peripheral equipment |  |                | 6,170 |      |   | 6,722  | 
| | Office furniture and equipment                      |  |                | 417   |      |   | 569    | 
| | Leasehold improvements                              |  |                | 245   |      |   | 304    | 
| |                                                     |  |                |       |      |   |        | 
| |                                                     |  |                |       |      |   |        | 
| |                                                     |  |                | 6,832 |      |   | 7,595  | 
| |                                                     |  |                |       |      |   |        | 
| |                                                     |  |                |       |      |   |        | 
| | Depreciated cost                                    |  | $              | 2,516 |      | $ | 2,464  | 
| |                                                     |  |                |       |      |   |        | 

| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Depreciation expenses for the years ended December 31, 2003, 2004 and
  2005 were $ 1,306, $ 833 and $ 972, respectively.
| |                                                                                                                          
| | As for
  pledges on assets, see Note 8d.                                                                                 

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

| |                                     |  |                |       |      |   |       | 
| | ----------------------------------- |  | -------------- | ----- | ---- | - | ----- | 
| |                                     |  | December
  31, |      
| |                                     |  |                |      
| |                                     |  | 2004           |       | 2005 |  
| |                                     |  |                |       |      |  
| |                                     |  |                |       |      |   |       | 
| | Employees and payroll accruals      |  | $              | 2,866 |      | $ | 3,018 | 
| | Accrued expenses                    |  |                | 876   |      |   | 530   | 
| | Royalties to government authorities |  |                | 994   |      |   | 1,190 | 
| | Provision for warranty costs        |  |                | 708   |      |   | 783   | 
| | Other                               |  |                | 32    |      |   | 20    | 
| |                                     |  |                |       |      |   |       | 
| |                                     |  |                |       |      |   |       | 
| |                                     |  | $              | 5,476 |      | $ | 5,541 | 
| |                                     |  |                |       |      |   |       | 

F-21

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---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                       
|----------- | --------------------------------------
|NOTE 8:    | COMMITMENTS AND CONTINGENT LIABILITIES

| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ---------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Royalties:
| |    |           
| |    | 1.         | The Company
  participated in programs sponsored by the Israeli Government for the support
  of research and development activities. Through December 31, 2005, the
  Company had obtained grants from the Office of the Chief Scientist of the
  Israeli Ministry of Industry and Trade (the OCS) aggregating to $ 18,320 for
  certain of the Companys research and development projects. The Company is
  obligated to pay royalties to the OCS, amounting to 3%-3.5% of the sales of
  the products and other related revenues generated from such projects, equal
  to 100% of the grants received, linked to the U.S. dollar and for grants
  received after January 1, 1999 also bearing interest at the rate of LIBOR.
  The obligation to pay these royalties is contingent on actual sales of the
  products and in the absence of such sales, no payment is required.
| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |            | Through
  December 31, 2005, the Company has paid or accrued royalties to the OCS in
  the amount of $ 7,494. As of December 31, 2005, the aggregate contingent
  liability to the OCS amounted to $ 10,026.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | 2.         | The Company
  was committed to pay royalties to a subcontractor for the development of a
  component of the Companys product and its integration into certain of the
  Companys products. Royalties were paid at the rates of 4%, 3%, 2% and 1% for
  the first, second, third and fourth years of revenues, respectively, and 1%
  for the fifth to seventh year of revenues. The royalties were calculated as a
  rate of specific sales collection of a specific product. The first year of
  such revenues was 1998. As of December 31, 2005, the Company terminated
  its seventh year of revenues under the abovementioned plan.                                                                                                                                                                                                                                           
| |    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |            | Royalties
  paid or accrued to the subcontractor amounted to $ 90, $ 55 and $ 59 in the
  years ended December 31, 2003, 2004 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-22

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

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

| |    |                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Lease commitments:                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                           
| |    | The Company
  and its subsidiaries lease their facilities and vehicles under various
  operating lease agreements that expire on various dates. Aggregate minimum
  rental commitments under non-cancelable leases at December 31, 2005, are as
  follows:

| |                         |  |            |       |          |   |       |  |   |       | 
| | ----------------------- |  | ---------- | ----- | -------- | - | ----- |  | - | ----- | 
| | Year ended December 31, |  | Facilities |       | Vehicles |   | Total | 
| |                         |  |            |       |          |   |       | 
| |                         |  |            |       |          |   |       |  |   |       | 
| | 2006                    |  | $          | 836   |          | $ | 830   |  | $ | 1,666 | 
| | 2007                    |  |            | 325   |          |   | 545   |  |   | 870   | 
| | 2008                    |  |            | 64    |          |   | 54    |  |   | 118   | 
| | 2009                    |  |            | 64    |          |   | -     |  |   | 64    | 
| | 2010 and thereafter     |  |            | 328   |          |   | -     |  |   | 328   | 
| |                         |  |            |       |          |   |       |  |   |       | 
| |                         |  |            |       |          |   |       |  |   |       | 
| |                         |  | $          | 1,617 |          | $ | 1,429 |  | $ | 3,046 | 
| |                         |  |            |       |          |   |       |  |   |       | 

| |    |                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Expenses for
  Lease of facilities for the years ended December 31, 2003, 2004 and 2005 were
  approximately $ 963, $ 889 and $ 997, respectively (see also Note 13).                                                                                                     
| |    |                                                                                                                                                                                                                                                                           
| |    | Expenses for
  Lease of vehicles the years ended December 31, 2003, 2004 and 2005 were
  approximately $ 520, $ 629 and $ 928, respectively.                                                                                                                              
| |    |                                                                                                                                                                                                                                                                           
| | c. | Agreements with suppliers:                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                           
| |    | The Company
  has entered into an agreement with a supplier , pursuant to which the Company
  is committed to purchase a minimum amount of products per year. As of
  December 31, 2005, the remaining amount of the commitment is approximately
  $ 1.5 million for 2006.
| |    |                                                                                                                                                                                                                                                                           
| | d. | Charges and guarantees:                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                           
| |    | As of
  December 31, 2005, the Company provided bank guarantees in an aggregate
  amount of $ 1,376 with respect to tender offer guarantees and performance
  guarantees to its customers.                                                                                

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                                                                                                                  
|            |                                                                                                                                        |                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | The Ordinary
  shares of the Company are traded on NASDAQ National Market and on the Tel
  Aviv Stock Exchange, under the symbol CRNT.
|            |                                                                                                                                        |                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | a.                                                                                                                                     | General:                                                                                                                                                                                                                                 
|            |                                                                                                                                        |                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                        | The Ordinary
  shares entitle their holders to receive notice to participate and vote in
  general meetings of the Company, the right to share in distributions upon
  liquidation of the Company, and to receive dividends, if declared.
|            |                                                                                                                                        |                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | b.                                                                                                                                     | Stock options plans:                                                                                                                                                                                                                     
|            |                                                                                                                                        |                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                        | 1.                                                                                                                                                                                                                                        | Under the
  Companys 1996 key Employee Share Incentive Plan, the 1997 affiliate
  employees Stock Option Plan (the Plans), and the 2003 Share Option Plan
  (the 2003 Plan), options may be granted to officers, directors, employees
  and consultants of the Company or its subsidiaries. The options vest
  primarily over three to five years. The options expire five to ten years from
  the date of grant.
|            |                                                                                                                                        |                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                        |                                                                                                                                                                                                                                           | As of
  December 31, 2002, the Company ceased granting options under the Plans in
  light of the adoption of the 2003 Plan, although options granted under the
  Plans before December 31, 2002, are still valid, subject to the Plans.                                                                                                                                                                               
|            |                                                                                                                                        |                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                        | 2.                                                                                                                                                                                                                                        | Pursuant to its
  stock option plans, the Company reserved for issuance 12,973,188 Ordinary
  shares. As of December 31, 2005, 646,620 Ordinary shares of the Company are
  still available for future grant under the plans. Any options, which are
  canceled or forfeited before expiration date, become available for future
  grants.                                                                            
|            |                                                                                                                                        |                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                        |                                                                                                                                                                                                                                           | The
  following is a summary of the Companys stock options granted among the
  various plans:                                                                                                                                                                                                                                                                                                                        

| |                                    |  |                         |            |                                       |   |                      |  |                                       |            |                     |   |                                       |  |  |           |   |   |      | 
| | ---------------------------------- |  | ----------------------- | ---------- | ------------------------------------- | - | -------------------- |  | ------------------------------------- | ---------- | ------------------- | - | ------------------------------------- |  |  | --------- | - | - | ---- | 
| |                                    |  | Year ended December 31, |           
| |                                    |  |                         |           
| |                                    |  | 2003                    |            | 2004                                  |   | 2005                 | 
| |                                    |  |                         |            |                                       |   |                      | 
| |                                    |  | Number 
  of options    |            | Weighted
  average
  exercise
  price |   | Number 
  of options |  | Weighted
  average
  exercise
  price |            | Number
  of options |   | Weighted
  average
  exercise
  price | 
| |                                    |  |                         |            |                                       |   |                      |  |                                       |            |                     |   |                                       | 
| |                                    |  |                         |            |                                       |   |                      |  |                                       |            |                     |   |                                       |  |  |           |   |   |      | 
| | Outstanding at beginning of year   |  |                         | 6,305,533  |                                       | $ | 2.59                 |  |                                       | 6,482,121  |                     | $ | 3.14                                  |  |  | 6,504,073 |   | $ | 4.00 | 
| | Granted                            |  |                         | 1,528,307  |                                       | $ | 3.66                 |  |                                       | 1,846,450  |                     | $ | 5.36                                  |  |  | 1,491,950 |   | $ | 4.40 | 
| | Exercised                          |  |                         | (1,210,189 | )                                     | $ | 0.96                 |  |                                       | (1,178,108 | )                   | $ | 1.25                                  |  |  | (481,582  | ) | $ | 1.37 | 
| | Forfeited                          |  |                         | (141,530   | )                                     | $ | 3.09                 |  |                                       | (646,390   | )                   | $ | 4.19                                  |  |  | (241,077  | ) | $ | 6.64 | 
| |                                    |  |                         |            |                                       |   |                      |  |                                       |            |                     |   |                                       |  |  |           |   |   |      | 
| |                                    |  |                         |            |                                       |   |                      |  |                                       |            |                     |   |                                       |  |  |           |   |   |      | 
| | Outstanding at end of year         |  |                         | 6,482,121  |                                       | $ | 3.14                 |  |                                       | 6,504,073  |                     | $ | 4.00                                  |  |  | 7,273,364 |   | $ | 4.17 | 
| |                                    |  |                         |            |                                       |   |                      |  |                                       |            |                     |   |                                       |  |  |           |   |   |      | 
| |                                    |  |                         |            |                                       |   |                      |  |                                       |            |                     |   |                                       |  |  |           |   |   |      | 
| | Options exercisable at end of year |  |                         | 2,786,030  |                                       | $ | 3.45                 |  |                                       | 3,156,072  |                     | $ | 3.84                                  |  |  | 3,978,135 |   | $ | 3.98 | 
| |                                    |  |                         |            |                                       |   |                      |  |                                       |            |                     |   |                                       |  |  |           |   |   |      | 

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 9:    | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                                                                                                                                                                                                            
|            |                              | Since the
  Initial Public Offering in August 2000, all the options (except for the
  85,000 options mentioned below) were granted at exercise prices which were
  equal to the market value of the Ordinary shares at the grant date. The
  weighted average fair values of the options granted during 2003, 2004 and
  2005 were $ 1.45, $ 1.79 and $ 1.17, respectively.
|            |                              |                                                                                                                                                                                                                                                                                                                                                                            
|            |                              | In September
  2004, the Company granted 85,000 options at an exercise price below market
  value at a fair value of $1.36.                                                                                                                                                                                                                                                
|           
|            |                              | During the
  third quarter of 2005, the Company accelerated 104,791 options and recorded
  $ 115 as of stock-based compensation accordingly.                                                                                                                                                                                                                               
|            |                              |                                                                                                                                                                                                                                                                                                                                                                            
|            |                              | The options
  outstanding as of December 31, 2005, have been separated into ranges of
  exercise price as follows:                                                                                                                                                                                                                                                         

| |                             |               |                                                     |  |                                                             |  |                                       |      |                                                      |   |                                                                |  |  |           |  |   |       | 
| | --------------------------- | ------------- | --------------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------- | ---- | ---------------------------------------------------- | - | -------------------------------------------------------------- |  |  | --------- |  | - | ----- | 
| | Range of
  exercise
  price |               | Options
  outstanding
  as of
  December 31,
  2005 |  | Weighted
  average
  remaining
  contractual
  life (years) |  | Weighted
  average
  exercise
  price |      | Options
  exercisable
  as of
  December 31, 
  2005 |   | Weighted average
  exercise
  price of
  options
  exercisable | 
| |                             |               |                                                     |  |                                                             |  |                                       |      |                                                      |   |                                                                | 
| |                             |               |                                                     |  |                                                             |  |                                       |      |                                                      |   |                                                                |  |  |           |  |   |       | 
| |                             | *)            |                                                     |  | 486,150                                                     |  |                                       | 3.95 |                                                      |   | *)                                                             |  |  | 486,150   |  |   | *)    | 
| | $                           | 1.02 - 1.50   |                                                     |  | 576,700                                                     |  |                                       | 6.62 |                                                      | $ | 1.40                                                           |  |  | 372,025   |  | $ | 1.41  | 
| | $                           | 1.92 - 4.09   |                                                     |  | 2,541,365                                                   |  |                                       | 6.79 |                                                      | $ | 3.14                                                           |  |  | 1,789,582 |  | $ | 2.84  | 
| | $                           | 4.35 - 8.18   |                                                     |  | 3,253,399                                                   |  |                                       | 8.54 |                                                      | $ | 5.09                                                           |  |  | 914,628   |  | $ | 5.74  | 
| | $                           | 11.00 - 11.75 |                                                     |  | 332,250                                                     |  |                                       | 4.95 |                                                      | $ | 11.63                                                          |  |  | 332,250   |  | $ | 11.63 | 
| | $                           | 12.94 - 17.00 |                                                     |  | 83,500                                                      |  |                                       | 4.65 |                                                      | $ | 13.51                                                          |  |  | 83,500    |  | $ | 13.51 | 
| |                             |               |                                                     |  |                                                             |  |                                       |      |                                                      |   |                                                                |  |  |           |  |   |       | 
| |                             |               |                                                     |  |                                                             |  |                                       |      |                                                      |   |                                                                |  |  |           |  |   |       | 
| |                             |               |                                                     |  | 7,273,364                                                   |  |                                       | 7.26 |                                                      | $ | 4.17                                                           |  |  | 3,978,135 |  | $ | 3.98  | 
| |                             |               |                                                     |  |                                                             |  |                                       |      |                                                      |   |                                                                |  |  |           |  |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                    
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
| |    | *)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Lower than
  $ 0.5.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                    
| |    | Where the
  Company has recorded deferred stock-based compensation for options, with an
  exercise price below the fair market value of the Ordinary shares, it has
  been amortized and recorded as compensation expense ratably over the vesting
  period of the options using the graded-vesting approach. Compensation
  expenses of approximately $ 1,354, $ 374 and $ 162 (including $ 115 with regard
  to compensation related to accelerated options) were recognized during the
  years ended December 31, 2003, 2004 and 2005, respectively.                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                    
| | c. | Warrant to a supplier:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | On October
  31, 2002, the Company entered into a supplementary arrangement with one of
  its suppliers, according to which the Company issued a warrant to the
  supplier to purchase an aggregate of 700,000 Ordinary shares of the Company
  at an exercise price per Ordinary share of $ 0.003, with a cash settlement
  alternative (instead of the exercise for shares) for $ 875. Commencing April
  30, 2003 and expiring on October 31, 2004, the warrant may be exercised for
  cash (in whole but not in part) payable in six equal monthly payments
  (puttable warrant). Commencing September 30, 2003, the puttable warrant may
  be exercised (in whole but not in part) together with a cash payment of
  $ 0.003 per share, or by a cashless exercise, for 700,000 restricted Ordinary
  shares.

F-25

---

---



|                                                           
|-----------------------------------------------------------
|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.)
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              | The Company
  recorded the carrying amount of the Puttable Warrant at inception as a
  liability of $ 875. The adoption of SFAS 150 (see also Note 2) resulted with
  the Company recording the puttable warrant at fair value.                                                                                                                                                                                                                                              
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              | During
  November 2003, the supplier exercised the warrant by a cashless exercise into
  699,624 Ordinary shares. Accordingly, the Company reclassified the fair value
  of the puttable warrant at the date of exercise from a liability to equity.
  During 2003 the Company recognized a non-cash charge in the financial
  statements totaling $ 3,432.                                                                                                                  
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | d.                           | Dividends:                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              | In the event
  that cash dividends are declared in the future, such dividends will be paid in
  NIS or in foreign currency subject to any statutory limitations. The Company
  does not intend to pay cash dividends in the foreseeable future.                                                                                                                                                                                                                              
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 10:   | TAXES ON INCOME             
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | a.                           | Tax benefits under the Law for the Encouragement of Industry (Taxes),
  1969:                                                                                                                                                                                                                                                                                                                                                                                                
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              | The Company
  currently qualifies as an industrial company under the above law and, as
  such, is entitled to certain tax benefits, mainly accelerated depreciation of
  machinery and equipment, and the right to claim public issuance expenses, as
  a deduction for tax purposes.                                                                                                                                                                                      
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | b.                           | Reduction in Israeli tax rates:                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              | On July 25,
  2005 the Israeli Parliament passed the Law for the Amendment of the Income
  Tax Ordinance (No.147 and
  Temporary Order), 2005 (the Amendment).                                                                                                                                                                                                                                                                                                             
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              | Inter alia,
  the Amendment provides for a gradual reduction in the statutory corporate tax
  rate in the following manner: in 2006, the tax rate will be 31%, in 2007, the
  tax rate will be 29%, in 2008, the tax rate will be 27%, in 2009, the tax
  rate will be 26% and from 2010 onward, the tax rate will be 25%. Furthermore,
  as from 2010, upon reduction of the corporate tax rate to 25%, real capital
  gains will be subject to tax of 25%.                 
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | c.                           | Measurement of taxable income:                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              | Commencing
  with the year 2003, the Company has elected filing its tax return under the
  Israeli Income Tax Regulations 1986 (Principles Regarding the Management of
  Books of Account of Foreign Invested Companies and Certain Partnerships and
  the Determination of Their Taxable Income),. Such an elective obligates the
  Company for three years. Accordingly, commencing the year 2003, results for
  tax purposes are measured in terms of earnings in dollars.

F-26

---

---



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

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | d.                      | Tax benefits under the Law for the Encouragement of Capital
  Investments, 1959 (the Capital Investment Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           
|            |                         | The
  Companys production facilities have been granted Approved Enterprise
  status under the Capital Investments Law currently under three separate
  investment programs. Pursuant to the Capital Investments Law, the Company has
  elected the alternative benefits track and has waived Government grants in
  return for a tax exemption.                                                                                                                                                                                                                     
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                         | The Company
  is also a foreign investors company, as defined by the Capital Investments
  Law, and, as such, is entitled to a 10-year period of benefits and may be
  entitled to reduced tax rates of between 10% and 25% (depending on the
  percentage of foreign ownership in each taxable year).                                                                                                                                                                                                                                                                
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                         | For the
  Companys three investment programs, the tax benefits are as follows: income
  derived from investment programs is tax exempt for the first two years of the
  10-year tax benefit period, and is entitled to a reduced tax rate of 10%-25%
  during the remaining benefit period. The benefit period commences in the
  first year the Company reports taxable income after utilization of all net
  operating losses. The period of benefits for all these investment programs
  has not yet commenced, since the Company has not yet reported taxable income
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                         | The period
  of tax benefits, detailed above (except for the first two years in which the
  Company is tax exempt), is subject to a limit of 12 years from the
  commencement of production, or 14 years from the approval date, whichever is
  earlier. The benefit periods have not yet commenced since the Company has not
  yet generated taxable income.                                                                                                                                                                                                            
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                         | The
  entitlement to the above benefits is subject to the Companys fulfilling the
  conditions stipulated by the Encouragement of Investments Law, regulations
  published thereunder and the 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, linked to
  the CPI and including interest.                                                        
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                         | In the event
  of a distribution of such tax-exempt income including, among other things, a
  cash dividend, the Company will be required to pay tax at the rate of 10%-25%
  on the amount of the dividend distributed. In addition, these dividends will
  be subject to a 15% withholding tax in source.                                                                                                                                                                                                                                                              
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                         | The
  Companys Board of Directors has determined that such tax-exempt income will
  not be distributed as dividends. Accordingly, no deferred taxes have been
  provided on income attributable to the Companys Approved Enterprise.                                                                                                                                                                                                                                                                                                                                 

F-27

---

---



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

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                         | The Capital
  Investments Law also grants entitlement to claim accelerated depreciation on
  equipment used by the Approved Enterprise during the first five tax years
  of using the equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                         | Income from
  sources other than the Approved Enterprise during the benefit period will
  be subject to the tax at the regular tax rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                         | On April 1,
  2005, an amendment to the Capital Investments Law came into effect (the
  Amendment) and has significantly changed the provisions of the Capital
  Investments Law. The Amendment limits the scope of enterprises which may be
  approved by the Investment Center by setting criteria for the approval of a
  facility as a Beneficiary
  Enterprise, such as provisions generally requiring that at least 25%
  of the Beneficiary Enterprises
  income will be derived from export. Additionally, the Amendment enacted major
  changes in the manner in which tax benefits are awarded under the Capital
  Investments Law so that companies no longer require Investment Center
  approval in order to qualify for tax benefits.
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                         | However, the
  Capital Investments Law provides that terms and benefits included in any
  certificate of approval already granted will remain subject to the provisions
  of the law as they were on the date of such approval. Therefore, the
  Companys existing Approved Enterprise will generally not be subject to the
  provisions of the Amendment.                                                                                                                                                                                                                                                                                                                                                                                           
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                         | As a result
  of the Amendment, among others, tax-exempt income generated under the
  provisions of the new law, will subject the Company to taxes upon
  distribution or liquidation and the Company may be required to record
  deferred tax liability with respect to such tax-exempt income. As of December
  31, 2005, the Company did not generate income under the provisions of the new
  law.                                                                                                                                                                                                                                                                                                                                                
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                         | The Company
  has had no taxable income since inception.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | e.                      | Deferred income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                         | Deferred
  income taxes reflect the net tax effects of temporary differences between the
  carrying amounts of assets and liabilities for financial reporting purposes
  and the amounts used for income tax purposes. Significant components of the
  Companys deferred tax assets and liabilities are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                                          |  |   |              |   |   |         |  
| | -------------------------------------------------------- |  | - | ------------ | - | - | ------- | -
| |                                                          |  |   | December 31, |  
| |                                                          |  |   |              |  
| |                                                          |  |   | 2004         |   |   | 2005    |  
| |                                                          |  |   |              |   |  
| | Deferred tax assets:                                     |  |   |              |   |   |         |  
| | Net operating loss carryforward   *)                     |  | $ | 21,766       |   | $ | 22,299  |  
| | Temporary differences relating to reserve and
allowances |  |   | 2,211        |   |   | 2,680   |  
| |                                                          |  |   |              |   |   |         |  
| |                                                          |  |   |              |   |   |         |  
| | Total net deferred tax asset before valuation allowance  |  |   | 23,977       |   |   | 24,979  |  
| | Valuation allowance                                      |  |   | (23,977      | ) |   | (24,979 | )
| |                                                          |  |   |              |   |   |         |  
| |                                                          |  |   |              |   |   |         |  
| | Net deferred tax asset                                   |  | $ |             |   | $ |        |  
| |                                                          |  |   |              |   |   |         |  

| | *) | Including
deferred  taxes on losses for Israeli income tax purposes as of December 31, 2004 and 2005,
derived from the exercise of employee  stock  options in the amount of $ 3,881 and $ 4,049,  respectively.
The benefit derived from the exercise of employee stock options was not recorded  through  additional paid
in capital as required  under APB 25 since a full valuation  allowance was provided in this respect.  As a
result,  there is no impact on the Companys  shareholders  equity and on the deferred  taxes for each of
the years presented.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-28

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | ----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                         | As of December  31,  2005,  the Company has provided  valuation  allowances  of $ 24,979 in respect of
deferred tax assets resulting from tax loss carryforward and other temporary  differences.  The net change
in the  valuation  allowance in the year 2005  amounted to $ 1,002.  Management  currently  believes  that
since the Company has a history of losses,  it is more likely  than not that the  deferred  tax  regarding
the loss carryforward and other temporary differences will not be realized in the foreseeable future.                                      
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | f.                      | Net operating loss carryforward:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                         | The Company has  accumulated  losses for Israeli income tax purposes as of December 31, 2004 and 2005,
in the amount of  approximately  $ 77,000  (including an additional  amount which was not disclosed in the
Companys  financial  statements for the year 2004 of $ 7,136 based on the Companys actual tax return for
2004  attributed  to the income tax benefit  derived  from the  exercise of employee  stock  options)  and
$ 77,200,  respectively.  These losses may be carried  forward and offset  against  taxable  income in the
future for an indefinite period.
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                         | As of December 31, 2005, the Companys U.S. subsidiary had U.S.
  federal net operating loss carryforward of approximately $ 8,850 that can be
  carried forward and offset against taxable income and that expires during the
  years 2019 to 2025. Utilization of U.S. net operating losses may be subject to
  substantial annual limitations due to the change in ownership provisions of
  the Internal Revenue Code of 1986 and similar state law provisions. The
  annual limitations may result in the expiration of net operating losses
  before utilization.          
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | g.                      | Pre-tax income (loss) is comprised as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |          |  |                         |        |      |   |       |   |   |        |  
| | -------- |  | ----------------------- | ------ | ---- | - | ----- | - | - | ------ | -
| |          |  | Year ended December 31, |       
| |          |  |                         |       
| |          |  | 2003                    |        | 2004 |   | 2005  |  
| |          |  |                         |        |      |   |       |  
| |          |  |                         |        |      |   |       |   |   |        |  
| | Domestic |  | $                       | (6,672 | )    | $ | 2,016 |   | $ | (2,067 | )
| | Foreign  |  |                         | (1,050 | )    |   | (402  | ) |   | (1,760 | )
| |          |  |                         |        |      |   |       |   |   |        |  
| |          |  |                         |        |      |   |       |   |   |        |  
| |          |  | $                       | (7,722 | )    | $ | 1,614 |   | $ | (3,827 | )
| |          |  |                         |        |      |   |       |   |   |        |  

F-29

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                         |                                                                                                                                                                                                                                             
|----------- | ----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                             
|            | h.                      | Reconciliation of the theoretical tax expense to the actual tax
  expense:                                                                                                                                                                  
|            |                         |                                                                                                                                                                                                                                             
|            |                         | A reconciliation between the theoretical tax expense, assuming all
  income is taxed at the statutory tax rate applicable to income of the Company
  and the actual tax expense as reported in the Statement of Operations, is as
  follows:

| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  
| | --------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ----- | - | - | ------ | -
| |                                                                                                                             |  | Year ended
  December 31, |       
| |                                                                                                                             |  |                           |       
| |                                                                                                                             |  | 2003                      |        | 2004 |   | 2005  |  
| |                                                                                                                             |  |                           |        |      |   |       |  
| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  
| | Pre-tax  income  (loss) as reported in the consolidated  statements of income                                               |  | $                         | (7,722 | )    | $ | 1,614 |   | $ | (3,827 | )
| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  
| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  
| | Statutory tax rate                                                                                                          |  |                           | 36     | %    |   | 35    | % |   | 34     | %
| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  
| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  
| | Theoretical tax expenses on the
  above amount at the Israeli statutory tax rate                                            |  | $                         | (2,780 | )    | $ | 565   |   | $ | (1,301 | )
| | Non-deductible expenses                                                                                                     |  |                           | 62     |      |   | 75    |   |   | 78     |  
| | Deferred taxes on losses
  (utilization of losses) and temporary differences for which a valuation
  allowance was provided |  |                           | 2,033  |      |   | (364  | ) |   | 1,115  |  
| | Tax adjustment due to Approved
  Enterprise different tax rate                                                              |  |                           | 734    |      |   | (202  | ) |   | 186    |  
| | Other                                                                                                                       |  |                           | (49    | )    |   | (74   | ) |   | (78    | )
| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  
| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  
| | Actual tax expense                                                                                                          |  | $                         | -      |      | $ | -     |   | $ | -      |  
| |                                                                                                                             |  |                           |        |      |   |       |   |   |        |  

|            |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | -------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:   | RESTRUCTURING AND NON-RECURRING INCOME
|            |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                        | Restructuring and non-recurring income recorded in 2003 is related to
  net profits from sales of raw materials to incidental customers in the amount
  of $ 226 (since these transactions were not made in the ordinary course of
  business of the Company, they were classified as non-recurring income) and to
  income related to the reversal of an excess provision for restructuring from
  past years amounting to $ 478.

F-30

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                
|----------- | ----------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:   | GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA
|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                
|            | a.                                                                | Segments, customers and geographical information:                                                                                                                                                                                                                                                                                              
|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                
|            |                                                                   | The Company
  applies SFAS No. 131, Disclosures About Segments of an Enterprise and
  Related Information (SFAS 131). The Company operates in one reportable
  segment (see Note 1 for a brief description of the Companys business). The
  total revenues are attributed to geographic areas based on the location of
  the end customer.
|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                
|            |                                                                   | The
  following presents total revenues for the years ended December 31, 2003, 2004
  and 2005 and long-lived assets as of December 31, 2003, 2004 and 2005:                                                                                                                                                                                   

| |                                                          |  |                           |        |      |   |        |  |   |        | 
| | -------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
| |                                                          |  | Year ended
  December 31, |       
| |                                                          |  |                           |       
| |                                                          |  | 2003                      |        | 2004 |   | 2005   | 
| |                                                          |  |                           |        |      |   |        | 
| | Revenues from sales to external
  customers:             |  |                           |        |      |   |        |  |   |        | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| | North America                                            |  | $                         | 9,263  |      | $ | 16,449 |  | $ | 19,738 | 
| | Europe, Middle East and Africa                           |  |                           | 20,480 |      |   | 22,006 |  |   | 36,048 | 
| | Asia-Pacific                                             |  |                           | 3,222  |      |   | 14,001 |  |   | 9,877  | 
| | Latin America                                            |  |                           | 1,456  |      |   | 2,375  |  |   | 8,114  | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| |                                                          |  | $                         | 34,421 |      | $ | 54,831 |  | $ | 73,777 | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| | Property and equipment, net, by
  geographic areas:      |  |                           |        |      |   |        |  |   |        | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| | Israel                                                   |  | $                         | 2,465  |      | $ | 2,295  |  | $ | 2,202  | 
| | United States                                            |  |                           | 30     |      |   | 26     |  |   | 66     | 
| | Other                                                    |  |                           | 172    |      |   | 195    |  |   | 196    | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| |                                                          |  | $                         | 2,667  |      | $ | 2,516  |  | $ | 2,464  | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| |                                                          |  |                           |        |      |   |        |  |   |        | 
| | Major customer data as a percentage of
  total revenues: |  |                           |        |      |   |        |  |   |        | 

| |            |  |                           |  |      |      |      |  |      |  | 
| | ---------- |  | ------------------------- |  | ---- | ---- | ---- |  | ---- |  | 
| |            |  | Year ended
  December 31, | 
| |            |  |                           | 
| |            |  | 2003                      |  | 2004 |      | 2005 | 
| |            |  |                           |  |      |      |      | 
| |            |  | %                         | 
| |            |  |                           | 
| |            |  |                           |  |      |      |      |  |      |  | 
| | Customer A |  | 10                        |  |      | 14   |      |  | *) - |  | 
| | Customer B |  | 10                        |  |      | *) - |      |  | *) - |  | 
| | Customer C |  | *) -                      |  |      | 14   |      |  | *) - |  | 
| | Customer D |  | *) -                      |  |      | *) - |      |  | 13   |  | 

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

F-31

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                                                           |                       
|----------- | ------------------------------------------------------------------------- | ----------------------
|NOTE 12:   | GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)
|            |                                                                          
|            | b.                                                                        | Financial income, net:

| |                                            |  |                           |       |      |   |       |   |   |       |  
| | ------------------------------------------ |  | ------------------------- | ----- | ---- | - | ----- | - | - | ----- | -
| |                                            |  | Year ended
  December 31, |      
| |                                            |  |                           |      
| |                                            |  | 2003                      |       | 2004 |   | 2005  |  
| |                                            |  |                           |       |      |   |       |  
| |                                            |  |                           |       |      |   |       |   |   |       |  
| | Financial income:                          |  |                           |       |      |   |       |   |   |       |  
| | Interest on marketable
  securities        |  | $                         | 544   |      | $ | 465   |   | $ | 415   |  
| | Interest on bank deposits                  |  |                           | 549   |      |   | 249   |   |   | 399   |  
| | Foreign currency translation
  differences |  |                           | 504   |      |   | 503   |   |   | 645   |  
| | Other                                      |  |                           | 22    |      |   | 2     |   |   | -     |  
| |                                            |  |                           |       |      |   |       |   |   |       |  
| |                                            |  |                           |       |      |   |       |   |   |       |  
| |                                            |  |                           | 1,619 |      |   | 1,219 |   |   | 1,459 |  
| |                                            |  |                           |       |      |   |       |   |   |       |  
| | Financial expenses:                        |  |                           |       |      |   |       |   |   |       |  
| | Bank commissions                           |  |                           | (82   | )    |   | (195  | ) |   | (172  | )
| | Foreign currency translation
  differences |  |                           | (378  | )    |   | (350  | ) |   | (663  | )
| | Other                                      |  |                           | -     |      |   | -     |   |   | (17   | )
| |                                            |  |                           |       |      |   |       |   |   |       |  
| |                                            |  |                           |       |      |   |       |   |   |       |  
| |                                            |  |                           | (460  | )    |   | (545  | ) |   | (852  | )
| |                                            |  |                           |       |      |   |       |   |   |       |  
| |                                            |  |                           |       |      |   |       |   |   |       |  
| |                                            |  | $                         | 1,159 |      | $ | 674   |   | $ | 607   |  
| |                                            |  |                           |       |      |   |       |   |   |       |  

| |    |                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------
| | c. | Net earnings (loss) per share:                                                                        
| |    |                                                                                                       
| |    | The
  following table sets forth the computation of basic and diluted net earnings
  (loss) per share:

| |                                                                                                                                |  |                           |            |      |   |            |  |   |            |  
| | ------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ---------- | ---- | - | ---------- |  | - | ---------- | -
| |                                                                                                                                |  | Year ended
  December 31, |           
| |                                                                                                                                |  |                           |           
| |                                                                                                                                |  | 2003                      |            | 2004 |   | 2005       | 
| |                                                                                                                                |  |                           |            |      |   |            | 
| | Numerator:                                                                                                                     |  |                           |            |      |   |            |  |   |            |  
| | Numerator for basic and diluted
  net earnings (loss) per share - income (loss) available to shareholders of
  Ordinary shares |  | $                         | (7,722     | )    | $ | 1,614      |  | $ | (3,827     | )
| |                                                                                                                                |  |                           |            |      |   |            |  |   |            |  
| |                                                                                                                                |  |                           |            |      |   |            |  |   |            |  
| | Denominator:                                                                                                                   |  |                           |            |      |   |            |  |   |            |  
| | Denominator for basic net
  earnings (loss) per share - weighted average number of Ordinary shares                             |  |                           | 23,063,160 |      |   | 25,066,937 |  |   | 26,137,121 |  
| |                                                                                                                                |  |                           |            |      |   |            |  |   |            |  
| |                                                                                                                                |  |                           |            |      |   |            |  |   |            |  
| | Effect of dilutive securities:                                                                                                 |  |                           |            |      |   |            |  |   |            |  
| | Employee stock options                                                                                                         |  |                           | *) -       |      |   | 3,002,907  |  |   | *) -       |  
| |                                                                                                                                |  |                           |            |      |   |            |  |   |            |  
| |                                                                                                                                |  |                           |            |      |   |            |  |   |            |  
| | Denominator for diluted net
  earnings (loss) per share - adjusted weighted average number of shares                           |  |                           | 23,063,160 |      |   | 28,069,844 |  |   | 26,137,121 |  
| |                                                                                                                                |  |                           |            |      |   |            |  |   |            |  

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

F-32

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | RELATED PARTY BALANCES AND TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | Most of the related party balances and transactions are with related
  companies and principal shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | Yehuda Zisapel is a principal shareholder and Zohar Zisapel is the
  Chairman of the Board of Directors and a principal shareholder of the
  Company. They are brothers who, as of December 31, 2004 and 2005, jointly own
  22.9% and 22.5%, 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 legal, management information systems, marketing, and administrative
  services, and the Company reimburses each company for its costs in providing
  these services. The aggregate amount of these expenses was approximately
  $ 170, $ 180 and $ 335 in 2003, 2004 and 2005, respectively.                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | The Company leases its offices in Israel from real estate holding
  companies controlled by Yehuda and Zohar Zisapel. During 2005, the Company
  extended its facility lease agreement by an additional two years.
  Additionally, the Company leases the U.S. subsidiary office space from a real
  estate holding company controlled by Yehuda and Zohar Zisapel. The lease for
  this facility is valid until September 2008. The aggregate amount of rent and
  maintenance expenses related to these properties was approximately $ 0.9
  million in 2003 and 2004, and $ 0.8 million in 2005.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | The Company purchases certain inventory components from other members
  of the RAD-BYNET group, which are integrated into its products. The aggregate
  purchase price of these components was approximately $ 1,660 for the year
  ended December 31, 2005.                                                                                                                                                                                                                                                                                                                                       
|           
|            | Transactions with related party:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |                                       |  |                           |     |      |   |      |  |   |       | 
| | ------------------------------------- |  | ------------------------- | --- | ---- | - | ---- |  | - | ----- | 
| |                                       |  | Year ended
  December 31, |    
| |                                       |  |                           |    
| |                                       |  | 2003                      |     | 2004 |   | 2005 | 
| |                                       |  |                           |     |      |   |      | 
| |                                       |  |                           |     |      |   |      |  |   |       | 
| | Cost of revenues                      |  | $                         | 643 |      | $ | 934  |  | $ | 1,861 | 
| |                                       |  |                           |     |      |   |      |  |   |       | 
| |                                       |  |                           |     |      |   |      |  |   |       | 
| | Research and development expenses     |  | $                         | 427 |      | $ | 381  |  | $ | 445   | 
| |                                       |  |                           |     |      |   |      |  |   |       | 
| |                                       |  |                           |     |      |   |      |  |   |       | 
| | Selling and marketing expenses        |  | $                         | 440 |      | $ | 291  |  | $ | 356   | 
| |                                       |  |                           |     |      |   |      |  |   |       | 
| |                                       |  |                           |     |      |   |      |  |   |       | 
| | General and administrative
  expenses |  | $                         | 90  |      | $ | 142  |  | $ | 160   | 
| |                                       |  |                           |     |      |   |      |  |   |       | 

F-33

---

---



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                                  
|----------- | -------------------------------------------------
|NOTE 13:   | RELATED PARTY BALANCES AND TRANSACTIONS
  (Cont.)
|            |                                                  
|            | Balances with related parties:                   

| |                                                     |  |                |     |      |   |    | 
| | --------------------------------------------------- |  | -------------- | --- | ---- | - | -- | 
| |                                                     |  | December
  31, |    
| |                                                     |  |                |    
| |                                                     |  | 2004           |     | 2005 |  
| |                                                     |  |                |     |      |  
| |                                                     |  |                |     |      |   |    | 
| | Trade payables, other payables and accrued expenses |  | $              | 127 |      | $ | 63 | 
| |                                                     |  |                |     |      |   |    | 
| |                                                     |  |                |     |      |   |    | 
| | Other receivables                                   |  | $              | 3   |      | $ | 3  | 
| |                                                     |  |                |     |      |   |    | 
| |                                                     |  |                |     |      |   |    | 
| | Trade receivables                                   |  | $              | 170 |      | $ | -  | 
| |                                                     |  |                |     |      |   |    | 

F-34

---

---

# SIGNATURE

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

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

Date: June 30, 2006



---

---



# EXHIBITS

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

|1.2 |  | Articles
of Association, as amended August 25, 2005
|--- |  | ---------------------------------------------------

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

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

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

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

---

* Previously filed as exhibit 3.1 in
connection with the 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 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.



---

---