---

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As filed with the Securities and Exchange Commission on March 28, 2007

# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

# or

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

For the fiscal year ended December 31, 2006

# or

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

# For the transition
period from __________ to __________

# or

|o | SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

Date of event requiring this shell company report .................

# Commission file
number: 0-21218

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

ISRAEL (Jurisdiction
of incorporation or organization)

Gilat House, 21 Yegia
Kapayim Street, Kiryat Arye, Petah Tikva, 49130 Israel(Address
of principal executive offices)

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

|                                    |                                          
|----------------------------------- | -----------------------------------------
|
|
|
|
|Title of each class                 | Name of each exchange on which registered
|Ordinary Shares, NIS 0.20 Par Value | NASDAQ Global Market                     

Securities registered or to be registered pursuant of Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock at the close of
the period covered by the annual report:

# 38,820,352 Ordinary
Shares, NIS 0.20 par value per share.



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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 o    Accelerated filer   x    Non-accelerated filer o

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

Item 17 o Item 18       x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as
         defined in Rule 12b-2 of the Exchange Act).

Yes o No x

This report on Form 20-F is being incorporated by reference into our Registration Statements on Form
         S-8 (Registration Nos. 333-132649, 333-123410, 333-113932, 333-08826, 333-10092, 333-12466 and
         333-12988).

2

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INTRODUCTION

We
are a leading global provider of Internet Protocol, or IP, based digital satellite
communication and networking products and services. We design, produce and market VSATs,
or very small aperture terminals, and related VSAT network equipment. VSATs are
earth-based terminals that transmit and receive broadband, Internet, voice, data and video
via satellite. VSAT networks have significant advantages to wireline and wireless
networks, as VSATs can provide highly reliable, cost-effective, end-to-end communications
regardless of the number of sites or their geographic locations.

We
have a large installed customer base and have shipped more than 670,000 VSAT units to
customers in over 85 countries on six continents since 1989. We have 16 sales and
service offices worldwide and two call centers to support our customers. Our products are
primarily sold to communication service providers and operators that use VSATs to serve
enterprise, government and residential users. Also, in the U.S. and certain countries in
Latin America, we provide services directly to end-users in various market segments.

We
currently operate three complementary, vertically-integrated business units: Gilat Network
Systems, or GNS, a provider of VSAT-based networks and associated professional services,
including turnkey and management services, to telecom operators worldwide;
Spacenet Inc. a provider of satellite network services to enterprises, small
office/home office, or SOHOs, and residential customers in the U.S.; and Spacenet Rural
Communications, or SRC, a provider of telephony, Internet and data services primarily for
rural communities in emerging markets in Latin America under projects that are subsidized
by government entities.

We
were incorporated in Israel in 1987 and are subject to the laws of the State of Israel.
Our corporate headquarters, executive offices and research and development, engineering
and manufacturing facilities are located at Gilat House, 21 Yegia Kapayim Street, Kiryat
Arye, Petah Tikva 49130, Israel. Our telephone number is (972) 3-925-2000.

The
name Gilat® and the names Connexstar,
SkyAbis, SkyEdge, Spacenet, and
StarBand appearing in this annual report on Form 20-F are trademarks of
Our company and its subsidiaries. See Item 4: Information on the Company.
Other trademarks appearing in this annual report on Form 20-F are owned by their
respective holders.

Except
for the historical information contained in this annual report, the statements contained
in this annual report are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our business, financial condition
and results of operations. 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 Item 3: Key InformationRisk Factors and elsewhere in
this annual report.

We
urge you to consider that statements which use the terms believe, do not
believe, expect, plan, intend,
estimate, anticipate and similar expressions are intended to
identify forward-looking statements. These statements reflect our current views with
respect to future events and are based on assumptions and are subject to risks and
uncertainties. Except as required by applicable law, including the securities laws of the
U.S., we do not intend to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.



---

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Our
consolidated financial statements appearing in this annual report are prepared in U.S.
dollars and in accordance with U.S. generally accepted accounting principles, or U.S.
GAAP. All references in this annual report to dollars or $ are to
U.S. dollars and all references in this annual report to NIS are to New
Israeli Shekels. The representative exchange rate between the NIS and the dollar as
published by the Bank of Israel onMarch 26, 2007 was NIS 4.2030 per $1.00.

As
used in this annual report, the terms we, us, Gilat
and our mean Gilat Satellite Networks Ltd. and its subsidiaries, unless
otherwise indicated.

Statements
made in this annual report concerning the contents of any contract, agreement or other
document are summaries of such contracts, agreements or documents and are not complete
descriptions of all of their terms. If we filed any of these documents as an exhibit to
this annual report or to any registration statement or annual report that we previously
filed, you may read the document itself for a complete description.



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TABLE OF CONTENTS

|         |                                                                              | Page
|-------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|Part I   |                                                                              |     
|        
|Item 1   | Identity of Directors, Senior Management and Advisers                        | 1   
|Item 2   | Offer Statistics and Expected Timetable                                      | 1   
|Item 3   | Key Information                                                              | 1   
|         | Selected Consolidated Financial Data                                         | 1   
|         | Risk Factors                                                                 | 3   
|Item 4   | Information on the Company                                                   | 16  
|Item 4A  | Unresolved Staff Comments                                                    | 32  
|Item 5   | Operating and Financial Review and Prospects                                 | 32  
|Item 6   | Directors and Senior Management                                              | 49  
|Item 7   | Major Shareholders and Related Party Transactions                            | 58  
|Item 8   | Financial Information                                                        | 60  
|Item 9   | The Offer and Listing                                                        | 62  
|Item 10  | Additional Information                                                       | 64  
|Item 11  | Quantitative and Qualitative Disclosures about Market Risk                   | 82  
|Item 12  | Description of Securities Other than Equity Securities                       | 83  
|        
|Part II 
|        
|Item 13  | Defaults, Dividends, Arrearages and Delinquencies                            | 83  
|Item 14  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 84  
|Item 15  | Controls and Procedures                                                      | 84  
|Item 15T | Controls and Procedures                                                      | 84  
|        
|Part III
|        
|Item 16  | [Reserved]                                                                   | 85  
|Item 16A | Audit Committee Financial Expert                                             | 85  
|Item 16B | Code of Ethics                                                               | 85  
|Item 16C | Principal Accounting Fees and Expenses                                       | 85  
|Item 16D | Exemptions from the Listing requirements and Standards for Audit Committee   | 86  
|Item 16E | Purchase of Equity Securities by the Issuer and Affiliates and Purchases     | 86  
|Item 17  | Financial Statements                                                         | 86  
|Item 18  | Financial Statements                                                         | 86  
|Item 19  | Exhibits                                                                     | 86  



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# PART I

|ITEM 1: |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|------- |  | -----------------------------------------------------

Not
Applicable.

|ITEM 2: |  | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not
Applicable.

|ITEM 3: |  | KEY INFORMATION
|------- |  | ---------------

# Selected Consolidated
Financial Data

The
selected consolidated statement of operations data set forth below for the years ended
December 31, 2004, 2005 and 2006, and the selected consolidated balance sheet data as of
December 31, 2005 and 2006 are derived from our audited consolidated financial statements
that are included elsewhere in this Report. These financial statements have been prepared
in accordance with U.S. generally accepted accounting principles or U.S. GAAP. The
selected consolidated statement of operations data set forth below for the years ended
December 31, 2002 and 2003 and the selected consolidated balance sheet data as of December
31, 2002, 2003 and 2004 are derived from our audited consolidated financial statements
that are not included in this Report.

The
selected consolidated financial data set forth below should be read in conjunction with
Item 5: Operating and Financial Review and Prospects and the Consolidated
Financial Statements and Notes thereto included in Item 18 in this annual report on Form
20-F for the year ended December 31, 2006.

|                                    | Year ended December 31.
|----------------------------------- | -----------------------
|
|
|
|
|Statement of Operations Data:       |                        
|Revenues:                           |                        
|Products                            |                        
|Services                            |                        
|                                    |                        
|                                    |                        
|                                    |                        
|Cost of revenues:                   |                        
|Products                            |                        
|Services                            |                        
|Write-off of inventories            |                        
|                                    |                        
|                                    |                        
|                                    |                        
|Gross profit                        |                        
|Operating expenses:                 |                        
|Research and development expenses,  |                        
|net                                 |                        
|Selling and marketing expenses      |                        
|General and administrative expenses |                        

1

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|                                    | Year ended December 31.
|----------------------------------- | -----------------------
|
|
|
|
|Provision and write-off for         |                        
|doubtful accounts and capital       |                        
|lease receivables                   |                        
|Impairment of goodwill              |                        
|Impairment of tangible and          |                        
|intangible assets                   |                        
|Restructuring charges               |                        
|                                    |                        
|Operating income (loss)             |                        
|Financial expenses, net             |                        
|Gain from restructuring of          |                        
|debts                               |                        
|Other income (expense)              |                        
|Gain (loss) from write-off of       |                        
|investments in affiliated and       |                        
|other companies                     |                        
|                                    |                        
|Income (loss) before taxes on       |                        
|income                              |                        
|Taxes on income                     |                        
|                                    |                        
|Income (loss) after taxes on income |                        
|Equity in earnings (losses) of      |                        
|affiliated companies                |                        
|Minority interest in losses of a    |                        
|subsidiary                          |                        
|                                    |                        
|Income (loss) before cumulative     |                        
|effect of a change in an            |                        
|accounting principle                |                        
|Gain (loss) from cumulative effect  |                        
|of a change in an accounting        |                        
|principle                           |                        
|                                    |                        
|Loss from discontinued operations   |                        
|Net income (loss)                   |                        
|                                    |                        
|Earnings (loss) per share before    |                        
|cumulative effect of a change in    |                        
|an accounting principle             |                        
|Basic                               |                        
|                                    |                        
|Diluted                             |                        
|                                    |                        
|Basic and diluted net earnings      |                        
|(loss) per share from cumulative    |                        
|effect of a change in an            |                        
|accounting principle                |                        
|                                    |                        
|Basic and diluted loss per share    |                        
|from discontinued operation         |                        
|                                    |                        
|Net earnings (loss) per share:      |                        
|Basic                               |                        
|                                    |                        
|Diluted                             |                        
|                                    |                        
|Weighted average number of shares   |                        
|used in computing net earnings      |                        
|(loss) per share:                   |                        
|Basic                               |                        
|                                    |                        
|Diluted                             |                        
|                                    |                        

2

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|                                   | As of December 31,
|---------------------------------- | ------------------
|
|
|
|
|Balance Sheet Data:                |                   
|Working capital                    |                   
|Total assets                       |                   
|Short-term bank credit and current |                   
|maturities of long-term debt       |                   
|Convertible subordinated notes     |                   
|Other long-term liabilities        |                   
|Shareholders' equity (deficiency)  |                   

# RISK FACTORS

# Risks Relating to Our
Business

We
have incurred major losses in past years and may not sustain profitable operations in the
future.

While
we achieved net income of approximately $10.5 million in 2006 we incurred losses of 3.7
million in 2005 and $11.5 million in 2004. We can not assure you that we can continue to
operate profitably in the future. If we do not sustain profitability, the viability of
our company will be in question and our share price could decline.

If
commercial wireless communications markets fail to grow as anticipated, our business
could be materially harmed.

A
number of the commercial markets for our products and services in the wireless
communications area, including our broadband products, have been developed only in recent
years. Because these markets are relatively new, it is difficult to predict the rate at
which these markets will grow, if at all. If the markets for commercial wireless
communications products fail to grow, or grow more slowly than anticipated, our business
could be materially harmed. Conversely, to the extent that growth in these markets
results in capacity limitations in the wireless communications area, it could materially
harm our business and impair the value of our shares. Specifically, we derive virtually
all of our revenues from sales of VSAT communications networks and provision of services
related to these networks. A significant decline in this market or the replacement of
VSAT technology by an alternative technology could materially harm our business and
impair the value of our shares.

Trends
and factors affecting the telecommunications industry are beyond our control and may
result in reduced demand and pricing pressure on our products.

We
operate in the telecommunication industry and are affected by trends and factors affecting
the telecommunications industry, which are beyond our control and may affect our
operations. These trends and factors include:

| |  | adverse
changes in the public and private equity and debt markets and our ability, as well as the
ability of our customers and suppliers, to obtain financing or to fund working capital
and capital expenditures;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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| |  | adverse
changes in the credit ratings of our customers and suppliers;
| | - | ---------------------------------------------------------------------

| |  | adverse
changes in the market conditions in our industry and the specific markets for our
              products;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | access
to, and the actual size and timing of, capital expenditures by our customers;
| | - | ------------------------------------------------------------------------------------

| |  | inventory
practices, including the timing of product and service deployment, of our customers;
| | - | ----------------------------------------------------------------------------------------------

| |  | the
amount of network capacity and the network capacity utilization rates of our customers,
and the amount of sharing and/or acquisition of new and/or existing network capacity by
our customers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
overall trend toward industry consolidation and rationalization among our customers,
              competitors, and suppliers;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | increased
price reductions by our direct competitors and by competing technologies including, for
example, the introduction of Ka-band satellite systems by our direct competitors which
could significantly drive down market prices;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | conditions
in the broader market for communications products, including data networking products and
computerized information access equipment and services;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | governmental
regulation or intervention affecting communications or data networking;
| | - | ------------------------------------------------------------------------------------

| |  | monetary
stability in the countries where we operate; and
| | - | ---------------------------------------------------------

| |  | the
effects of war and acts of terrorism, such as disruptions in general global economic
activity, changes in logistics and security arrangements, and reduced customer demand for
our products and services.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These
trends and factors may reduce the demand for our products and services or require us to
increase our research and development expenses and may harm our financial results.

Because
we compete for large-scale contracts in competitive bidding processes, losing a small
number of bids could have a significant adverse impact on our operating results.

A
significant portion of our sales revenue is derived from being selected as the supplier of
networks based on VSATs, under large-scale contracts that we are awarded from time to time
in a competitive bidding process. These large-scale contracts typically involve the
installation of thousands of VSATs. The number of major bids for these large-scale
contracts for VSAT-based networks in any given year is limited and the competition is
intense. Losing or defaulting on a relatively small number of bids each year could have a
significant adverse impact on our operating results.

Many
of our large-scale contracts are with governments or large enterprises in Latin America
and other parts of the world, so that any instability in the exchange rates or in the
political or economic situation or any unexpected unilateral termination could have a
significant adverse impact on our business.

In
recent years, a significant portion of our revenues has been from large-scale contracts,
including those in Peru, Colombia, Mexico and Brazil. Agreements with the governments in
these countries typically include unilateral early termination clauses and other risks
such as the imposition of new government regulations and taxation that could pose
additional financial burdens on us. In addition, the foreign exchange risks in these
countries are often significant due to possible fluctuations in local currencies relative
to the U.S. dollar. Any termination of business in any of the aforementioned countries or
any instability in the exchange rates could have a significant adverse impact on our
business.

4

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In
addition, in November 2002, we were awarded two large projects by the Colombian
government, including the installation and operation of approximately 550 telecenters to
provide Internet connectivity and telephony services in cities and towns throughout
Colombia and a second site of approximately 3,300 public rural satellite telephony
network. The original total value of the contracts was approximately $72 million and the
remaining value of the contracts, which are being held in restricted cash, is
approximately $22.8 million as of December 31, 2006. If we do not meet certain minimum
equity requirements, the Colombian government may assert that we are in breach of our
contract with them. Any early unilateral termination by the Colombian government could
have a significant adverse impact on our operating results.

If
we are unable to develop, introduce and market new products, applications and services on
a cost-effective and timely basis, our business could be adversely affected.

The
network communications market, to which our products and services are targeted, is
characterized by rapid technological changes, new product introductions and evolving
industry standards. If we fail to stay abreast of significant technological changes, our
existing products and technology could be rendered obsolete. Historically, we have
enhanced the applications of our existing products to meet the technological changes and
industry standards. For example, in February 2004, we introduced the SkyEdge product
family, which delivers broadband, Internet, data, voice and video services over a single
platform. Until then, each of these applications demanded a separate hub. In addition, in
2005, in order to meet the demands of utility companies and government customers, we
introduced our Armadillo VSAT, a durable, environmentally controlled broadband satellite
router system suitable for use in outdoor environments and extreme weather conditions. Our
success is dependent upon our ability to continue to develop new products, applications
and services and meet developing market needs.

To
remain competitive in the network communications market, we must continue to be able to
anticipate changes in technology, market demands and industry standards and to develop and
introduce new products, applications and services, as well as enhancements to our existing
products, applications and services. If we are unable to respond to technological advances
on a cost-effective and timely basis, or if our new products or applications are not
accepted by the market, our business, financial condition and operating results could be
adversely affected.

A
decrease in the selling prices of our products and services could materially harm our
business.

The
average selling prices of wireless communications products historically decline over
product life cycles. In particular, we expect the average selling prices of our products
to decline as a result of competitive pricing pressures and customers who negotiate
discounts based on large unit volumes. We also expect space segment prices to decline, in
particular in the U.S. where two of our competitors have announced plans to launch
extended Ka-band satellites. We also expect that competition in this industry will
continue to increase. To offset these price decreases, we intend to rely primarily on
obtaining yield improvements and corresponding cost reductions in the manufacturing
process of existing products, on the introduction of new products with advanced features
and on offering turnkey and other solutions to communications operators that are higher up
in the value chain. However, we cannot assure you that we will be able to obtain any yield
improvements or cost reductions, introduce any new products in the future or reach the
higher value chain to which we strive to sell. To the extent that we do not meet any or
all of these goals, it could materially harm our business and impair the value of our
shares.

5

---

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If
we lose existing contracts and orders for our products are not renewed, our ability to
generate revenues will be harmed.

A
majority of our business generated in 2006 was from recurring customers, and, as a result,
the termination or non-renewal of our contracts could have a material adverse effect on
our business, financial condition and operating results. Some of our existing contracts
could be terminated due to any of the following reasons, among others:

| |  | dissatisfaction
of our customers with our products and/or the services we provide or our inability to
provide or install additional products or requested new applications on a timely basis;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | customers'
default on payments due;
| | - | -----------------------------------

| |  | our
failure to comply with financial covenants in our contracts;
| | - | ----------------------------------------------------------------

| |  | the
cancellation of the underlying project by the government-sponsoring body; or
| | - | --------------------------------------------------------------------------------

| |  | the
loss of existing contracts or a decrease in the number of renewals of orders or the
number               of new large orders.
| | - | ---------------------------------------------------------------------------------------------------------------------------------

If
we are not able to gain new customers and retain our present customer base, our revenues
will decline significantly. In addition, if Spacenet has a higher than anticipated
subscriber churn, this could materially adversely affect our financial performance.

We
are dependent upon a limited number of suppliers for key components to build our hubs and
VSATs, and may be significantly harmed if we are unable to obtain the hardware necessary
for our hubs and VSATs on favorable terms or on a timely basis.

Several
of the components required to build our VSATs and hubs are manufactured by a limited
number of suppliers. In the past, we have not experienced any difficulties with our
suppliers with respect to availability of components. However, we cannot assure you of the
continuous availability of key components or our ability to forecast our component
requirements sufficiently in advance. Our research and development and operations groups
are continuously working with our vendors and subcontractors to obtain components for our
products on favorable terms in order to reduce the overall price of our products. If we
are unable to obtain the necessary volume of components at desired favorable terms or
prices, we may be unable to produce our products at desired favorable terms or prices. As
a result, sales of our products may be lower than expected, which could have a material
adverse effect on our business, financial condition and operating results. In addition,
recently, the lead-time for product delivery requested by our customers has shortened
significantly. Our suppliers are not always able to meet our requested lead times. If we
are unable to satisfy these customers needs, we could lose their business.

The
terms on which we are able to obtain components for our products are also affected by our
relationship with our suppliers. In this regard, we entered into a non-exclusive supply
chain management agreement with Arrow/Rapac Ltd., or Arrow, a part of Arrow Electronics,
Inc., to purchase certain components necessary for the manufacture of our products as well
as to provide comprehensive logistic services. While this agreement is intended to
guarantee the supply of our products and reduce prices, it also increases our reliance on
a single sub-contractor. Any inability on Arrows part to substantively perform under
the agreement could have an adverse effect on our operations.

We
operate in a highly competitive network communications industry. We may be unsuccessful
in competing effectively against many of our competitors who have substantially greater
financial resources.

We
operate in a highly competitive industry of network communications, both in the sales of
our products and our services. As a result of the rapid technological changes that
characterize our industry, we face intense worldwide competition to capitalize on new
opportunities, to introduce new products and to obtain proprietary and standard
technologies that are perceived by the market as being superior to those of our
competitors. Some of our competitors have substantially greater financial resources,
providing them with greater research and development and marketing capabilities. These
competitors may also be more experienced in obtaining regulatory approvals for their
products and services and in marketing them. Our relative position in the network
communications industry may place us at a disadvantage in responding to our
competitors pricing strategies, technological advances and other initiatives. Our
principal competitors in the supply of VSAT networks are Hughes Network Systems, LLC, or
HNS, ViaSat Inc., and iDirect Technologies. Most of our competitors have developed or
adopted different technology standards for their VSAT products. To the extent that one of
these competing standards becomes an industry standard, demand for our products will
decrease and our business will be harmed.

6

---

---



In
the U.S. market, where we operate as a service provider via Spacenet, the enterprise wide
area network, or WAN, market is extremely competitive, with a number of established VSAT
and terrestrial providers competing for nearly all contracts. The U.S. enterprise VSAT
market is primarily served by HNS and Spacenet. In addition, more recently,
Spacenets primary competitors in the enterprise WAN market are large terrestrial
carriers such as AT&T, Verizon and Qwest.

In
Peru and Colombia, where we primarily operate public rural telecom services we typically
encounter competition on government subsidized bids from various service providers, system
integrators and consortiums. Some of these competitors offer solutions based on VSAT
technology and some on alternate technologies (typically cellular, wireless local loop or
WiMAX). As operators that offer terrestrial or cellular networks expand their reach to
certain SRC regions, they compete with our VSAT solutions.

Our
actions to protect our proprietary VSAT technology may be insufficient to prevent others
from developing products similar to our products.

Our
business is based mainly on our proprietary VSAT technology and related products and
services. We establish and protect proprietary rights and technology used in our products
by the use of patents, trade secrets, copyrights and trademarks. We also utilize
non-disclosure and intellectual property assignment agreements. Because of the rapid
technological changes and innovation that characterize the network communications
industry, our success will depend in large part on our ability to protect and defend our
intellectual property rights. Our actions to protect our proprietary rights in our VSAT
technology and related products may be insufficient to prevent others from developing
products similar to our products. In addition, the laws of many foreign countries do not
protect our intellectual property rights to the same extent as the laws of the U.S. If we
are unable to protect our intellectual property, our ability to operate our business and
generate expected revenues may be harmed.

We
depend on a single facility in Israel and are susceptible to any event that could
adversely affect its condition.

Most
of our laboratory capacity, our principal offices and principal research and development
facilities are concentrated in a single location in Israel. Fire, natural disaster or any
other cause of material disruption in our operation in this location could have a material
adverse effect on our business, financial condition and operating results. As discussed
above, to remain competitive in the network communications industry, we must respond
quickly to technological developments. Damage to our facility in Israel could cause
serious delays in the development of new products and services and, therefore, could
adversely affect our business. In addition, the particular risks relating to our location
in Israel are described below.

Our
international sales expose us to changes in foreign regulations and tariffs, tax
exposures, political instability and other risks inherent to international business, any
of which could adversely affect our operations.

We
sell and distribute our products and provide our services internationally, particularly in
the U.S., Latin America, Asia, Africa and Europe. A component of our strategy is to
continue to expand into new international markets. Our operations can be limited or
disrupted by various factors known to affect international trade. These factors include
the following:

| |  | imposition
of governmental controls, regulations and taxation which might include a governments
decision to raise import tariffs or license fees in countries in which we do business;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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| |  | government
regulations that may prevent us from choosing our business partners or restrict our
activities. For example, a particular Latin American country may decide that high-speed
data networks used to provide access to the Internet should be made available generally
to Internet service providers and may require us to provide our wholesale service to any
Internet service provider that request it, including entities that compete with us. If we
become subject to any additional obligations such as these, we would be forced to comply
with potentially costly requirements and limitations on our business activities, which
could result in a substantial reduction in our revenue;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | tax
exposures in various jurisdictions relating to our activities throughout the world;
| | - | ---------------------------------------------------------------------------------------

| |  | political
instability in countries in which we do or desire to do business. For example, economic
instability in Brazil has led to an increase in the value of the Brazilian Reals. Such
unexpected increases have had an adverse affect on the gross margin of our projects in
Brazil. We also face similar risks from potential or current political and economic
instability in countries such as Russia, Kazakhstan, Angola, India and Kenya;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | trade
restrictions and changes in tariffs which could lead to an increase in costs associated
with doing business in foreign countries;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | difficulties
in staffing and managing foreign operations that might mandate employing staff in the
U.S. and Israel to manage foreign operations. This change could have an adverse effect on
the profitability of certain projects;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | longer
payment cycles and difficulties in collecting accounts receivable;
| | - | -------------------------------------------------------------------------

| |  | seasonal
reductions in business activities;
| | - | -------------------------------------------

| |  | foreign
exchange risks due to fluctuations in local currencies relative to the dollar; and
| | - | ------------------------------------------------------------------------------------------

| |  | relevant
zoning ordinances that may restrict the installation of satellite antennas and might also
reduce market demand for our service. Additionally, authorities may increase regulation
regarding the potential radiation hazard posed by transmitting earth station satellite
antennas emissions of radio frequency energy that may negatively impact our
business plan and revenues.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any
decline in commercial business in any country can have an adverse effect on our business
as these trends often lead to a decline in technology purchases or upgrades by private
companies. We expect that in difficult economic periods, countries in which we do business
will find it more difficult to raise financing from investors for the further development
of the telecommunications industry. Any such changes could adversely affect our business
in these and other countries.

We
may face difficulties in obtaining regulatory approvals for our telecommunication
services, which could adversely affect our operations.

Our
telecommunication services require licenses and approvals by the Federal Communications
Commission, or FCC, in the U.S., and by regulatory bodies in other countries. In the U.S.,
the operation of satellite earth station facilities and VSAT systems such as ours are
prohibited except under licenses issued by the FCC. We must also obtain approval of the
regulatory authority in each country in which we propose to provide network services or
operate VSATs. The approval process in Latin America and elsewhere can often take a
substantial amount of time and require substantial resources.

In
addition, any approvals that are granted may be subject to conditions that may restrict
our activities or otherwise adversely affect our operations. Also, after obtaining the
required approvals, the regulating agencies may, at any time, impose additional
requirements on our operations. We cannot assure you that we will be able to comply with
any new requirements or conditions imposed by such regulating agencies on a timely or
economically efficient basis.

8

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Our
lengthy sales cycles could harm our results of operations if forecasted sales are delayed
or do not occur.

The
length of time between the date of initial contact with a potential customer or sponsor
and the execution of a contract with the potential customer or sponsor may be lengthy and
vary significantly depending on the nature of the arrangement. During any given sales
cycle, we may expend substantial funds and management resources and not obtain significant
revenue, resulting in a negative impact on our operating results.

Our
operating results may vary significantly from quarter to quarter and these quarterly
variations in operating results, as well as other factors, may contribute to the
volatility of the market price of our shares.

Our
operating results may vary significantly from quarter to quarter. The causes of
fluctuations include, among other things:

| |  | the
timing, size and composition of orders from customers;
| | - | ----------------------------------------------------------

| |  | the
timing of introducing new products and product enhancements by us and the level of their
              market acceptance;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | the
mix of products and services we offer; and
| | - | ----------------------------------------------

| |  | the
changes in the competitive environment in which we operate.
| | - | ---------------------------------------------------------------

The
quarterly variation of our operating results, may, in turn, create volatility in the
market price for our shares. Other factors that may contribute to wide fluctuations in our
market price, many of which are beyond our control, include, but are not limited to:

| |  | announcements
of technological innovations;
| | - | -------------------------------------------

| |  | customer
orders or new products or contracts;
| | - | ---------------------------------------------

| |  | competitors'
positions in the market;
| | - | -------------------------------------

| |  | changes
in financial estimates by securities analysts;
| | - | ------------------------------------------------------

| |  | conditions
and trends in the VSAT and other technology industries;
| | - | ------------------------------------------------------------------

| |  | our
earnings releases and the earnings releases of our competitors; and
| | - | -----------------------------------------------------------------------

| |  | the
general state of the securities markets (with particular emphasis on the technology and
              Israeli sectors thereof).
| | - | -----------------------------------------------------------------------------------------------------------------------------------

In
addition to the volatility of the market price of our shares, the stock market in general
and the market for technology companies in particular have been highly volatile and at
times thinly traded. Investors may not be able to resell their shares following periods of
volatility.

9

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We
may at times be subject to claims by third parties alleging that we are infringing on
their intellectual property rights. We may be required to commence litigation to protect
our intellectual property rights. Any intellectual property litigation may continue for
an extended period and may materially adversely affect our business, financial condition
and operating results.

There
are numerous patents, both pending and issued, in the network communications industry. We
may unknowingly infringe on a patent. We may from time to time be notified of claims that
we are infringing on the patents, copyrights or other intellectual property rights owned
by third parties. While we do not believe that we have in the past or are at present
infringed on any intellectual property rights of third parties, we cannot assure you that
we will not be subject to such claims.

In
addition, we may be required to commence litigation to protect our intellectual property
rights and trade secrets, to determine the validity and scope of the proprietary rights of
others or to defend against third-party claims of invalidity. An adverse result in any
litigation could force us to pay substantial damages, stop designing or manufacturing,
using and selling the infringing products, spend significant resources to develop
non-infringing technology, discontinue using certain processes or obtain licenses to use
the infringing technology. In addition, we may not be able to develop non-infringing
technology, and we may not be able to find appropriate licenses on reasonably satisfactory
terms. Any such litigation could result in substantial costs and diversion of resources
and could have a material adverse effect on our business, financial condition and
operating results.

Potential
product liability claims relating to our products could have a material adverse effect on
our business.

We
may be subject to product liability claims relating to the products we sell. Potential
product liability claims could include those for exposure to electromagnetic radiation
from the antennas we provide. Our agreements with our business customers generally contain
provisions designed to limit our exposure to potential product liability claims. We also
maintain a product liability insurance policy. However, our insurance may not cover all
relevant claims or may not provide sufficient coverage. To date, we have not experienced
any material product liability claim. Our business, financial condition and operating
results could be materially adversely affected if costs resulting from future claims are
not covered by our insurance or exceed our coverage.

Our
insurance coverage may not be sufficient for every aspect or risk related to our business.

Our
business includes risks, only some of which are covered by our insurance. For example, in
many of our satellite capacity agreements, we do not have a back up for satellite
capacity, and we do not have indemnification or insurance in the event that our
suppliers satellite malfunctions or is lost. In addition, we are not covered by our
insurance for acts of fraud or theft. Our business, financial condition and operating
results could be materially adversely affected if we incur significant costs resulting
from these exposures.

We
may engage in acquisitions that could harm our business, results of operations and
financial condition, and dilute our shareholders' equity.

We
have a corporate business development team whose goal is to pursue new business
opportunities. This team pursues growth opportunities through internal development and
through the acquisition of complementary businesses, products and technologies. We are
unable to predict whether or when any prospective acquisition will be completed. The
process of integrating an acquired business may be prolonged due to unforeseen
difficulties and may require a disproportionate amount of our resources and
managements attention. We cannot assure you that we will be able to successfully
identify suitable acquisition candidates, complete acquisitions, integrate acquired
businesses into our operations, or expand into new markets. Further, once integrated,
acquisitions may not achieve comparable levels of revenues, profitability or productivity
as our existing business or otherwise perform as expected. The occurrence of any of these
events could harm our business, financial condition or results of operations. Future
acquisitions may require substantial capital resources, which may not be available to us
or may require us to seek additional debt or equity financing. Future acquisitions by us
could result in the following, any of which could seriously harm our results of operations
or the price of our shares:

| |  | issuance
of equity securities that would dilute our current shareholders' percentages of
              ownership;
| | - | -----------------------------------------------------------------------------------------------------------------

10

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| |  | large
one-time write-offs;
| | - | --------------------------

| |  | the
incurrence of debt and contingent liabilities;
| | - | --------------------------------------------------

| |  | difficulties
in the assimilation and integration of operations, personnel, technologies,
              products and information systems of the acquired companies;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | diversion
of management's attention from other business concerns;
| | - | -----------------------------------------------------------------

| |  | contractual
disputes;
| | - | ---------------------

| |  | risks
of entering geographic and business markets in which we have no or only limited prior
              experience; and
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | potential
loss of key employees of acquired organizations.
| | - | ----------------------------------------------------------

Our
failure to manage growth effectively could impair our business, financial condition and
results of operations.

# Risks Related to
Ownership of Our Ordinary Shares

Our
share price has been highly volatile and may continue to be volatile and decline.

The
trading price of our shares has fluctuated widely in the past and may continue to do so in
the future as a result of a number of factors, many of which are outside our control. In
addition, the stock market has experienced extreme price and volume fluctuations that have
affected the market prices of many technology companies, particularly telecommunication
and Internet-related companies, and that have often been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations could
adversely affect the market price of our shares. In the past, following periods of
volatility in the market price of a particular companys securities, securities class
action litigation has often been brought against that company. Securities class action
litigation could result in substantial costs and a diversion of our managements
attention and resources.

The
concentration of our ordinary share ownership may limit our shareholders' ability to
influence corporate matters.

As
of March 1, 2007, York Capital Management, or York, and entities affiliated with them
beneficially own or vote approximately 30% of our outstanding ordinary shares. As a
result, York may have a substantial influence over all matters that require approval by
our shareholders, including the election of directors and approval of significant
corporate transactions. As a result, corporate actions might be taken even if other
shareholders oppose them. This concentration of ownership might also have the effect of
delaying or preventing a change of control of our company that other shareholders may view
as beneficial.

Future
sales of our ordinary shares and the future exercise of options may cause the market
price of our ordinary shares to decline and may result in substantial dilution.

We
cannot predict what effect, if any, future sales of our ordinary shares by York and our
other 5% shareholders, or the availability of our ordinary shares for future sale,
including shares issuable upon the exercise of our options, will have on the market price
of our ordinary shares. Sales of substantial amounts of our ordinary shares in the public
market by our 5% shareholders, or the perception that such sales could occur, could
adversely affect the market price of our ordinary shares and may make it more difficult
for you to sell your ordinary shares at a time and price you deem appropriate.

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We
have never paid cash dividends and have no intention to pay dividends in the foreseeable
future.

We
have never paid cash dividends on our shares and do not anticipate paying any cash
dividends in the foreseeable future. We intend to continue retaining earnings for use in
our business, in particular to fund our research and development, which are important to
capitalize on technological changes and develop new products and applications. In
addition, the terms of some of our financing arrangements restrict us from paying
dividends to our shareholders.

Our
ordinary shares are traded on more than one market and this may result in price
variations.

Our
ordinary shares are traded on the NASDAQ Global Market and on the Tel Aviv Stock Exchange.
Trading in our ordinary shares on these markets is made in different currencies (U.S.
dollars on the NASDAQ Global Market, and new Israeli Shekels, or NIS, on the Tel Aviv
Stock Exchange), and at different times (resulting from different time zones, different
trading days and different public holidays in the U.S. and Israel). Consequently, the
trading prices of our ordinary shares on these two markets often differ. Any decrease in
the trading price of our ordinary shares on one of these markets could cause a decrease in
the trading price of our ordinary shares on the other market.

# Risks Related To
Regulatory Matters

We
have historically relied, and in the future intend to rely, upon tax benefits from the
State of Israel to reduce our taxable income. The termination or reduction of these tax
benefits would significantly increase our costs and could have a material adverse effect
on our financial condition and results of operations.

Under
the Israeli Law for Encouragement of Capital Investments, 1959 (Investment Law), portions
of our Israeli facility qualify as Approved Enterprises. As a result, we have
been eligible for tax benefits for the first several years in which we generated taxable
income from such Approved Enterprise. Our historical operating results reflect
substantial tax benefits, including tax exemptions and decreased tax rates up to December
31, 2000. In 2001, 2002 and 2003, we had substantial losses for tax purposes and a
decrease in revenues and therefore could not realize any tax benefits since then due to
current and/or carryforward losses. On April 1, 2005, an amendment to the Investment Law,
or the Amendment, came into effect, and has significantly changed the provisions of the
Investment Law and the criteria for new investments qualified to receive tax benefits. The
Amendment enacted major changes in the manner in which tax benefits are awarded under the
Investment Law so that companies no longer require approval of the Investment Center of
the Ministry of Industry, Commerce and Labor of the State of Israel, or the Investment
Center, in order to qualify for tax benefits. The Amendment will be applied to new
approved enterprises, and there is no assurance that we will, in the future, be eligible
to receive additional tax benefits under this law. Our financial condition and results of
operations could suffer if the Israeli government terminated or reduced the current tax
benefits available to us.

In
order to be eligible for these tax benefits under the Amendment, we must comply with two
material conditions. We must invest a specified amount in property and equipment in
Israel, and at least 25% of each new Approved Enterprise income should be
derived from export. We believe we have complied with these conditions, but we have not
received confirmation of our compliance from the Israeli government. If we fail in the
future to comply in whole or in part with these conditions, we may be required to pay
additional taxes and would likely be denied these tax benefits in the future, which could
harm our financial condition and results of operations. For additional information
concerning Israeli taxation, please see Israeli Taxation.

The
transfer and use of some of our technology and its production is limited because of the
research and development grants we received from the Israeli government to develop such
technology.

Our
research and development efforts associated with the development of certain of our legacy
products have been partially financed through grants from the Office of the Chief
Scientist of the Israeli Ministry of Industry, Trade and Labor. We may be subject to
certain restrictions under the terms of the Chief Scientist grants. Specifically, any
product incorporating technology developed with the funding provided by these grants may
not be manufactured, nor may the technology which is embodied in our products be
transferred outside of Israel without appropriate governmental approvals. These
restrictions do not apply to the sale or export from Israel of our products developed with
this technology.

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As
a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may
follow certain home country corporate governance practices instead of NASDAQ requirements.

As
a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are
permitted to follow certain home country corporate governance practices instead of certain
requirements of the NASDAQ Marketplace Rules, including the composition of our Board of
Directors, director nomination procedure, compensation of officers, distribution of annual
reports to shareholders, and quorum at shareholders meetings. In addition, we may follow
Israeli law instead of the NASDAQ Marketplace Rules that require that we obtain
shareholder approval for certain dilutive events, such as for the establishment or
amendment of certain equity based compensation plans, an issuance that will result in a
change of control of our company, certain transactions other than a public offering
involving issuances of a 20% or more interest in our company and certain acquisitions of
the stock or assets of another company.

If
we are unable to satisfy the requirements of Section  404 of the Sarbanes-Oxley Act, or
our  internal control over financial reporting is not effective, the reliability of our
financial  statements may be questioned and our share price may suffer.

Section
404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements
of the U.S. securities laws to do a comprehensive evaluation of its and its combined
subsidiaries internal control over financial reporting. To comply with this statute,
we are required to document and test our internal control procedures and our management
has assessed and issued a report concerning our internal controls over financial reporting
in this annual report on Form 20-F. Our independent auditors will be required to issue an
opinion on managements assessment of those matters for our annual report on Form
20-F for the fiscal year ending December 31, 2007. The rules governing the standards that
must be met for management to assess our internal controls over financial reporting are
relatively new and complex and require significant documentation, testing and possible
remediation to meet the detailed standards under the rules.

# Risks Related to Doing
Business in Israel

Political
and economic conditions in Israel may limit our ability to produce and sell our products.
This could have a material adverse effect on our operations and business.

We
are incorporated under the laws of the State of Israel, where we also maintain our
headquarters and most of our research and development and manufacturing facilities.
Political, economic and security conditions in Israel directly influence us. Since the
establishment of the State of Israel in 1948, Israel and its Arab neighbors have engaged
in a number of armed conflicts. A state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. Major hostilities between Israel and its
neighbors may hinder Israels international trade and lead to economic downturn.
This, in turn, could have a material adverse effect on our operations and business.

Since
September 2000, there has been substantial deterioration in the relationship between
Israel and the Palestinian Authority that has resulted in increased violence. The future
effect of this deterioration and violence on the Israeli economy and our operations is
unclear. The recent election of representatives of the Hamas movement to a majority of
seats in the Palestinian Legislative Council has resulted in an escalation in violence
among Israel, the Palestinian Authority and other groups. In July and August 2006,
significant fighting took place between Israel and Hezbollah in Lebanon, resulting in
rockets being fired from Lebanon up to 50 miles into Israel. Ongoing violence between
Israel and the Palestinians as well as tension between Israel and the neighboring Syria
and Lebanon may have a material adverse effect on our business, financial conditions and
results of operations.

13

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In
addition, in recent years, Israel has been going through a period of recession in economic
activity, resulting in low growth rates and growing unemployment. Our operations could be
adversely affected if the economic conditions in Israel deteriorate again. Also, due to
significant economic measures proposed by the Israeli government, there have been several
general strikes and work stoppages in 2003 and 2004, affecting banks, airports and ports.
These strikes have had an adverse effect on the Israeli economy and on business, including
our ability to deliver products to our customers. Following the passage by the Israeli
Parliament of laws to implement the economic measures, the Israeli trade unions have
threatened further strikes or work stoppages, and these may have a material adverse effect
on the Israeli economy and on us.

You
may not be able to enforce civil liabilities in the U.S. against our officers and
directors.

Most
of our executive officers are non-residents of the U.S. A significant portion of our
assets and the personal assets of most of our directors and executive officers are located
outside the U.S. Therefore, it may be difficult to effect service of process upon any of
these persons within the U.S. In addition, a judgment obtained in the U.S. against us, and
most of our directors and executive officers, including but not limited to judgments based
on the civil liability provisions of the U.S. federal securities laws, may not be
collectible in the U.S.

Generally,
it may also be difficult to bring an original action in an Israeli court to enforce
judgments based upon the U.S. federal securities laws against us and most of our directors
and executive officers. Subject to particular time limitations, executory judgments of a
U.S. court for liquidated damages in civil matters may be enforced by an Israeli court,
provided that:

| |  | the
judgment was obtained after due process before a court of competent jurisdiction, that
recognizes and enforces similar judgments of Israeli courts, and according to the rules
of private international law currently prevailing in Israel;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | adequate
service of process was effected and the defendant had a reasonable opportunity to be
              heard;
| | - | ------------------------------------------------------------------------------------------------------------------

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

| |  | the
judgment was not obtained by fraud and does not conflict with any other valid judgment in
              the same matter between the same parties;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment is no longer appealable; and
| | - | -----------------------------------------

| |  | an
action between the same parties in the same matter is not pending in any Israeli court at
the time the lawsuit is instituted in the foreign court.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

If
a foreign judgment is enforced by an Israeli court, it will be payable in Israeli
currency.

Additionally,
it may be difficult for an investor or any other person or entity, to assert U.S.
securities law claims in original actions instituted in Israel. Israeli courts may refuse
to hear a claim based on a violation of U.S. securities laws on the ground that Israel is
not the most appropriate forum in which to bring such a claim. Even if an Israeli court
agrees to hear a claim, it may determine that Israeli law is applicable to the claim.
Certain matters of procedures will also be governed by Israeli law.

Terrorist
attacks in Israel and globally may have a material adverse effect on our operating
results.

Terrorist
attacks, such as the attacks that occurred in New York and Washington, D.C. on September
11, 2001, terrorist attacks in Israel and other acts of violence or war may affect the
securities markets on which our shares trade, the markets in which we operate, and our
operations and profitability. We cannot assure you that there will not be further
terrorist attacks against the U.S. or Israel, or against American or Israeli businesses.
These attacks or subsequent armed conflicts resulting from or connected to them may
directly impact our physical facilities or those of our suppliers or customers.
Furthermore, these terrorist attacks may make travel and the transportation of our
supplies and products more difficult and more expensive and ultimately affect the sales of
our products in the U.S. and overseas. Also, the ongoing armed conflicts around the world
such as in Iraq could have a further impact on our sales, our profitability, our supply
chain, our production capability and our ability to deliver product and services to our
customers.

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Our
operating results would be adversely affected if inflation in Israel is not offset on a
timely basis by a devaluation of the NIS against the U.S. dollar.

Our
international sales expose us to fluctuations in foreign currencies. Most of our sales are
denominated in U.S. dollars. When the Israeli inflation rate exceeds the rate of the NIS
devaluation against foreign currencies, our NIS expenses increase to the extent of the
difference between the rates. A significant disparity of this kind may have a material
adverse effect on our operating results.

The
rights and responsibilities of our shareholders are governed by Israeli law and differ in
some respects from the rights and responsibilities of shareholders under U.S. law.

We
are incorporated under Israeli law. The rights and responsibilities of holders of our
ordinary shares are governed by our articles of association and by Israeli law. These
rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli
company has a duty to act in good faith toward the company and other shareholders and to
refrain from abusing his power in the company, including, among other things, in voting at
the general meeting of shareholders on, among other things, amendments to a companys
articles of association, increases in a companys authorized share capital, mergers
and interested party transactions requiring shareholder approval. In addition, a
shareholder who knows that it possesses the power to determine the outcome of a
shareholder vote or to appoint or prevent the appointment of a director or executive
officer in the company has a duty of fairness toward the company. However, Israeli law
does not define the substance of this duty of fairness. Because Israeli corporate law has
undergone extensive revision in recent years, there is little case law available to assist
in understanding the implications of these provisions that govern shareholder behavior.

Israeli
law may delay, prevent or make difficult a merger with, or an acquisition of us, which
could prevent a change of control and therefore depress the price of our shares.

Provisions
of Israeli law may delay, prevent or make undesirable a merger or an acquisition of all or
a significant portion of our shares or assets. Israeli corporate law regulates
acquisitions of shares through tender offers and mergers, requires special approvals for
transactions involving significant shareholders and regulates other matters that may be
relevant to these types of transactions. These provisions of Israeli law could have the
effect of delaying or preventing a change in control and may make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our shareholders. These
provisions may limit the price that investors may be willing to pay in the future for our
ordinary shares. Furthermore, Israeli tax considerations may make potential transactions
undesirable to us or to some of our shareholders.

Under
current Israeli law, we may not be able to enforce covenants not to compete and therefore
may be unable to prevent our competitors from benefiting from the expertise of some
of our former employees.

We
currently have non-competition clauses in the employment agreements of nearly all of our
employees. The provisions of such clauses prohibit our employees, if they cease working
for us, from directly competing with us or working for our competitors. Recently, Israeli
courts have required employers, seeking to enforce non-compete undertakings against former
employees, to demonstrate that the competitive activities of the former employee will
cause harm to one of a limited number of material interests of the employer recognized by
the courts (for example, the confidentiality of certain commercial information or a
companys intellectual property). In the event that any of our employees chooses to
leave and work for one of our competitors, we may be unable to prevent our competitors
from benefiting from the expertise our former employee obtained from us, if we cannot
demonstrate to the court that we would be harmed.

15

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

# OUR BUSINESS

We
are a leading global provider of Internet Protocol, or IP, based digital satellite
communication and networking products and services. We design, produce and market VSATs,
or very small aperture terminals, and related VSAT network equipment. VSATs are
earth-based terminals that transmit and receive broadband, Internet, voice, data and video
via satellite. VSAT networks combine a large central earth station, called a hub, with
multiple remote sites (ranging from tens to thousands of sites), which communicate via
satellite. VSAT networks have significant advantages to wireline and wireless networks, as
VSATs can provide highly reliable, cost-effective, end-to-end communications regardless of
the number of sites or their geographic locations.

We
have a large installed customer base and have shipped more than 670,000 VSAT units to
customers in over 85 countries on six continents since 1989. We have 16 sales and service
offices worldwide and two call centers to support our customers. Our products are
primarily sold to communication service providers and operators that use VSATs to serve
enterprise, government and residential users. Also, in the U.S. and certain countries in
Latin America, we provide services directly to end users in various market segments.

We
currently operate three complementary, vertically-integrated business units:

Gilat Network Systems, or GNS,
is a provider of VSAT-based networks and associated professional services, including
turnkey and management services, to telecom operators worldwide. According to the 2005
COMSYS VSAT Report, prepared by Communications Systems Limited, or COMSYS, a leading
satellite industry research firm, we are the second-largest manufacturer of VSATs, with a
21% global market share of shipped VSATs. We also provide industry specific solutions for
cellular backhaul, governments, business continuity and disaster recovery. In the year
ended December 31, 2006, we derived approximately 46% of our revenues from GNS. GNSs
representative customers include StarOne in Brazil, Optus in Australia, China Unicom,
Bharti in India, Global Teleport in Russia, Telkom in South Africa and AT&T in Europe.

Spacenet Inc. provides
satellite and hybrid terrestrial network services to enterprises, governments, small
office/home office, or SOHOs, and residential customers in the U.S. According to the
COMSYS report, we have a 20% market share of U.S. VSAT enterprise sites. In the year ended
December 31, 2006, we derived approximately 38% of our revenues from Spacenet.
Spacenets representative customers include Dollar General, Goodyear,
Intercontinental Hotels Group, Valero, Sunoco and Kroger.

Spacenet Rural Communications, or
SRC, provides telephony, Internet and data services primarily for rural communities in
emerging markets in Latin America under projects that are subsidized by government
entities. We believe that we are the largest rural satellite telecom provider in Latin
America, and currently have 16,000 operational sites. In the year ended December 31, 2006,
we derived approximately 16% of our revenues from SRC.

Since
July 2005, we have operated under a new management team as well as a new board of
directors. Our Chairman and CEO, Amiram Levinberg, who is a co-founder of our company,
leads a highly experienced team of satellite industry executives. Our new management has
refocused our business strategy and continued our financial turnaround, which has resulted
in four consecutive quarters of increasing revenues and net income.

We
have diversified revenue streams that result from both sales of products and services. In
the year ended December 31, 2006, approximately 51% of our revenues were derived from
product sales and approximately 49% of our revenues were derived from services. Our
service revenues are derived from long-term contracts of three to six years, which provide
stability and visibility into future revenues. As of December 31, 2006, we had a backlog
of $209 million for equipment and multi-year service contracts. During the same period, we
derived 37.8% of our revenues from the U.S., 32.0% from South and Central America, 15.3%
from Asia, 7.5% from Africa and 7.4% from Europe.

16

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We
were incorporated in Israel in 1987 and shipped our first generation VSAT in 1989. Since
then, we have been among the technological leaders in the VSAT industry. Our continuous
investment in research and development has resulted in the development of new and
industry-leading VSAT products and our intellectual property portfolio includes 55 issued
patents (24 U.S. and 31 foreign). As of December 31, 2006, we had approximately 950
employees, including 160 persons engaged in research, development and engineering
activities.

# Industry Overview

Satellite
networks are comprised of multiple ground stations that communicate through a satellite in
orbit, providing continent-wide wireless connectivity. VSAT networks are used in a variety
of applications such as broadband, Internet, voice, data and video. VSAT networks are
usually deployed in a hub-and-spoke configuration, with customer locations connecting
directly via satellite to a central hub facility. The value chain of VSAT
satellite networks consists of the following four main elements:



Satellite
operators provide satellite transponder capacity on satellites positioned in
geostationary orbit above the equator. Once in orbit, a satellite beam can typically
service a geographic area the size of the continental U.S. or larger. The satellite
receives information from a VSAT or the network hub, amplifies it and transmits it back to
earth on a different frequency. Satellite operators sell the capacity in a variety of
leasing agreements to their customers. The current generation of high-power satellites
uses Ku-band frequencies. Other frequencies are C-band and the more recently introduced
Ka-band. Our technology is compatible with C-band, Ku-band and Ka-band satellites
including special extended C-band and extended Ku-band satellites. Some of the leading
satellite operators are Intelsat/PanAmSat, SES and Eutelsat.

Ground
station equipment providers manufacture VSAT networks that combine a large central
earth station, called a hub, with multiple remote sites (ranging from tens to thousands of
sites) which communicate via satellite. GNS is a leading ground station equipment
provider.

Communication
service providers buy equipment from ground station equipment providers, install and
maintain such equipment, lease capacity from satellite operators and sell a full package
of communication services to the end user. Spacenet and SRC are leading communication
service providers in the U.S. and in Latin America, respectively.

End
users are customers utilizing equipment and satellite communication services. Examples
of end users range from enterprises, to SOHOs, to residential consumers.

17

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VSAT
networks have a diverse range of uses and applications, and provide communication services
as a stand-alone, alternate or complement to wireline and wireless networks. We believe
that the advantages of VSAT networks include:

| | Universal
availability - VSATs provide service to any location within a satellite footprint.
| | --------------------------------------------------------------------------------------------

| | Timely
implementation- Deployment times (ranging from a few weeks to a few months) can ensure
rapid connectivity.
| | -----------------------------------------------------------------------------------------------------------------

| | Broadcast
and multicast capabilities - The satellite medium is an ideal solution for broadcast
and multicast applications as the satellite signal is simultaneously received by any
group of users in the satellite footprint.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reliability
and service availability - VSAT network availability is high due to VSAT reliability,
small number of components in the network as well as terrestrial infrastructure
independence.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Scalability - VSAT
networks scale easily from a single site to thousands of locations.
| | --------------------------------------------------------------------------------------

| | Cost-effectiveness - The
cost of VSAT networks is distance independent and therefore a cost-effective solution for
multiple sites in remote locations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | Applications
delivery - Wide spectrum of capabilities and customer applications such as e-mail,
virtual private networks, or VPN, video, voice, Internet access, distance learning,
content distribution and financial transactions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Portability - VSAT
solutions can be mounted on vehicles or deployed rapidly in fixed locations, then
relocated or moved as required.
| | ------------------------------------------------------------------------------------------------------------------------------------

Given
the technological and implementation benefits afforded by VSAT networks, we believe that
the market for VSAT products and services will continue to grow.

According
to the COMSYS report, the VSAT equipment market generated approximately $750 million of
revenues in 2004, which represents an annual growth rate of approximately 29% from 2003 to
2004. According to a Northern Sky Research report from 2006, the number of VSAT sites is
expected to grow at a compounded annual growth rate, or CAGR, of approximately 17% through
2010.

According
to the COMSYS report, the VSAT service market generated approximately $3.9 billion of
revenues in 2004, which represents an annual growth rate of approximately 13% from 2003 to
2004. According to the Northern Sky Research report, the global broadband satellite
services market is expected to have a CAGR of approximately 9% through 2010.

We
believe that there are three primary categories of end-users that require VSAT products
and services:

Enterprise
and Business. This market includes large companies and organizations, government
entities, small medium enterprises, or SMEs, and SOHO end users. For enterprises, VSAT
networks offer network connectivity and deliver applications such as networks within
corporations (known as corporate intranets), Internet connections for voice, data and
video (known as broadband), transaction-based connectivity to enable on-line data delivery
such as point-of-sale (credit and debit card authorization), inventory control and real
time stock exchange trading. According to the Northern Sky Research report, global
enterprise and SME IP VSAT sites will grow from approximately 600,000 in 2005 to 1.2
million sites in 2010. This represents a CAGR of 14.3%.

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Rural
Telecommunications. The rural telecommunications market is comprised of communities
throughout the world that require telephone, facsimile and Internet access in areas that
are underserved by existing telecommunications services. These communication services are
usually provided to the rural population via government-subsidized initiatives. This
market segment is comprised of Build-Operate projects, in which governments
subsidize the establishment and the operation of a rural network to be served by a
satellite, wireless or cellular service provider that is usually selected in a bid
process. According to the 2006 GSM Association Universal Access Report, 57 out of the 92
emerging market and developing countries sampled for their study have plans to establish
universal service funds, or USFs, within their jurisdictions to meet local telephony and
Internet service requirements. According to this report, the USFs jointly collected
approximately $6.0 billion worldwide through 2006, out of which $1.6 billion has been
redistributed to the communications industry. In other instances, local communications
operators have USOs which require them to serve rural areas lacking terrestrial
infrastructure. Some local communications operators elect to fulfill this obligation by
hiring third parties in a model known as Build-Operate-Transfer. In these
instances, the network is established and made operational by a third party service
provider and then transferred to the operator.

Consumer.           The
consumer market consists of residential users. These users require a           high-speed
internet connection that enables the transmission of data, audio and           video,
similar to a digital subscriber line, or DSL, or cable modem service.           According
to the Northern Sky Research report, 82.9% of these sites are located           in North
America.

# Our Competitive Strengths

We
are a leading provider of satellite communication and networking products and services.
Our competitive strengths include:

Market
leadership in large and growing markets. Since our inception, we have sold
more than 670,000 VSATs to customers in over 85 countries. Our customer base includes a
large number of satellite-based communications service providers and operators worldwide.
In addition, we provide satellite-based communication services primarily to enterprises in
the U.S. and we are the largest satellite communications service provider to rural
communities in Latin America. The large installed base of our VSAT equipment also provides
opportunities for new and incremental sales to existing customers. According to the 2005
COMSYS report, our global market share to the enterprise market was approximately 21%,
based on the number of terminals shipped, making us the second largest VSAT manufacturer
in the world for this segment.

Technology
leadership.  We have been at the forefront of VSAT technology and services
for almost 20 years and continue to be an innovator and developer of new satellite
technologies. Our highly customizable single platform VSAT technology enables us to
provide our customers with a wide range of broadband, Internet, voice, data and video
solutions and our product and operations infrastructure is capable of running hubs with
greater than 99.99% availability while rolling out thousands of new VSAT site locations
each month. We have unified all our legacy product lines under SkyEdge, our latest
generation VSAT product family. The single platform of products enables us to focus our
research, development and engineering efforts, which are supported by approximately 160
persons. This enables us to rapidly develop new features and applications. In addition, by
directly serving end-users through our service organizations, we are able to quickly
respond to changing market conditions to ensure we maintain our leadership position.

As
an example of our technology innovation, we have adapted our SkyEdge platform to meet the
Cisco Systems criteria for interoperability with its Cisco VSAT Network Module, or NM. We
are a Cisco Systems Technology Developer Partner and, with our SkyEdge hubs, we offer
interoperability with the Cisco VSAT NM that may be integrated into several of
Ciscos routers, enabling near-instantaneous failover from a primary circuit to the
satellite backup.

Global
presence and local support worldwide.  We have sold our products in over 85
countries on six continents. Our products and services are used by a large and diverse
group of customers including some of the largest enterprises in the world, several
government agencies and many rural communities. We have 16 sales and service offices
worldwide. Through our network of offices we are able to maintain a two-tier customer
support program offering local support offices and a centralized supply facility.

19

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Complementary
business lines. Our three business units, GNS, Spacenet and SRC, enable us
to provide a full turnkey solution to our customers by integrating a diverse range of
value-added products and services. Our offerings range from VSAT network equipment,
installation, operation and maintenance to provide services ranging from broadband,
Internet, voice, data and video to managed solutions that are highly flexible and
customizable. Our business model enables us to be closely attuned to all of our
customers needs and to rapidly adapt to changing market trends. Our VSAT-based
networks often serve as a platform for the delivery of a complete system, providing
versatile solutions for corporate enterprises, government agencies, SMEs, rural
communities, SOHOs and consumers.

Diversified
revenue streams and customer base. For the one-year period ended December
31, 2006, our revenues were equally generated from products and services. Our product
sales are generally independent equipment orders which often generate maintenance
contracts and additional opportunities for future product sales. Our service sales are
characterized by long-term contracts that provide a recurring revenue base. In the year
ended December 31, 2006, our three business units, GNS, Spacenet and SRC, accounted for
46%, 38% and 16% of our revenues, respectively. We are not overly dependant on any single
customer, project or geographic region and no single customer accounted for more than 10%
of our revenues.

Strong
financial position. Our strong financial position allows us to compete
effectively with other companies in our industry. We have had five consecutive quarters of
revenue growth and improved profitability. As of December 31, 2006, our cash and cash
equivalents increased to $149.5 million, from $74.9 million at December 31, 2005, and we
reduced our debt to $45.2 million, from $119.8 million at December 31, 2005.

Experienced
management team. Since July 2005, we have operated under a new management
team as well as a new board of directors. Our Chairman and CEO, Amiram Levinberg, is a
co-founder of our company and leads a highly experienced executive team of satellite
industry veterans. Our new management has refocused our business strategy and continued
our financial turnaround, which has resulted in four consecutive quarters of increasing
revenues and net income.

# Our Growth Strategy

Our
objective is to leverage our advanced technology and capabilities to:

Enhance
our leadership position in our core markets. We are expanding our position
in the VSAT market through the development of new products, solutions and services within
our target markets. Through the development of our SkyEdge single platform product and our
end-to-end solution offerings, we are focused on providing innovative products and
services required by our customers and end-users. Currently, our research and development
efforts are focused on a number of initiatives, including increasing the satellite
communications efficiency of our products, increasing the levels of network performance
and enhancing ease of use and user interfaces. We are also expanding our VSAT
products throughput by increasing the amount of data that can be processed during
the upload and download process and we are expanding the use of our VSAT technology for
applications such as cellular backhaul, electronic voting and business continuity.

Expand
our presence across the communications value chain. We are currently a
leading global provider of VSAT network equipment and services. GNS is focused on
providing more than VSAT equipment to our customers by offering full solutions and turnkey
implementation based on capabilities developed to meet customer requirements. Spacenet is
focused on more than connectivity by expanding its offering to include managed network
services and other value-added services.

Focus
on emerging markets. We are expanding our focus on rural and emerging
markets. Traditionally, it has been considered too costly for service providers to provide
full-terrestrial networks to these regions. As a result, many governments either require
telecommunications operators to provide communications access through USOs to these
communities or provide funding via USFs to subsidize the provision of these services. At
this time, available worldwide USF funding is estimated to be $4.4 billion in
approximately 15 countries. As this communications rollout is adopted, VSAT-based
communication networks provide a high quality, cost-effective alternative to terrestrial,
wireless and cellular systems. GNS is currently focusing its growth efforts to service
providers that are either being required by USOs to facilitate the rural expansion, or to
service providers that are utilizing the subsidies created through USFs. SRC is also
focusing on expanding its services to emerging markets with USFs.

20

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Focus
on business continuity. We are addressing the growing area of business
continuity and disaster recovery applications by providing secondary networks for
continuous operations during network failures or natural disasters. As one of our business
continuity solutions, we have adapted our SkyEdge platform to meet the Cisco Systems
criteria for interoperability with its Cisco VSAT Network Module, or NM. We are a Cisco
Systems Technology Developer Partner and, with our SkyEdge hubs, we offer interoperability
with the Cisco VSAT NM that may be integrated into several of Ciscos routers,
enabling near-instantaneous failover from a primary circuit to the satellite backup.

Enter
new strategic markets. We have identified a number of markets which we
believe will be strategic to our future growth, including Broadband Wireless Access, or
BWA, solutions and additional government markets. BWA is a developing technology designed
to solve the last mile connectivity problem facing many rural and remote locations.
Service providers are using BWA systems to provide a link between end users and
communications networks. We already have significant operations in emerging markets and
have established sales and distribution channels in many of these remote locations. The
current focus of most established BWA providers is geared toward urban and mobile
solutions. We will leverage our distribution channels, expertise and presence in rural
areas to provide BWA solutions, which will complement our present product offerings.

We
also intend to leverage our technology expertise to further develop customized VSAT
products, applications and services for the government and government-supported sectors in
additional territories. Many governments, including the U.S., require applications with
specific communication parameters that are particularly well-suited for satellite networks
based on cost and performance. These applications range from border control and sensitive
military applications to distance learning and open classroom education programs.

Proactively
evaluate acquisitions that will support and enable our growth strategy. As
we continue to focus on expanding the target markets for our products, services and
solutions, we may have opportunities to acquire companies or technologies that would be
complementary or additive to our existing platform and global distribution channels. We
will proactively, but selectively, evaluate opportunities to expand our business.

# Our Business Units

Gilat
Network Systems

Overview

GNS
is a leading global provider of network systems and associated professional services for
operators of satellite communications systems. Our operational experience in large VSAT
networks together with our local offices worldwide enables us to work closely and directly
with those operators. We provide VSAT communication equipment and solutions to the
enterprise, rural communications and consumer markets.

Our
SkyEdge product portfolio delivers efficient, reliable and affordable broadband, Internet,
voice data and video. SkyEdge offers a cost-effective way to deliver the communications
services that enterprises, carriers, service providers and governments require, from
interactive data and broadband IP to public telephony and corporate voice over Internet
Protocol, or VoIP, services.

We
also provide solutions tailored to the requirements of individual industries. Based on our
open SkyEdge platform, our solutions provide added value to operators through better
performance and integration as well as simpler deployment. One such solution is SkyAbis,
which provides cost-effective cellular backhaul for rural communications.

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We
also support satellite networking through professional services, training and a full range
of turnkey solutions and outsourced network operations including
Build-Operate-Transfer for networking facilities.

GNS
is headquartered in Petah Tikva, Israel and has 12 offices worldwide, with approximately
500 employees. In the year ended December 31, 2006, GNS had revenues of $136.0 million,
including sales of $19.8 million to Spacenet and SRC.

Products
and Solutions

SkyEdge
Family of Products

Our
SkyEdge platform is based on a single hub with multiple VSATs to support a variety of
services and applications. Our advanced access scheme and quality of service
implementation enables delivering high quality services in an efficient manner. The
SkyEdge system can support triple play services, such as wireline quality voice, video,
and data on the same platform. In addition, multiple network topologies can be deployed
with the same platform. This enables an improved user-experience and reduced operating
expenses.

We
currently offer the following VSAT products:

|                      |                                                                    |                                                          |                               |                                                   |                                                
|--------------------- | ------------------------------------------------------------------ | -------------------------------------------------------- | ----------------------------- | ------------------------------------------------- | -----------------------------------------------
|Product               | SkyEdge IP                                                         | SkyEdge PRO                                              | SkyEdge Call                  | SkyEdge Gateway                                   | SkyEdge
  Armadillo                            
|                      |                                                                    |                                                          |                               |                                                   |                                                
|                      | (VSAT PRODUCT)                                                     | (VSAT PRODUCT)                                           | (VSAT PRODUCT)                | (VSAT PRODUCT)                                    | (VSAT PRODUCT)                                 
|                      |                                                                    |                                                          |                               |                                                   |                                                
|Description           | IP
  Router
  VSAT                                                 | Multi-Service
  VSAT                                     | Telephony
  VSAT              | Trunking
  Solution
  VSAT                        | VSAT
  for
  outdoor
  applications            
|                      |                                                                    |                                                          |                               |                                                   |                                                
|Interfaces            | Single
  IP                                                        | Multiple
  IP,
  Multiple
  Telephony, Mesh              | Single
  IP, Dual
  Telephony | Multiple
  IP,
  Multiple
  Telephony, E1,
  Mesh | Single
  IP                                    
|                      |                                                                    |                                                          |                               |                                                   |                                                
|Typical
  Application | Internet,
  Intranet,
  E-mail, VoIP,
  IP devices,
  Transactions | Internet,
  Native
  voice, VoIP,
  Video
  conferencing | Internet,
  Native voice      | E1
  Trunking,
  Voice, Video,
  Data             | Outdoor
  install,
  Transactions, IP
  devices
|                      |                                                                    |                                                          |                               |                                                   |                                                
|Type
  of
  Customers | Residential,
  SOHO, SME,
  Enterprise                             | SME,
  Enterprise,
  Carriers                            | Carriers
  for
  USOs         | Enterprise,
  Carriers                            | Utility,
  SCADA,
  Video
  surveillance       
|                      |                                                                    |                                                          |                               |                                                   |                                                

All
of these products are connected to a microwave outdoor unit which is mounted on a dish
antenna.

Solutions

Our
VSAT-based networks serve as a platform for the delivery of custom tailored solutions for
identified markets. We pre-package, commercialize and sell these end-to-end solutions
which offer higher value to our customers. For example, in 2005, we released an integrated
solution, called SkyAbis, which supports a cellular backhaul application for Global System
for Mobile Communications, or GSM, and Code Division Multiple Access, or CDMA,
cellular-based stations. Our end-to-end solutions include government communication
infrastructure solutions for post offices, elections, military and security and rapid VSAT
deployment. We also provide turnkey solutions that include installation, operation and
third-party peripheral equipment.

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We
currently offer the following solutions:

|                                  |                                                                                       |                                                                                                                             |                                                                                                |                                                                                                   |                                                                     
|--------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------
|Solution                          | SkyAbis                                                                               | e-Post                                                                                                                      | e-Voting                                                                                       | Disaster
  Recovery/Rapid
  Deployment                                                            | Cisco VSAT NM                                                       
|                                  |                                                                                       |                                                                                                                             |                                                                                                |                                                                                                   |                                                                     
|Description                       | Cellular
  traffic
  backhaul
  enabling
  operators to
  expand their
  market reach | Turnkey
  communication
  and applications
  for electronic
  postal services                                               | Turnkey
  communication,
  authentication
  and electronic
  voting for
  national
  elections | Transportable
  and man-pack
  units
  communication
  solutions                                  | Satellite-based
  networking for
  Cisco router with
  Cisco VSAT NM
|                                  |                                                                                       |                                                                                                                             |                                                                                                |                                                                                                   |                                                                     
|Typical
  Application             | Cellular
  backhaul for
  GSM and
  CDMA
  networks                                   | Communication
  network,
  Internet access,
  Fax, Prepaid
  telephony,
  Counter
  automation
  software,
  Money transfer | Communication
  network,
  Polling
  terminals,
  Fingerprint
  identification
  system        | On-demand
  access to voice,
  data, video                                                        | Business
  continuity,
  Disaster recovery,
  Content
  distribution
|                                  |                                                                                       |                                                                                                                             |                                                                                                |                                                                                                   |                                                                     
|Type
  of
  Customers/
  Vertical | GSM
  and
  CDMA
  cellular
  operators                                               | Governments,
  Postal agencies                                                                                              | Governments,
  National
  election
  committees                                                | Mobile
  medical
  units, Mobile
  ATM, Military
  and security
  forces, Fire and
  police units | Enterprise,
  Financial sector,
  Government                        
|                                  |                                                                                       |                                                                                                                             |                                                                                                |                                                                                                   |                                                                     
|Selected
  customers              | Enitel(Nicaragua)                                                                     | Posta (Kenya)                                                                                                               | CNE(Venezuela)                                                                                 | Petrobras
  (Brazil),
  Metpresa
  (Mexico)                                                       | Cisco saleschannel
  customers,
  Valero (U.S.)                     

Turnkey
Implementation Capabilities

We
provide end-to-end turnkey solutions and integration to existing infrastructures. This
includes network rollout projects, where we provide operators with a fully operational
network. We also provide consultancy and other professional services for customers.

Among
the components that go into our turnkey projects are planning (including network analysis,
system design, teleport design and network, space segment and backhaul planning),
integration of our existing operators infrastructure and equipment with the VSAT
network and implementation of the project plan.

Manufacturing,
Customer Support and Warranty

Our
products are designed and tested primarily at our facilities in Israel. We outsource a
significant portion of the manufacturing of our products to third parties. We also work
with third-party vendors for the development and manufacture of components integrated into
our products, as well as for assembly of components for our products.

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We
offer a customer care program, which we refer to as SatCare, and professional services
programs that improve customer network availability through ongoing support and
maintenance cycles. As part of our professional services, we provide:

| |  | Outsourced
operations such as VSAT installation, service commissioning and hub operations.
| | - | ------------------------------------------------------------------------------------------

| |  | Proactive
troubleshooting, such as periodic network analysis, to identify symptoms in advance.
| | - | ----------------------------------------------------------------------------------------------

| |  | Training
and certification to ensure customers and local installers are proficient in VSAT
operation.
| | - | -----------------------------------------------------------------------------------------------------

We
typically provide a one-year warranty to our customers as part of our standard contract.
We also provide extended warranty services through our SatCare program, for an additional
annual fee.

GNS
Customers and Markets

We
sell VSAT communications networks and solutions primarily to service providers. The
service providers to whom we sell our products and solutions are primarily serving the
enterprise and rural communication market segments. We have more than 200 customers
worldwide.

Enterprise
service providers use our networks for broadband, Internet, voice, data and video
connectivity for applications such as credit card authorizations, online banking,
corporate intranet, interactive distance learning, lottery transactions, retail
point-of-sale, inventory control and Supervisory Control and Data Acquisition, or SCADA,
services. Examples of service providers to whom we sell VSAT networks are StarOne in
Brazil whose end users include franchises such as OBoticario, a major Brazilian
cosmetics chain, and HCL in India whose end users include stock brokerage firms.

Service
providers serving the rural communications market are typically public telephony and
Internet operators providing telephony and Internet services through public call offices,
telecenters, Internet cafes or pay phones. Some of the rural communication projects are
for government customers. Examples of our rural telecom customers include Telkom in South
Africa, China Unicom and Embratel in Brazil.

Our
VSAT networks also provide underserved areas with a high-speed Internet connection similar
to DSL service to residential users. Examples of customers in this area are StarOne in
Brazil and Optus in Australia.

GNS
Sales and Marketing

We
use both direct and indirect sales channels to market our products, solutions and
services. Most of our revenues are derived from direct sales. Our GNS equipment sales
division has organized its marketing activities by geographic areas, with groups,
subsidiaries or affiliates covering most regions of the world. Our sales teams are
comprised of account managers and sales engineers (approximately 130 employees), who
establish account relationships and determine technical and business requirements for the
network. These teams also support the other distribution channels with advanced technical
capabilities and application experience. Sales cycles in the VSAT network market vary
significantly, with some sales requiring 18 months from an initial lead through signing of
the contract and others stemming from an immediate need for product delivery within two to
three months. The sales process includes understanding customer needs, several network
design iterations, network demonstrations, and on occasion, software development and
integrations with third-party equipment for complete solution offerings.

24

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Spacenet Inc.

Overview

Spacenet
provides satellite network services to business, government and residential customers in
the U.S. In addition, we offer our enterprise customers value-added services, including
hybrid satellite/terrestrial networks and outsourced network management.

Spacenets
equipment and services are currently deployed at more than 100,000 business, government
and residential locations in the U.S. Our customers include Dollar General, Goodyear,
Intercontinental Hotels Group, Valero, Sunoco and Kroger. The 2005 COMSYS report ranked
Spacenet as the second largest satellite network service provider in North America for the
enterprise/government market, with a 20.5% market share, which is more than four times
larger than the third-ranked provider. Our market includes WAN services for retail, energy
, financial services, hospitality and government customers, as well as Internet access
services for SOHO and residential customers.

Spacenet
is based in McLean, Virginia, and has approximately 230 employees. In the year ended
December 31, 2006, Spacenet had revenues of $93.6 million.

Services

Spacenet
offers prepackaged and custom network services that are sold under the Spacenet,
Connexstar and StarBand brand names. These service lines target a variety of markets and
applications, as is illustrated in the diagram below:

|                       |                                     |                                                      |                                                        |                                                                             |                                                         
|---------------------- | ----------------------------------- | ---------------------------------------------------- | ------------------------------------------------------ | --------------------------------------------------------------------------- | --------------------------------------------------------
|Service                | StarBand                            | Connexstar
  Transaction                             | Connexstar
  Broadband                                 | Connexstar
  Performance                                                    | Spacenet
  Custom
  Networks                            
|                       |                                     |                                                      |                                                        |                                                                             |                                                         
|Description            | VSAT
  Internet
  access
  services | Low-bandwidth
  VSAT network                         | Commercial
  grade
  broadband
  VSAT
  networks       | High-bandwidth
  VSAT network                                               | Customized
  VSAT and
  hybrid
  terrestrial
  WANs     
|                       |                                     |                                                      |                                                        |                                                                             |                                                         
|Typical
  applications | Web,
  E-mail                       | Credit
  cards,
  Point-of-sale,
  SCADA             | Intranet,
  Credit cards,
  Back-office
  applications | VoIP,
  Video
  monitoring,
  Backup
  networks                             | Credit
  cards,
  Point-of-sale,
  Multicast,
  Intranet
|                       |                                     |                                                      |                                                        |                                                                             |                                                         
|Target
  Markets       | SOHOs                               | Utilities
  pipeline
  networks, Lottery
  operators | Retail,
  Hospitality,
  Small business                | Disaster
  recovery,
  Business continuity,Government,
  Energy exploration | Large
  enterprise
  customers                          
|                       |                                     |                                                      |                                                        |                                                                             |                                                         
|Sample
  Customers     | Residential
  users                 | Chevron
  Pipeline,
  TXU                            | Do
  It Best,
  Boston Market                          | Government,
  Cisco-based
  networks                                        | Goodyear,
  Sunoco                                      
|                       |                                     |                                                      |                                                        |                                                                             |                                                         

Spacenets custom network
services for large enterprise and government customers provide secure private networks
specifically sized and tuned to a customers application, protocol support and
bandwidth needs. These networks may be delivered as a private hub (each set of
hub equipment is used for only one customer) or virtual private hub (hub
equipment is shared among multiple customers but is logically partitioned to provide
private hub benefits at a lower cost). Custom network configurations also include hybrid
terrestrial/satellite networks in which Spacenet provides management of both network
components, integrating them as a single WAN.

Spacenets standard Connexstar
services are optimized for popular customer applications, and are engineered to provide
superior performance compared to other providers one size fits all
solutions. Connexstar services are offered in full-time plans for primary network use or
as on-demand services for emergency response and backup use.

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These services are also available in
fixed site or transportable configurations for on-the-go communications. All of
Spacenets custom network and standard Connexstar services offer Service Level
Agreements, or SLAs, for network reliability; network management and reporting tools;
professional program management and implementation assistance; and professional-grade
installation and maintenance options.

Network
Operations and Customer Support

We
operate teleport facilities with Network Operation Centers, or NOCs, in the McLean,
Virginia, Chicago, Illinois, and Marietta, Georgia. Our operations staff of more than 100
people supervises network implementation and installation quality assurance, manages
shared-hub and private-hub networks, provides first-level and escalated help desk/problem
resolution, manages inventory and shipping, and dispatches field service/maintenance
technicians. The Chicago NOC facility specializes in operation of high-availability
networks on legacy VSAT platforms. The Marietta NOC facility operates the Connexstar and
StarBand services as well as the first and second-level call center. The McLean
headquarters facility provides pilot and disaster recovery hub operations, third-tier
network escalation and advanced network management services.

For
enterprise and government satellite networks, we offer SLAs providing guarantees on
network uptime and availability as well as guaranteed network performance and issue
resolution time. Spacenets network management and operations features include
diverse and scalable hub and satellite options, centralized network management center,
extensive web-based tools for customers, dedicated program management and service
automation.

Spacenet
Sales and Marketing

We
sell our enterprise and government services directly through a team of ten major-account
executives as well as through a network of approximately 30 authorized enterprise service
resellers, primarily telecom carriers, IT integrators and value-added resellers focused on
specific industries.

Our
StarBand SOHO and residential services are sold both directly and through approximately
600 sales agents, that are typically direct-to-home satellite TV resellers and/or
satellite Internet service resellers. Our distribution channel strategy is shown below:



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Spacenet Rural Communications

Overview

SRC
is a service provider for public telephony and Internet services to rural areas in Latin
America, mainly in Peru and Colombia. In these countries, we have built the infrastructure
and act as an operator (Build-and-Operate model) in subsidized government projects. Our
services include operating public phones and telecenters and distributing pre-paid cards
for telephone usage at remote villages. In addition, SRC uses its infrastructure to
provide services to enterprise, SME, SOHO and residential customers. SRC also provides
outsourcing of VSAT network implementation and operation to other operators in the region.

SRC
has offices in Peru and Colombia and employs approximately 220 persons. In the year ended
December 31, 2006 SRC had revenues of $38.9 million.

SRC
Services and Solutions

We
began to operate in Peru in 1998, with the award of our first rural telephony project
called Frontera Norte for FITEL, with approximately 200 sites. Since then, we
have participated in almost every rural communications project launched by the Peruvian
government and have won, either wholly or partially, all five projects. Overall, we
operate almost 6,000 telephony sites in Peru, of which approximately 600 have Internet
connectivity, and have been awarded over $45 million in government subsidies to build and
operate these networks. In addition, we have developed services for private customers,
such as Banco de la Nacion, utilizing our current infrastructure and providing those
customers with Internet, data and telephony services. Our rural network manages millions
of incoming and outgoing minutes every month, serving more than six million people in
rural areas. On average, the network in Peru has reduced the distance between rural phone
locations from 50km to 5km.

SRC
Colombia started operations in 1999 by winning the governments Compartel I project
focused on rural telephony. Since then we have been awarded two additional projects with
over $100 million in government subsidies in the aggregate.

Currently,
SRC Colombia operates a network of almost 10,000 rural sites spread throughout the
country, serving over seven million persons. The services for those rural sites include
telephony, Internet, data, fax and other services. In order to comply with government bid
requirements, SRC has integrated a variety of technologies into its VSAT based network
such as wireless local loop and cellular.

In
addition to its well established operations in Peru and Colombia, SRC provides services to
customers in other countries in the region. In Panama, SRC is working with Cable &
Wireless to allow it to fulfill its USO with cost efficient technology and high quality
service. In Venezuela, SRC was hired by the Venezuelan electoral entity, or CNE, to manage
a 3,000 site network for the transmission of voting data. SRC was responsible for
logistics, installations and operations of the satellite network for the CNE. The project
was installed and fully operational in 45 days. CNE has used SRC in subsequent elections
to supervise, manage and support installations as well as manage and support hub
operations during elections.

Customer
Support Operations

SRC
complements its services with back office support for subsidized telephony and Internet
networks as well as for private Internet, data and telephony clients including a call
center, network operations center, field service maintenance and a pre-paid calling card
platform and distribution channels.

SRC
Customers and Markets

Public
Rural Telecom Services:

In
a large number of remote and rural areas, primarily in developing countries, there is
limited or no telephone or Internet service, due to inadequate terrestrial
telecommunications infrastructure. In these areas, VSAT networks utilize existing
satellites to rapidly provide high-quality, cost-effective telecommunications solutions.
In contrast to terrestrial networks, VSAT networks are simple to reconfigure or expand,
relatively immune to difficulties of topography and can be situated almost anywhere.
Additionally, VSATs can be installed and connected to a network quickly without the need
to rely on local infrastructure. For example, some of our VSATs are powered by solar
energy where there is no existing power infrastructure. Our VSATs provide reliable
service, seldom require maintenance and, when necessary, repair is relatively simple.

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As
a result of the above advantages, there is a demand for government-sponsored, VSAT-based
bundled services of fixed telephony and Internet access. Many of these government-funded
projects have been expanded to provide not only telephony services and Internet access,
but to also provide telecenters that can serve the local population. These telecenters
typically include PCs, printers, fax machines, photocopiers, VCRs and TVs for educational
programs. Additional revenue may be received, both in the form of subsidies and direct
revenues from the users, when these additional services are provided. Our rural telecom
government customers are Compartel in Colombia and FITEL in Peru.

VSAT
Services to Telecom Operators:

In
some markets, existing telecom operators are mandated by the government to provide
universal services. Providing these services in remote areas is a challenge to these
operators, and they sometimes outsource these services to rural telecom service providers.
The exact nature of these outsourcing projects varies, but they are typically a
Build-Transfer model or a Build-Operate-Transfer model. Cable
& Wireless in Panama is SRCs first Build-Operate-Transfer customer.

Enterprise
and Government Agencies:

We
also provide private network services to enterprises and government agencies. These
customers contract directly with SRC for VSAT equipment and associated network services to
be deployed at customer locations, typically for a contract term of three to five years.
We also resell managed terrestrial connectivity equipment and services from
facilities-based Local Exchange Carrier partners. One such customer is Banco de la Nacion
in Peru.

SRC
Sales and Marketing

We
use direct sales channels to market our services. Our sales team of account managers and
sales engineers are the primary account interfaces and work to establish account
relationships and determine technical and business demands.

# Competition

The
network communications industry is highly competitive and the level of competition is
increasing. In the equipment market, GNS faces competition from other VSAT providers, such
as Hughes Network Systems LLC, Viasat, iDirect and other smaller vendors.

The
U.S. enterprise VSAT market is primarily served by Spacenet and Hughes Network Systems
LLC. In addition, more recently, Spacenets primary competitors in the enterprise WAN
market are large terrestrial carriers such as AT&T, Verizon and Qwest.

In
Peru and Colombia, where we primarily operate public rural telecom services, we typically
encounter competition on government subsidized bids from various service providers, system
integrators and consortiums. Some of these competitors offer solutions based on VSAT
technology and some on alternate technologies (typically cellular, wireless local loop or
WiMAX). As operators that offer terrestrial or cellular networks expand their reach to
certain SRC regions, they compete with our VSAT solutions.

# Geographic Distribution
of our Business

The
following table sets forth our revenues by geographic area for the periods indicated below
as a percent of our total sales:

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| |                                   | Years Ended December 31,
| | --------------------------------- | ------------------------
|
|
|
|
| | United States                     |                         
| | South America and Central America |                         
| | Asia                              |                         
| | Africa                            |                         
| | Europe                            |                         
| | Other                             |                         
| |                                   |                         
| | Total                             |                         
| |                                   |                         

|(1) | Including
revenues from a related party of 1.2% and 0.8% for the years ended December 31, 2004 and
2005, respectively
|--- | ---------------------------------------------------------------------------------------------------------------------

Capital
Expenditures and Divestitures. In 2004, 2005 and 2006, our property and equipment
purchases amounted to approximately $6.2 million, $3.6 million and $6.5 million,
respectively. These amounts do not include the reclassification of inventory to property
and equipment made during 2004, 2005 and 2006 in the amount of approximately $21.7
million, $7.3 million and $9.2 million, respectively. In 2004, we completed the sale of
our Argentinean subsidiary, Servicio Satelital S.A. to a third party. In 2005, we
completed the sale of Deterministic Networks Inc. to some of its employees, we purchased
the remaining shares of StarBand and our shareholdings in Satlynx were diluted from
approximately 40.6% to 0.17%. On March 1, 2006 we and SES executed an agreement whereby we
transferred our remaining 0.17% interest in Satlynx to SES. As part of this agreement, we
received a waiver from SES on any royalty payments which may be payable by us to SES in
accordance with development agreements signed between the parties in 2002 and SES provided
a corporate guarantee to cover Satlynxs obligations to us..

# Strategic Alliances,
Joint Ventures and Acquisitions

We
have acquired certain entities and established certain key strategic marketing
relationships and joint ventures, including the following:

StarBand. On May 31, 2002, StarBand, a joint venture established with MSN, Echostar
          and ING, filed a voluntary petition for reorganization under Chapter 11 of the
          U.S. Bankruptcy Code. In November 2003, StarBand emerged from bankruptcy and we
          held 49.1% of StarBand. Upon StarBands emergence from Chapter 11, and in
          consideration of the 49.1% interest issued to us at that time, we forgave
          approximately $84 million of debt that we provided to StarBand and we entered
          into three agreements with StarBand: (i) the restated master agreement for the
          supply of equipment and services upon the terms described above; (ii) a note
and           loan agreement providing for repayment of $14 million of debtor in
          possession financing supplied by us to StarBand during the Chapter 11
          proceeding, bearing 3.5% annual interest and with quarterly payments to be made
          between March 31, 2004 and December 31, 2008 and principal payments to be made
          between March 31, 2006 and December 31, 2008; and (iii) a financing agreement
          for the provision of up to $7.5 million in revolving financing and trade
credit,           subject to various restrictions and reductions, through the end of
2009. In           March 2005, we paid $600,000 for the remaining 50.9% of StarBand
shares then           held by certain Israeli banks. In addition, in the event certain
events occur           before December 31, 2007, including the sale of StarBand shares,
the sale of           substantially all of StarBands assets to a third party, the
merger with a           third party or the dissolution of StarBand, we have agreed to pay
the banks an           amount equal to fifty percent of the consideration received by us,
directly or           indirectly, as a result of such events. We have consolidated
StarBand into our           financial statements as of January 1, 2004.

rStar. In January 2001, following a tender offer, we became the owner of 51% of the
          outstanding shares of rStar (a then publicly traded NASDAQ company) at a cost
of           approximately $51 million. In May 2001, rStar issued 19,396,552 shares of
its           common stock to us in full satisfaction of the approximately $45 million of
          outstanding capital lease obligations due to Spacenet Inc. ,which resulted in
          our increasing our shareholdings in rStar to approximately 66%. In August 2002,
          we increased our ownership interest to approximately 85%. In December 2003, we
          entered into an agreement with certain rStar stockholders to acquire an
          additional 9.3% of rStars shares for $0.60 per share. In April 2004,
          immediately following such transaction, we effected a short-form merger and
          acquired the remaining shares of rStar. rStar is a holding company for most of
          our service entities in Latin America.

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# Backlog

Our
2006 year-end backlog for equipment sales and revenues from multi-year service contracts
for our VSAT products was approximately $209 million, up from approximately $206 million
at year-end 2005. Backlog does not include revenues from future traffic on our rural
networks, future revenues from subscribers from our consumer and enterprise operation and
other cancelable agreements. Backlog is not necessarily indicative of future sales. Many
of our contracts can be terminated at the convenience of the customer. In addition, some
of our contracts may include product specifications that require us to complete additional
product development. Any inability to meet the specifications or complete the product
development could lead to a termination of the related contract.

# Patents and Intellectual
Property

We
currently rely on a combination of patent, trade secret, copyright and trademark law,
together with non-disclosure agreements and technical measures, to establish and protect
proprietary rights in our products. Our patent portfolio includes 55 patents issued (24
U.S. and 31 foreign patents), 11 U.S. utility patent applications, 3 U.S. provisional
patent applications and 12 foreign applications pending. All of the patents and
applications that were developed and/or owned by our subsidiaries have been formally
transferred to the parent company and are now controlled by us. In addition, we have filed
patent applications with respect to our SkyEdge family of products, as well as patents
concerning a range of other inventions. As part of our patent program, we intend to file
additional patent applications on an ongoing basis.

We
believe that our patents are important to our business. We also believe that the
improvement of existing products, reliance upon trade secrets and unpatented proprietary
know-how as well as the development of new products are generally as important as patent
protection in establishing and maintaining a competitive advantage. We believe that the
value of our products is dependent upon our proprietary software and hardware remaining
trade secrets or subject to copyright protection. Generally, we enter into
non-disclosure and invention assignment agreements with our employees, subcontractors and
certain customers and other business partners.

# Government Regulations

Regulatory
Overview

The
international telecommunications environment is highly regulated. As a provider of
communications services in the U.S., we are subject to the regulatory authority of the
U.S., primarily the FCC. We are also subject to regulation by the national communications
authorities of other countries in which we provide service. Each of these entities can
potentially impose operational restrictions on us. The changing policies and regulations
of the U.S. and other countries will continue to affect the international
telecommunications industry. We cannot predict the impact that these changes will have on
our business or whether the general deregulatory trend in recent years will continue. We
believe that continued deregulation would be beneficial to us, but also could reduce the
limitations facing many of our existing competitors and potential new competitors.

We
are required to obtain approvals from numerous national and local authorities in the
ordinary course of our business in connection with most arrangements for the provision of
services. The necessary approvals generally have not been difficult for us to obtain in a
timely manner. However, the failure to obtain particular approvals has delayed, and in the
future may delay our provision of services. Moreover, it is possible that any approvals
that may be granted may be subject to materially adverse conditions.

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United
States Regulation

All
entities that use radio frequencies to provide communications services in the U.S. are
subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended,
or the Communications Act. The Communications Act prohibits the operation of satellite
earth station facilities and VSAT systems such as those operated by us except under
licenses issued by the FCC. Major changes in earth station or VSAT operations require
modifications to the FCC licenses, which must also be approved by the FCC. The licenses we
hold are granted for ten-year terms. The FCC generally renews satellite earth station and
VSAT licenses routinely, but we cannot guarantee that our licenses will be renewed at
their expiration dates or that such renewals will be for full terms. In addition, certain
aspects of our business may be subject to state and local regulation including, for
example, local zoning laws affecting the installation of satellite antennas.

International
Regulation

We
must comply with the applicable laws and obtain the approval of the regulatory authority
of each country in which we propose to provide network services or operate VSATs. The laws
and regulatory requirements regulating access to satellite systems vary from country to
country. Some countries have substantially deregulated satellite communications, while
other countries maintain strict monopoly regimes. The application procedure can be
time-consuming and costly, and the terms of licenses vary for different countries. In
addition, in some countries there may be restrictions on our ability to interconnect with
the local switched telephone network. In certain countries, there are maximum tariffs and
fees set by the regulatory authority maximizing the fees that can be charged for the use
of telephony services that we provide.

# Trade Agreements

Israel
is a member of the World Trade Organization and is a signatory of the General Agreement on
Trade in Services and to the Agreement on Basic Telecommunications Services. Israel is a
signatory to the General Agreement on Tariffs and Trade, which provides for the reciprocal
lowering of trade barriers among its members. In addition, Israel has been granted
preferences under the Generalized System of Preferences from the United States, Australia,
Canada and Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.

Israel
and the European Union concluded a Free Trade Agreement in July 1975 that confers certain
advantages with respect to Israeli exports to most European countries and obligates Israel
to lower its tariffs with respect to 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 that has eliminated all tariff and certain non-tariff barriers on most trade between
the two countries. On January 1, 1993, Israel and the European Free Trade Association, or
EFTA, entered into an agreement establishing a free-trade zone between Israel and the EFTA
nations. In June 2000, Israel was admitted as an Associate Member of the European Union.
In recent years, Israel has established commercial and trade relations with a number of
other nations, (including Russia, the Peoples Republic of China, India and nations
in Eastern Europe and Asia), with which Israel had not previously had such relations.

# Our significant
subsidiaries

We
own a number of subsidiaries and affiliated companies that provide marketing and sales
support, sell our VSAT products or provide related services. The following table sets
forth our significant subsidiaries, as of March 1, 2007:

|Company                   | Place of
Incorporation | Ownership
Interest
|------------------------- | ---------------------- | ------------------
|
|
|
|
|Spacenet Inc.             | United States          | 100%              
|Gilat Colombia S.A. E.S.P | Colombia               | 100%              
|Gilat to Home Peru S.A    | Peru                   | 100%              

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# Facilities

Our
headquarters are located in a modern office park which we own in Petah Tikva, Israel. This
facility is comprised of approximately 380,000 square feet of office space.

We
have network operations centers in Marietta, Georgia and shared hub facilities in Chicago,
Illinois, Peru and Colombia, from which we perform network services and customer support
functions 24 hours a day, 7 days a week, 365 days a year.

We
lease approximately 160,000 square feet of office space in McLean, Virginia. These offices
house our personnel and also contain one of our U.S. shared hub centers. In 2000 and 2002,
we purchased and developed facilities on approximately 140,400 square feet of land in
Backnang, Germany. Since May, 2002, these facilities are leased to a third party.

We
also maintain facilities in Plano, Texas, Chicago, Illinois, Marietta, Georgia and in
Brazil, Colombia, Mexico, and Peru, along with representative offices in Beijing,
Melbourne, Pretoria, Bangkok, New Delhi, Almaty, Jakarta and Moscow and small facilities
in other locations throughout the world.

We
believe our facilities to be adequate for our needs.

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

Not
applicable.

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

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# Introduction

We
are a leading global provider of Internet Protocol, or IP, based digital satellite
communication and networking products and services. We design, produce and market VSATs,
or very small aperture terminals, and related VSAT network equipment. VSATs are
earth-based terminals that transmit and receive broadband, Internet, voice, data and video
via satellite. VSAT networks have significant advantages to wireline and wireless
networks, as VSATs can provide highly reliable, cost effective, end-to-end communications
regardless of the number of sites or their geographic locations.

We
have a large installed customer base and have shipped more than 670,000 VSAT units to
customers in over 85 countries on six continents since 1989. We have 16 sales and service
offices worldwide and two call centers to support our customers. Our products are
primarily sold to communication service providers and operators that use VSATs to serve
enterprise, government and residential users. Also, in the U.S. and certain countries in
Latin America, we provide services directly to end users in various market segments.

We
currently operate three complementary, vertically-integrated business units:

GNS
is a provider of VSAT-based networks and associated professional services, including
turnkey and management services, to telecom operators worldwide.

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Spacenet
provides satellite network services to enterprises, small office/home office, or SOHOs,
and residential customers in the U.S.

SRC
provides telephony, Internet and data services primarily for rural communities in emerging
markets in Latin America under projects that are subsidized by government entities.

# Financial Background

We
were incorporated in 1987 and began trading on the NASDAQ Stock Market in 1993. After a
general decline in the economy and a decline in our business in 2001 and 2002, we
commenced an arrangement in October 2002 to restructure our debt with holders of our
convertible bonds, bank lenders (the largest of which was Bank Hapoalim) and other
creditors, which was successfully completed in March 2003. Our financial condition in
early 2003 continued to negatively impact our sales. At that time, our management and
board of directors went through significant change. During these years, new management
imposed lay-offs and budget cuts and embarked on an effort to streamline our operations in
order to increase efficiency and reduce costs.

As
a result of the above arrangement, in March 2003, we reduced our principal debt by
approximately $309 million, which included $12 million of accrued interest. The
arrangement significantly increased our shareholders equity, reduced our debt and
reduced our financing costs.

In
November 2003, we concluded an exchange offer pursuant to which the majority of the
holders of the notes that we issued in March 2003 (as partial consideration for the
exchange of $350 million of 4.25% convertible subordinated notes) converted their new
notes into equity, further reducing our debt by approximately $76.0 million, which
included $2.3 million of accrued interest.

In
April 2004, we revised the terms of our loan from Bank Hapoalim, to whom we owed a
principal debt amount of $71.4 million. As part of this amendment, we granted Bank
Hapoalim a right to receive warrants for the purchase of our ordinary shares. The
aggregate maximum exercise amount to be paid under the warrants was equal to the
outstanding balance on the loan payable by us, including accrued interest.

In
July 2005, Bank Hapoalim assigned the outstanding loan held by it to York. At that time,
our then CEO and Chairman of the Board resigned and was replaced by our co-founder Amiram
Levinberg. Five other board members were also replaced. Our revenues declined 13.3% from
$241 million in 2004 to $209 million in 2005. The primary reason for the decline in
product and service revenues was due to our increased focus on higher margin sales and
recurring revenue business opportunities, while we eliminated other less profitable
business opportunities.

On
September 27, 2006, York exercised its right to have us issue it warrants in the amount of
the loan and accrued interest and immediately exercised its option to convert the warrants
into shares at $6.75 per share. This resulted in the issuance of approximately 10.6
million ordinary shares to York. As a result of the conversion, our liabilities were
reduced by approximately $68.1 million, including approximately $1.0 million of accrued
interest and net of the approximately $3.3 million of the unamortized balance representing
the fair value of change in conversion feature. Our shareholders equity increased by
the same amount. No profit or loss was recorded as a result of the conversion.

In
December, 2006, we completed a public offering of 8,050,000 of our ordinary shares at a
price to the public of $8.50 per share. Of such shares, 5,016,667 ordinary shares were
sold by us and the remaining shares were sold by York. We received net proceeds of
approximately $39.9 million from the offering.

# General

The
selected financial information as of December 31, 2006, December 31, 2005 and December 31,
2004 have been derived from our consolidated audited financial statements, which include
all adjustments consisting of normal recurring accruals that we consider necessary for a
fair presentation of the financial position and the results of operations for these
periods. Our financial statements have been prepared in accordance with accounting
principles generally accepted in the U.S.

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# Financial Statements in
U.S. dollars

The
currency of the primary economic environment in which most of our operations are conducted
is the U.S. dollar and, therefore, we use the U.S. dollar as our functional and reporting
currency. Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Gains and losses arising from non-U.S. dollar transactions and
balances are included in the consolidated statements of operations. The financial
statements of foreign subsidiaries, whose functional currency has been determined to be
their local currency, have been translated into U.S. dollars. Assets and liabilities have
been translated using the exchange rates in effect at the balance sheet date. Statements
of operations amounts have been translated using a specific exchange rate for each
transaction. The resulting translation adjustments are reported as a component of
shareholders equity in accumulated other comprehensive income (loss).

# Critical Accounting
Policies and Estimates

The
preparation of the financial information in conformity with generally accepted accounting
principles requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on going basis, we evaluate our estimates, mainly related to
account receivables, inventories, deferred charges, long-lived assets, restructuring
charges, revenues, stock based compensation relating to options and contingencies. We base
our estimates on historical experience and on various other assumptions, including
assumptions of third parties that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.

We
believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our unaudited consolidated financial information
included in this prospectus:

Revenues.           We
generate revenues mainly from the sale of products and services for
          satellite-based communications networks. Sale of products includes mainly the
          sale of VSATs and hubs. Service revenues include access to and communication
via           satellites, or space segment, installation of network equipment, telephone
          services, internet services, consulting, on-line network monitoring, network
          maintenance and repair services. We sell our products primarily through our
          direct sales force and indirectly through resellers. Sales consummated by our
          sales force and sales to resellers are considered sales to end-users.

Revenues
from product sales are recognized in accordance with SEC Staff Accounting Bulletin, or
SAB, No. 104, Revenue Recognition, or SAB No. 104, when delivery has occurred,
persuasive evidence of an agreement exists, the vendors fee is fixed or
determinable, no further obligation exists and collectability is probable, when
significant accepted provision is included in the arrangement. Revenues are deferred until
the acceptance occurs. Generally, we do not grant rights of return. Service revenues are
recognized ratably over the period of the contract or as services are performed, as
applicable.

In
accordance with Emerging Issues Task Force, or EITF, Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables, or EITF 00-21, a multiple-element arrangement (an
arrangement that involves the delivery or performance of multiple products, services
and/or rights to use assets) is separated into more than one unit of accounting, if the
functionality of the delivered element(s) is not dependent on the undelivered element(s),
there is vendor-specific objective evidence (VSOE) of fair value of the undelivered
element(s) and delivery of the delivered element(s) represents the culmination of the
earnings process for those element(s). If these criteria are not met, the revenue is
deferred until such criteria are met or until the period in which the last undelivered
element is delivered. If there is VSOE for all units of accounting in an arrangement, the
arrangement consideration is allocated to the separate units of accounting based on each
units relative VSOE.

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Revenues
from products under sales-type-lease contracts are recognized in accordance with SFAS No.
13, Accounting for Leases, or SFAS No. 13, upon installation or upon shipment,
in cases where the customer obtains its own or others installation services. The net
investments in sales-type-leases are discounted at the interest rates implicit in the
leases. The present values of payments due under sales-type-lease contracts are recorded
as revenues at the time of shipment or installation, as appropriate. Future interest
income is deferred and recognized over the related lease term as financial income.

Revenues
from products and services under operating leases of equipment are recognized ratably over
the lease period, in accordance with SFAS No. 13.

Deferred
product revenue generally relates to acceptance provisions that have not been met, partial
shipment or when the Company does not have VSOE of fair value on the undelivered items. In
general, when deferred revenues are recognized as revenues, the associated deferred costs
are also recognized as cost of sales.

Cost
of Revenues. Cost of revenues, for both products and services, includes the cost of
system design, equipment, satellite capacity, customer service, interconnection charges
and third party maintenance and installation. Generally, for equipment contracts, cost of
revenues is expensed as revenues are recognized. For network service contracts, cost of
revenues is expensed as revenues are recognized over the term of the contract. For
maintenance contracts, cost of revenues is expensed as the maintenance cost is incurred
over the term of the contract. At each balance sheet date, we evaluate our inventory
balance for excess quantities and obsolescence. This evaluation includes an analysis of
sales levels by product and projections of future demand. In addition, we write off
inventories that are considered obsolete. Remaining inventory balances are adjusted to the
lower of cost or market value. If future demand for our old or new products or market
conditions is less favorable than our projections, inventory write-offs may be required
and would be reflected in cost of revenues for such period.

Accounts
Receivable and Allowance for Doubtful Accounts. We are required to estimate our
ability to collect our trade receivables. A considerable amount of judgment is required in
assessing their ultimate realization. We provided allowance for our receivables relating
to customers that were specifically identified by our management as having difficulties
paying their respective receivables. This provision is in addition to a small portion of
general allowance which we have provided to cover additional potential exposures. If the
financial condition of our customers deteriorates, resulting in their inability to make
payments, additional allowances may be required. These estimates are based on historical
bad debt experience and other known factors. If the historical data we used to determine
these estimates does not properly reflect future realization, additional allowances may be
required.

Inventory
Valuation. We are required to state our inventories at the lower of cost or market
value. In assessing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements and compare that with the current or committed
inventory levels.

Impairment
of Intangible Assets, Long-Lived Assets and Investment in Affiliated Companies. We
periodically evaluate our intangible assets, long-lived assets and investments in
affiliates for potential impairment indicators. Our judgments regarding the existence of
impairment indicators are based on legal factors, market conditions and operational
performance of our acquired businesses and investments.

Our
long-lived assets are reviewed for impairment annually and 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 the assets to the future undiscounted cash flows expected to be generated by the
assets. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. In measuring the recoverability of assets, we are required to make
estimates and judgments in assessing our five year forecast and cash flows, which is the
estimated useful life of our current primary assets, and compare that with the carrying
amount of the assets. Additional significant estimates used by management in the
methodologies used to assess the recoverability of our long-lived assets include estimates
of future short-term and long-term growth rates, market acceptance of products and
services, our success in winning bids and other judgmental assumptions, which are also
affected by factors detailed in our risk factors section in this prospectus. If these
estimates or the related assumptions change in the future, we may be required to record
impairment charges for our long-lived assets.

35

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Our
investments in other companies are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an investment may not be recoverable.

Future
events could cause us to conclude that impairment indicators exist and that additional
intangible assets and long-lived assets associated with our acquired businesses and our
long-lived assets are impaired. Any resulting impairment loss could have a material
adverse impact on our financial condition and results of operations.

Restructuring
and Other Non-Recurring Charges. During fiscal year 2003, we recorded significant
charges in connection with our restructuring plans. These restructuring charges include
estimates pertaining to contractual obligations and primarily facilities-related operating
leases. We estimated facility exit costs for certain under-utilized facilities and made
assumptions regarding a sublessees future rental rate, as well as the amount of time
required to identify a sublessee. Such liabilities were recorded at fair value and are
updated for any changes in fair value every period. Our restructuring charge would have
been higher had we assumed a lower future rental rate or a longer period of time required
to identify a sublessee.

Legal
and Other Contingencies. We are currently involved in certain legal and other
proceedings and are also aware of certain tax and other legal exposures relating to our
business. We are required to assess the likelihood of any adverse judgments or outcomes of
these proceedings or contingencies as well as potential ranges of probable losses. A
determination of the amount of accruals required, if any, for these contingencies is made
after careful analysis. The accounting treatment for such proceedings is prescribed by the
Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies, or SFAS No. 5. SFAS No. 5 defines a contingency as an existing
condition, situation, or set of circumstances involving uncertainty as to possible gain or
loss to an enterprise that will ultimately be resolved when one or more future events
occur or fail to occur. In accordance with SFAS No. 5, accruals for exposures or
contingencies are being provided when the expected outcome is probable and when the amount
of loss can be reasonably estimated. It is possible, however, that future results of
operations for any particular quarter or annual period could be materially affected by
changes in our assumptions, the actual outcome of such proceedings or as a result of the
effectiveness of our strategies related to these proceedings.

Accounting
for Stock-Based Compensation. On January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standard (SFAS) No. 123(R),
Share-Based Payment, which requires us to measure all employee stock-based
compensation awards using a fair value method and recognize such expense in our
consolidated financial statements. We adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the accounting standard starting from
January 1, 2006. We estimate the fair value of stock options granted using the
Black-Scholes option pricing model. Prior to the adoption of SFAS 123(R), we accounted for
equity-based awards to employees and directors using the intrinsic value method in
accordance with APB No. 25, Accounting for Stock Issued to Employees
(APB 25) as allowed under SFAS 123. Non-cash share-based compensation of $3.8
million was recorded in 2006. As of December 31, 2006, there was $2.2 million of total
unrecognized compensation cost related to non-vested share-based awards granted under our
stock option plans. That cost is expected to be recognized over a weighted average period
of 1.2 years.

36

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# Year ended December 31,
2006 Compared to Year ended December 31, 2005

Revenues.           Revenues
for the years ended December 31, 2006 and 2005 for our three business           segments
are as follows:

|                         | Year EndedDecember 31, |  | Year EndedDecember 31,
|------------------------ | ---------------------- |  | ----------------------
|
|
|
|
|GNS                      |                        |  |                       
|Equipment                |                        |  | $                     
|Services                 |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|Spacenet                 |                        | 
|Equipment                |                        |  |                       
|Services                 |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|SRC                      |                        | 
|Equipment                |                        |  |                       
|Services                 |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|Intercompany Adjustments |                        | 
|Equipment                |                        |  |                       
|Services                 |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|Total                    |                        | 
|Equipment                |                        |  |                       
|Services                 |                        |  |                       
|                         |                        |  |                       
|Total                    |                        |  | $                     
|                         |                        |  |                       

The
increase in our revenues in the year ended December 31, 2006 is principally attributable
to increased equipment sales. GNS accounted for approximately $37.8 million of the
increase, mainly due to government and universal service obligations, or USOs, projects in
Latin America, Russia and Africa. The increase was in line with our business strategy to
focus on expanding our solutions and services across the value chain by offering project
implementation, turnkey solutions and value-added products and services. In addition,
Spacenet accounted for approximately $7.4 million of the increase in revenues, mainly due
to sales to lottery operators.

Intercompany
adjustments reflect the elimination of sales by GNS to the other business segments.

37

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Gross
profit. The gross profit of our three business segments for the years ended December
31, 2006 and 2005 was as follows:

|                   | Year Ended
December 31, | Year Ended
December 31,
|------------------ | ----------------------- | -----------------------
|
|
|
|
|GNS                |                         |                        
|Equipment          |                         |                        
|Services           |                         |                        
|                   |                         |                        
|                   |                         |                        
|                   |                         |                        
|Spacenet           |                         |                        
|Equipment          |                         |                        
|Services           |                         |                        
|                   |                         |                        
|                   |                         |                        
|                   |                         |                        
|SRC                |                         |                        
|Equipment          |                         |                        
|Services           |                         |                        
|                   |                         |                        
|                   |                         |                        
|                   |                         |                        
|Intercompany       |                         |                        
|adjustments        |                         |                        
|                   |                         |                        
|Total Gross Profit |                         |                        
|                   |                         |                        

Our
gross profit margin remained at approximately 36% for the years ended December 31, 2006
and 2005. Gross profit increased by approximately $14.2 million as a result of the
increase in our revenues. Spacenets gross margin increased from 14.9% in 2005 to
17.5% in 2006, mainly as a result of the increase in equipment sales to lottery operators
and improved efficiency in our service costs as a result of integrating the operations of
StarBand into those of Spacenet. GNSs gross profit increased by approximately $13.4
million, while the gross margin decreased, mainly due to an increase in the size of
transactions and volume of VSATs which carry lower margins, and to a general downward
pressure on prices in the industry. In addition, during 2006, we wrote-off approximately
$1.2 million of excess inventory compared to approximately $0.6 million in 2005.

When
reported by segment, the results of Spacenet and SRC are presented based upon transfer
prices. The intercompany adjustments line reflects the intercompany profits that were
realized in order to adjust the transfer price to our cost.

Research
and development expenses, net. All of our research and development expenses are
incurred by our GNS business segment. Our research and development expenses for the years
ended December 31, 2006 and 2005 are as follows:

|                  | Year EndedDecember 31, |  | Year EndedDecember 31,
|----------------- | ---------------------- |  | ----------------------
|
|
|
|
|Expenses incurred |                        |  | $                     
|Less - grants     |                        |  |                       
|                  |                        |  |                       
|Total             |                        |  | $                     
|                  |                        |  |                       

Net
research and development costs decreased by approximately $0.4 million in the year ended
December 31, 2006 compared to 2005. The decrease was mainly due to our sale of a wholly
owned subsidiary, Deterministic Networks Inc., in September 2005 and a decrease in the
level of depreciation and amortization, offset by the reduced amount of grants received
from SES Global due to our completion of the research and development project performed on
behalf of SES Global in 2005.

38

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Selling
and marketing expenses. The selling and marketing expenses of our three business
segments for the years ended December 31, 2006 and 2005 are as follows:

|         | Year EndedDecember 31, |  | Year EndedDecember 31,
|-------- | ---------------------- |  | ----------------------
|
|
|
|
|GNS      |                        |  | $                     
|Spacenet |                        |  |                       
|SRC      |                        |  |                       
|         |                        |  |                       
|Total    |                        |  | $                     
|         |                        |  |                       

Selling
and marketing expenses increased by approximately $5.1 million in the year ended December
31, 2006, compared to 2005. This increase is attributable mainly to approximately $4.5
million of increased expenses associated with our increased revenues in 2006 and the
adoption of SFAS 123(R) on January 1, 2006, resulting in non-cash compensation expenses of
approximately $1.4 million. These increases were offset mainly by a reduction in other
expenses in Spacenets operations due to the operational merger of StarBand and
Spacenet Inc in 2005.

General
and administrative expenses. The general and administrative expenses of our three
business segments for the years ended December 31, 2006 and 2005 are as follows:

|         | Year EndedDecember 31, |  | Year EndedDecember 31,
|-------- | ---------------------- |  | ----------------------
|
|
|
|
|GNS      |                        |  | $                     
|Spacenet |                        |  |                       
|SRC      |                        |  |                       
|         |                        |  |                       
|Total    |                        |  | $                     
|         |                        |  |                       

General
and administrative expenses decreased by approximately $2.7 million in 2006, compared to
2005. This decrease is attributable mainly to reduced administrative expenses of
approximately $2.9 million in our Spacenet operations as a result of the operational
merger of StarBand and Spacenet in 2005, reduced legal and professional fees of
approximately $0.9 million and a reduction in depreciation and amortization expenses of
approximately $0.8 million. These decreases were offset in part by the adoption of SFAS
123(R) on January 1, 2006, resulting in non-cash compensation expenses of approximately
$2.0 million.

Financial
expenses, net. In the year ended December 31, 2006, we had financial expenses of
approximately $0.7 million, compared to approximately $2.7 million in 2005. The decrease
in our financial expenses is mainly attributable to a $2.4 million increase in net
interest income from bank deposits, due to an increase in Libor rates and increased cash
balances, and a decrease in interest expenses on long-term loans in the amount of
approximately $1.2 million, mainly due to the conversion of the convertible loan from York
at the end of September 2006. This decrease in our financial expenses was offset in part
by reduced interest income relating to a capital lease of approximately $0.8 million and
approximately $0.5 million of amortization expenses related to the fair value of the
modification of the conversion feature relating to the loan from York.

39

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---



Taxes
on income. Taxes on income in 2006 were approximately $2.4 million compared to
approximately $3.1 million in 2005. The decrease is principally attributable to tax
expenses recorded in 2005 in connection with a settlement with the Israeli Tax Authorities
of approximately $1.2 million. Although our income before taxes increased, our tax
expenses did not change materially because the increase in income was primarily
attributable to reduced losses by some of our subsidiaries.

# Year Ended December 31,
2005 Compared to Year Ended December 31, 2004

Revenues.           Revenues
for the year ended December 31, 2005 and 2004 for our three business           segments
were as follows:

|                         | Year EndedDecember 31, |  | Year EndedDecember 31,
|------------------------ | ---------------------- |  | ----------------------
|
|
|
|
|GNS                      |                        |  |                       
|Equipment                |                        |  | $                     
|Services                 |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|Spacenet                 |                        | 
|Equipment                |                        |  |                       
|Services                 |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|SRC                      |                        | 
|Equipment                |                        |  |                       
|Services                 |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|Intercompany Adjustments |                        | 
|Equipment                |                        |  |                       
|Services                 |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|                         |                        |  |                       
|Total                    |                        | 
|Equipment                |                        |  |                       
|Services                 |                        |  |                       
|                         |                        |  |                       
|Total                    |                        |  | $                     
|                         |                        |  |                       

Revenues
in 2005 were derived 42.4% from equipment and 57.6% from services. In 2004, our revenues
were derived 41.5% from equipment and 58.5% from services. The decrease in service
revenues in 2005 is attributed to the following factors: (i) a decrease of approximately
$17 million in revenues from Spacenet Rural Communications as a result of the close of our
operation of the GESAC network in Brazil which had a low operational margin, offset by an
increase in subsidy and traffic revenues from the Compartel project in Colombia; and (ii)
a decrease in the sale of services in our GNS operation. The decrease in equipment sales
is attributed to: (a) an increased number of sales in 2005 which are comprised of
transactions that include the provision of bundled equipment, solutions and services,
which are recognized over the period in which services are provided; and (b) overall
industry-wide price reductions.

40

---

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Gross
profit. The gross profit of our three business segments for the years ended December
31, 2005 and 2004 was as follows:

|                   | Year EndedDecember 31, | Year EndedDecember 31,
|------------------ | ---------------------- | ----------------------
|
|
|
|
|GNS                |                        |                       
|Equipment          |                        |                       
|Services           |                        |                       
|                   |                        |                       
|                   |                        |                       
|                   |                        |                       
|Spacenet           |                        |                       
|Equipment          |                        |                       
|Services           |                        |                       
|                   |                        |                       
|                   |                        |                       
|                   |                        |                       
|SRC                |                        |                       
|Equipment          |                        |                       
|Services           |                        |                       
|                   |                        |                       
|                   |                        |                       
|                   |                        |                       
|Intercompany       |                        |                       
|Adjustments        |                        |                       
|                   |                        |                       
|Total Gross Profit |                        |                       
|                   |                        |                       

The
increase in our gross profit margin from 31.9% in 2004 to 36.4% in 2005 can be attributed
mainly to the following factors: (i) reduced operating expenses in our Spacenet Inc.
operations, mainly relating to lower space segment expenses, the operational merger of
StarBand and Spacenet Inc. and lower depreciation and amortization expenses; (ii) in
Spacenet Rural Communications, since the GESAC project embedded a very low margin, the
shut down of its operation increased our services gross margin; (iii) in our GNS segment,
we experienced higher profit margins and decreased wages and overhead costs due to a
reduction in headcount worldwide in 2005; and (iv) also in GNS, in 2004, we wrote off $2
million of excess inventory as part of our cost of goods sold compared to approximately
$0.6 million in 2005.

When
reported by segment, the results of Spacenet and Spacenet Rural Communications are
presented based upon transfer prices. The consolidation line reflects the intercompany
profits that have been realized in order to adjust the transfer price to our cost.

41

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# Research and Development
Expenses:

|                  | Year EndedDecember 31, |  | Year EndedDecember 31,
|----------------- | ---------------------- |  | ----------------------
|
|
|
|
|GNS               |                        |  |                       
|Expenses incurred |                        |  | $                     
|Less - grants     |                        |  |                       
|                  |                        |  |                       
|Total GNS         |                        |  |                       
|                  |                        |  |                       
|                  |                        | 
|Spacenet          |                        | 
|Expenses incurred |                        |  |                       
|Less - grants     |                        |  |                       
|                  |                        |  |                       
|Total Spacenet    |                        |  |                       
|                  |                        |  |                       
|                  |                        | 
|Total             |                        |  | $                     
|                  |                        |  |                       

Net
research and development costs increased slightly in 2005, primarily due to a lower amount
of grants received from (a) SES Global, due to the completion of the research and
development project performed on their behalf; and (b) the Office of the Chief Scientist,
due to a decrease in their overall budget; offset by (i) the transfer of the remaining
research and development operations from Spacenet Inc. to our GNS segment in Israel at the
beginning of 2005, which eliminated research and development costs in Spacenet Inc. and
did not significantly increase research and development costs in Israel; (ii) a decrease
in the level of depreciation and amortization; and (iii) the sale of Deterministic
Networks Inc. in September 2005.

Selling
and marketing expenses. The selling and marketing expenses of our three business
segments for the years ended December 31, 2005 and 2004 were as follows:

|         | Year EndedDecember 31, |  | Year EndedDecember 31,
|-------- | ---------------------- |  | ----------------------
|
|
|
|
|GNS      |                        |  | $                     
|Spacenet |                        |  |                       
|SRC      |                        |  |                       
|         |                        |  |                       
|Total    |                        |  | $                     
|         |                        |  |                       

Selling
and marketing expenses decreased by approximately $1.9 million in the year ended December
31, 2005, compared to 2004. This decrease was attributable mainly to reduced expenses
associated with our decreased revenues in 2005.

42

---

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General
and administrative expenses. The general and administrative expenses of our three
business segments for the year ended December 31, 2005 and 2004 were as follows:

|         | Year EndedDecember 31, |  | Year EndedDecember 31,
|-------- | ---------------------- |  | ----------------------
|
|
|
|
|GNS      |                        |  | $                     
|Spacenet |                        |  |                       
|SRC      |                        |  |                       
|         |                        |  |                       
|Total    |                        |  | $                     
|         |                        |  |                       

General
and administrative expenses decreased by approximately $6.9 million in the year ended
December 31, 2005, compared to 2004. This decrease is attributable mainly to having closed
or reduced the size of certain regional offices in the amount of approximately $2.5
million, a reduction of lease expenses in an amount of $1.2 million due to increased
subleasing of our premises in Israel, the completion of the GESAC project which resulted
in layoffs and reduced expenses in an amount of approximately of $1.2 million, reduction
in depreciation and amortization expenses of approximately $1.2 million and legal expenses
of $0.6 million incurred in 2004 in connection with the emergence of StarBand from Chapter
11.

Financial
expenses, net.In 2005, we had financial expenses of approximately $2.7 million
compared to approximately $0.3 million in 2004. The sharp increase in our financial
expenses is mainly attributed to (i) an increase in the LIBOR interest rate, to which some
of our loans are linked; and (ii) the modification of the Bank Hapoalim loan in April 2004
which led to an increase in the overall financial expenses recorded in 2005

Taxes
on income. Taxes on income decreased by approximately $1.3 million to approximately
$3.1 million in 2005 compared to approximately $4.4 million in 2004, primarily due to a
decrease in tax expenses in our Brazilian subsidiaries caused by a reduction of our
activities in Brazil, offset by additional expenses recorded in connection with our
Israeli tax settlement in 2005.

Equity
in earnings of affiliated companies. Equity in earnings of affiliated companies was
approximately $0.4 million in 2005, compared to approximately $1.2 million in 2004.The equity in earnings included the collection of amounts reserved in prior years.

# Variability of Quarterly
Operating Results

Our
revenues and profitability may vary from quarter to quarter and in any given year,
depending primarily on the sales mix of our family of products and the mix of the various
components of the products (i.e. the volume of sales of remote terminals versus hub
equipment and software and add-on enhancements), sale prices, and production costs, as
well as entering into new service contracts, the termination of existing service
contracts, or different profitability levels between different service contracts. Sales of
our products to a customer typically consist of numerous remote terminals and related hub
equipment and software, which carry different sales prices and margins.

Annual
and quarterly fluctuations in our results of operations may be caused by the timing and
composition of orders by our customers and the timing of our ability to recognize
revenues. Our future results may also be affected by a number of factors, including our
ability to continue to develop, introduce and deliver new and enhanced products on a
timely basis and expand into new product offerings at competitive prices, to anticipate
effectively customer demands and to manage future inventory levels in line with
anticipated demand. Our results may also be affected by currency exchange rate
fluctuations and economic conditions in the geographical areas in which we operate. In
addition, our revenues may vary significantly from quarter to quarter as a result of,
among other factors, the timing of new product announcements and releases by our
competitors and us. We can not be certain that revenues, gross profit and net income (or
loss) in any particular quarter will not vary from the preceding or comparable quarters.
Our expense levels are based, in part, on expectations as to future revenues. If revenues
are below expectations, operating results are likely to be adversely affected. In
addition, a substantial portion of our expenses are fixed (i.e. space segment, lease
payments), and adjusting the expenses in cases where revenues drop unexpectedly often
takes considerable time. As a result, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Due to all of the foregoing factors, it is possible
that in some future quarters our revenues or operating results will be below the
expectations of public market analysts or investors. In such event, the market price of
our shares would likely be materially adversely affected.

43

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Our
business historically has not been affected by seasonal variations.

# Liquidity and Capital
Resources

Since
inception, our financing requirements have been met through cash from funds generated by
private equity investments, public offerings, issuances of convertible notes, bank loans,
operations, as well as funding from research and development grants. In addition, we also
finance our operations through available credit facilities as discussed below. We have
used available funds primarily for working capital, capital expenditures and strategic
investments.

As
of December 31, 2006, we had cash and cash equivalents of $149.5 million, short-term and
long-term restricted cash of $11.5 million, short-term and long-term restricted cash held
in trustees accounts of $22.8 million and short-term bank credits of $1.2 million.
As of December 31, 2005, we had cash and cash equivalents of $74.9 million, short-term
bank deposits of $3.3 million, short-term and long-term restricted cash of $22.5 million,
short-term and long-term restricted cash held in trustees accounts of $20.3 million
and short-term bank credits of $8.2 million.

The
$22.8 million of restricted cash held in a trustees accounts relates to funds
collected from two of our large projects in Colombia, which are divided into seven
different regions and contracts. The release of these funds from the trust is dependent
both on a schedule of payments and on the achievement of operational milestones. However,
in the event that we do not meet certain milestones, or if the bids are terminated
unilaterally by the government of Colombia, we may be unable to receive this restricted
cash.

As
of December 31, 2006, our accumulated debt was approximately $45.2 million, comprised of
long-term loans of $28.9 million and convertible subordinates notes of approximately $16.3
million.

Our
credit agreements contain various restrictions and limitations that may impact us,
including pledges on our assets and property. These restrictions and limitations relate to
incurrence of indebtedness, contingent obligations, liens, mergers and acquisitions, asset
sales, dividends and distributions, redemption or repurchase of equity interests, certain
debt payments and modifications of loans and investments.

The
following table summarizes our cash flows for the periods presented:

|                                                             | December 31,
|------------------------------------------------------------ | ------------
|
|
|
|
|Net cash provided by operating activities                    |             
|Net cash provided by (used in) investing activities          |             
|Net cash provided by (used in) financing activities          |             
|Effect of exchange rate changes on cash and cash equivalents |             
|                                                             |             
|Net increase (decrease) in cash and cash equivalents         |             
|Cash and cash equivalents at beginning of the period         |             
|                                                             |             
|Cash and cash equivalents at end of the period               |             
|                                                             |             

Our
cash and cash equivalents increased by $74.6 million during the year ended December 31,
2006 as a result of the following:

Operating
activities. Cash provided by operating activities was approximately $37.8 million
mainly due to an increase in other accounts payable and other long-term liabilities in the
amount of $33.2 million mainly due to strong collections of advances from customers and
growth in our deferred revenues and positive net cash flow provided by other operating
activities in the amount of $16.4 million. The above was offset in part by an increase in
inventories of approximately $11.8 million to support the higher demand for our products.

44

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Investing
activities. Cash provided by investing activities was approximately $8.3 million,
mainly from net proceeds of restricted cash (including long-term) of approximately $11.1
million, proceeds from short-term bank deposits of approximately $3.3 million, proceeds
from sale of property and equipment of approximately $1.6 million and net proceeds from
loans to employees of approximately $0.3 million, net of purchase of property and
equipment in the amount of approximately $6.5 million and a net investment in restricted
cash held by trustees in the amount of approximately $1.6 million.

Financing
activities. Cash provided by financing activities was approximately $28.2 million,
primarily from proceeds of approximately $40.2 million from the offering completed in
December 2006 and proceeds of approximately $3.6 million from the exercise of options, net
of repayment of approximately $8.7 million of long-term loans and $7.0 million of
short-term bank credits.

Our
cash and cash equivalents decreased by $0.8 million during the year ended December 31,
2005 as a result of the following:

Operating
activities. Cash provided by operating activities was approximately $3.3 million
mainly from a decrease in other assets (short-term, long-term and deferred charges) of
approximately $6.7 million and positive net cash flow provided by other operating
activities in the amount of $6.5 million, net of an increase in inventories of
approximately $5.2 million and a decrease of $4.7 million of accrued expenses.

Investing
activities. Cash used in investing activities was approximately $0.9 million, mainly
from net loans provided to employees of approximately $3.6 million, purchase of property
and equipment approximately $3.6 million, investment in short-term bank deposits of
approximately $3.3 million and net investment of restricted cash (including long-term) of
approximately $0.8 million, net of net proceeds from restricted cash held by trustees of
approximately $9.8 million and other investing activities of approximately $0.5 million.

Financing
activities. Cash used in financing activities was approximately $3.6 million, mainly
due to repayment of $8.8 million of long-term loans (including long-term convertible loan)
net of an approximately $4.0 million increase in short-term bank credit and proceeds of
$1.2 million from the exercise of options.

As
of December 31, 2006, our short and long term obligations were as follows:

|Contractual Obligations                  | Payments due by period (in thousands)
|---------------------------------------- | -------------------------------------
|
|
|
|
|Long-term loans *                        |                                      
|Convertible subordinated notes           |                                      
|Accrued interest related to restructured |                                      
|debt (including $703 as short term       |                                      
|accrued expenses)                        |                                      
|Capital lease obligations                |                                      
|Operating lease                          |                                      
|Other long-term debt                     |                                      
|Total contractual cash obligations       |                                      

(*)
          Future interest payments are not included due to variability in interest rates

45

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# Off Balance Sheet
Arrangements

At
times, we guarantee the performance of our work to some of our customers, primarily
government entities. Guarantees are often required for our performance during the
installation and operational periods of long-term rural telephony projects such as in
Latin America, and for the performance of other projects (government and corporate)
throughout the rest of the world. The guarantees typically expire when certain operational
milestones are met. In addition, from time to time, we provide corporate guarantees to
guarantee the performance of our subsidiaries. No guarantees have ever been exercised
against us.

As
of December 31, 2006, the aggregate amount of bank guarantees outstanding in order to
secure our various performance obligations was approximately $12.2 million, comprised
mainly of performance guarantees provided on behalf of our subsidiary in Peru, in an
amount of approximately $7.6 million. We have restricted cash as collateral for these
guarantees in an amount of approximately $4.0 million.

We
have provided bank guarantees mainly for certain leases for our offices worldwide, which
are secured by restricted cash in the amount of approximately $5.7 million.

# Impact of Inflation and
Currency Fluctuations

While
most of our sales and service contracts are in U.S. dollars and most of our expenses are
in U.S. dollars and NIS, portions of our projects in Latin America are linked to their
respective local currencies. The foreign exchange risks are often significant due to
fluctuations in local currencies relative to the U.S. dollar.

The
U.S. dollar cost of our operations in Israel is influenced by the extent to which any
increase in the rate of inflation in Israel is not offset (or is offset on a lagging
basis) by a devaluation of the NIS in relation to the U.S. dollar. The influence on the
U.S. dollar cost of our operations in Israel relates primarily to the cost of salaries in
Israel, which are paid in NIS and constitute a substantial portion of our expenses in NIS.
In 2006, there was deflation in Israel of 0.1% and the NIS appreciated in relation to the
U.S. dollar at a rate of 8.2%, from NIS 4.603 per $1 on December 31, 2005 to NIS 4.225 per
$1 on December 31, 2006. In the period ending in December 31, 2005 inflation in Israel was
2.4% while the NIS depreciated in relation to the U.S. dollar at a rate of 6.8%. If future
inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the
timing of such devaluation lags behind increases in inflation in Israel, our results of
operations may be materially adversely affected. In 2007, in order to limit these risks,
we entered into a hedging agreement to cover certain of our exchange rate exposures.

Regarding
the changes in the value of other foreign currencies in relation to the U.S. dollar, our
monetary balances that are not linked to the U.S. dollar impacted our financial expenses
during 2006 and 2005. This is due to heavy fluctuations in currencies in certain regions
of Latin America in which we do business. There can be no assurance that in the future our
results of operations may not be materially adversely affected by other currency
fluctuations.

# Effective Corporate Tax
Rate

On
January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the tax
reform, resident companies are subject to Israeli tax on income accrued or derived in
Israel or abroad. In addition, the concept of a controlled foreign corporation
was introduced, according to which an Israeli company may become subject to Israeli taxes
on certain income of a non-Israeli subsidiary if the subsidiarys primary source of
income is passive income (such as interest, dividends, royalties, rental income or capital
gains). The tax reform also substantially changed the system of taxation of capital gains.
Following the reform, the capital gains tax rate applicable to us was decreased from 36%
to 25%, while the allocation of the gain between the two periods is proportional to the
holding periods until December 31, 2002, and after December 31, 2002. In 2005 and in 2006,
the tax reform did not have any material effect on our liquidity, financial condition or
results of operations.

46

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---



Israeli
companies are subject to income tax on their worldwide income. Pursuant to tax reform
legislation that came into effect in 2003, the corporate tax rate is to undergo staged
reductions to 25% by the year 2010. In order to implement these reductions, the corporate
tax rate is scheduled to decline from 31% in 2006, to 29% in 2007, 27% in 2008, and 26% in
2009. However, the effective tax rate payable by a company that derives income from an
Approved Enterprise, discussed further below, may be considerably less.

On
April 1, 2005, an amendment to the Investment Law came into effect which significantly
changed the provisions of the Investment 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, such as provisions generally requiring that at least 25% of the
approved enterprises income will be derived from export. A facility that is approved
under the Amendment is called a Benefited Enterprise. Additionally, the
Amendment enacted major changes in the manner in which tax benefits are awarded under the
Investment Law so that companies no longer require Investment Center approval in order to
qualify for tax benefits. However, the Investment Law provides that terms and benefits
included in any certificate of approval already granted will remain subject to the
provisions of the law as in effect on the date of such approval. Therefore, our existing
Approved Enterprises will not be subject to the provisions of the Amendment.

According
to the Amendment, tax-exempt income generated under the provisions of the Amendment will
be subject to taxes upon distribution or liquidation and we may be required in the future
to record deferred tax liabilities with respect to such tax-exempt income. As of December
31, 2006, we did not generate income under the provisions of the Amendment.

Currently,
we have nine Approved Enterprise programs under the alternative route of the Investment
Law. The period of benefits for the first six programs has expired and we do not expect
substantial benefits from the other three programs. See ITEM 10: Additional
Information  Israeli Taxation.

We
expect to derive a substantial portion of our operating income, when we become profitable
for Israeli tax purposes from future Benefited Enterprise facilities. We may therefore be
eligible for a tax exemption for a limited period on undistributed Benefited Enterprise
income, and an additional subsequent period of reduced corporate tax rates ranging between
10% and 25%, depending on the level of foreign ownership of our shares, on undistributed
such Benefited Enterprise income. Income from sources other than the Approved
Enterprises or Benefited Enterprises during the relevant period of
benefits will be taxable at the regular corporate tax rates.

We
anticipate that we will not have to pay taxes relating to 2007 tax year for most of our
major entities due to current or carry forward tax losses. Cash outlays for income taxes
in the future might be different from tax expenses, mainly due to cash tax payments for
previous years that might be triggered by tax audits in the various tax jurisdictions,
deferred tax expenses and payments usually made in arrears for annual taxes in profitable
years.

# Research and Development

We
devote significant resources to research and development projects designed to enhance our
VSAT products, to expand the applications for which they can be used and to develop new
products. We intend to continue to devote research and development resources to complete
development of certain features, to improve functionality, including supporting higher
throughput, to improve space segment utilization, and to reduce the cost of our products.

We
devoted significant research and development resources in 2004, 2005 and 2006 to the
development of our SkyEdge family of products. We develop our own network software and
software for our VSATs. We generally license our software to customers as part of the sale
of our network products and services. We also license certain third party software for use
in our products.

47

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Our
software and our internally developed hardware are proprietary and we have implemented
protective measures both of a legal and practical nature. We have obtained and registered
patents in the United States and in various other countries in which we offer our products
and services. We rely upon the copyright laws to protect against unauthorized copying of
the object code of our software and upon copyright and trade secret laws for the
protection of the source code of our software. We derive additional protection for our
software by licensing only the object code to customers and keeping the source code
confidential. In addition, we enter into confidentiality agreements with our customers and
other business partners to protect our software technology and trade secrets. We have also
made copyright, trademark and service mark registrations in the United States and abroad
for additional protection of our intellectual property. Despite all of these measures, it
is possible that competitors could copy certain aspects of our software or hardware or
obtain information that we regard as a trade secret in violation of our legal rights.

# Third-Party Funding

In
2001, we entered into an agreement with the Chief Scientist for the early payment of all
royalties arising from future sales with respect to previous Scientist grants we
received. The Company recorded a one-time operating charge of $3.4 million. This amount
was payable in semi-annual installments over a four-year period and has been repaid by us
in full. This agreement enables us to participate in a program under which we are
eligible to receive future research and development grants for generic research and
development projects without any royalty repayment obligations.

In
June 2003, we entered into two development agreements with SES Global which entitled us to
an aggregate of $6 million for the development of certain ODU (outdoor unit) technology,
all of which funding has been received.

The
following table sets forth, for the years indicated, our gross research and development
expenditures, the portion of such expenditures which was funded by royalty-bearing and
non-royalty bearing grants and the net cost of our research and development activities:

|                                     | Years
|------------------------------------ | -----
|
|
|
|
|Gross research and development costs |      
|Less:                                |      
|Royalty-bearing grants               |      
|Non-royalty-bearing grants           |      
|                                     |      
|                                     |      
|Research and development costs - net |      
|                                     |      

# Trend Information

In
the past few years the satellite communications market has experienced increasing
competition both from within its sector and from competing satellite communication
technologies. Specifically, the expansion of cellular coverage in rural areas worldwide,
increased terrestrial infrastructures as well as the advancement of wireless technologies,
increases the options for our potential and existing customers. In addition, the number of
satellite communications providers in the market has increased and prices of technologies
continue to decline. Further, many of the VSAT manufacturers have adopted certain
standards for products, such as that known as DVB-RCS. If these standards become more
accepted in the industry, it is likely that non-conforming products will be less
attractive in the market. Another development in our industry is the increasing demand for
complete solutions which encompass far more than a single platform of a communications
solution.

We
estimate that the political environment in Israel could continue to prevent certain
countries from doing business with us and this, in addition to the increased competition
and reduced prices in the telecommunications industry overall, may have adverse effects on
our business. Given all of the above, we cannot guarantee or predict what our sales will
be, what trends will develop and if any changes in our business and marketing strategy
will be implemented.

48

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# Impact of Recently
Issued Accounting Standards

In June 2006, the Financial
Accounting Standards Board, or FASB, issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, or FIN 48. FIN 48 creates a single model to address
uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes
from Financial Accounting Standards Board Statement No. 5, Accounting for
Contingencies. FIN 48 utilizes a two-step approach for evaluating tax positions.
Recognition (step one) occurs when an enterprise concludes that a tax position, based
solely on its technical merits, is more-likely-than-not to be sustained upon examination.
Measurement (step two) is only addressed if step one has been satisfied (i.e., the
position is more-likely-than-not to be sustained). FIN 48 applies to all tax positions
related to income taxes subject to Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes. This includes tax positions considered to be
routine as well as those with a high degree of uncertainty. Derecognition of a
tax position that was previously recognized would occur when a company subsequently
determines that a tax position no longer meets the more-likely-than-not threshold of being
sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute
for derecognition of tax positions. FIN 48 is effective for fiscal years beginning after
December 15, 2006. Our management is in the process of evaluating the possible impact of
the adoption of FIN 48 on our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
standard defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. Our management believes
this standard will not have a material effect on our consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, or SFAS No. 159, which permits companies to choose to
measure certain financial instruments and other items at fair value that are not currently
required to be measured at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We will adopt SFAS No. 159 no later than January 1,
2008. We have not yet determined the effect that the adoption of SFAS No. 159 will have on
our consolidated financial statements.

|ITEM 6: |  | DIRECTORS AND SENIOR MANAGEMENT
|------- |  | -------------------------------

# Directors

The
following table sets forth the name, age, position(s) and a brief account of the business
experience of each of the directors:

|Name                  | Age |  | Position(s)                                                   
|--------------------- | --- |  | --------------------------------------------------------------
|
|
|
|
|Amiram Levinberg      | 51  |  | Chairman of the Board of Directors and Chief Executive Officer
|Haim Benjamini (1)(2) | 67  |  | External Director                                             
|Jeremy Blank          | 28  |  | Director                                                      
|Ehud Ganani           | 54  |  | Director                                                      
|Leora Meridor (1)(2)  | 59  |  | External Director                                             
|Karen Sarid (1)(2)    | 56  |  | Director                                                      
|Izhak Tamir (1)(2)    | 52  |  | Director                                                      

---

|(1) | Member
of our Compensation and Stock Option Committee.
|--- | ------------------------------------------------------

|(2) | Member
of our Audit Committee.
|--- | ------------------------------

49

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Amiram
Levinberg co-founded our company and served as a director on our board
since its inception and until April 2004. In July 2005, Mr. Levinberg rejoined our company
as our Chairman of the Board and Chief Executive Officer. From July 1995 and until April
15, 2003, he served as our President. Until 2002, Mr. Levinberg also served as our Chief
Operations Officer. Until July 1995, he served as our Vice President of Engineering. From
1977 to 1987, Mr. Levinberg served in a research and development unit of the Israel
Defense Forces, where he managed a large research and development project. He was awarded
the Israel Defense Award in 1988. Mr. Levinberg holds a B.Sc. in Electrical Engineering
and Electronics and a M.Sc. degree in Digital Communications from Israel Institute of
Technology, in Haifa, Israel, or the Technion. Mr. Levinberg serves on the board of
directors of Cardboard Industries and Kargal, a cardboard manufacturer in Israel and
serves on the board of Kasamba, an Internet company offering online professional expert
advice.

Haim
Benjamini has served on our board as an external director since February
2005. Mr. Benjamini currently serves as an advisor to Teva Pharmaceutical Industries
Ltd.s CEO, board and management. He served as the Corporate Vice President of Human
Resources of Teva from 1988 until December 31, 2004. From 1982 to 1988, Mr. Benjamini
served as the Corporate Vice President of Human Resources at Scitex Corporation. Mr.
Benjamini served as a guest lecturer at Tel Aviv University from 1997 to 2003 as part of
the Masters of Arts program in Labor Studies. Mr. Benjamini holds a M.A. (Organizational
Behavior) from the University of Chicago and a B.A (Social Sciences, Sociology and
Political Science) from the Hebrew University. Mr. Benjamini is a Brigadier General (Ret)
in the Israel Defense Forces and served in various command staff and training roles from
1957 until 1982.

Jeremy
Blank has served on our board since July 2005. Mr. Blank is a senior
advisor to York Capital Management. Previously, Mr. Blank served as a Vice President
within York Capital Management. York is a private investment fund based in New York with
approximately $8.5 billion in assets under management. From 1999 to 2004, Mr. Blank worked
at Morgan Stanley as a vice president within Morgan Stanleys fixed income department
and earlier, in Morgan Stanleys mergers and acquisitions department. Mr. Blank
graduated from Yeshiva University in New York City with a Bachelors degree in
Finance.

Dr.           Ehud
Ganani has served on our board since July 2005. Dr. Ganani currently serves           as
Chairman of the boards of directors of the following companies, both in the
          security and defense markets: Trace Guard Technologies Inc., and DefenSoft Ltd.
          He served as the Chief Executive Officer of Israel Military Industries from
2002           to 2005. Prior to that he served in various senior positions in Rafael
Armament           Development Authority, the last of which was as Vice President of
Marketing and           Business Development from 1997 to 2002. Dr. Ganani holds a
Doctorate of Science           in chemical engineering from Washington University and a
Bachelor of Science in           Chemical Engineering from the Technion.

Dr.          Leora
(Rubin) Meridor  has served on our board since August 2005. Dr. Meridor is           a
business and financial consultant and serves on the boards of Teva
          Pharmaceutical Industries Ltd. and Nice Systems. Between 2001 and 2004, Dr.
          Meridor served as chair of the board of Poalim Capital Markets Ltd. and between
          2001 and 2005, as chair of the boards of directors of Bezeq International Ltd.
          and Walla! Communications Ltd. Between 1996 and 2000 she served as Senior Vice
          President, Head of Credit & Risk Management Division of the First
          International Bank. From 1992 to 1996 she served as Head of Research at the
Bank           of Israel. Dr. Meridor has a Ph.D in Economics, an M.Sc in Mathematics and
B.Sc.           in Mathematics and Physics, all from the Hebrew University in Jerusalem.
Her           studies include a post doctoral year at Massachusetts Institute of
Technology.

Karen
Sarid has served on our board since July 2005. Ms. Sarid currently serves
as the chief operating officer and chief financial officer of Galil Medical Ltd. and as
the general manager of Galil Israel. Galil Medical is a medical device company that
develops a cryotherapy platform. Ms. Sarid has served as a General Manager of Orex
Computed Radiography Ltd., a Kodak company focusing on advanced radiography systems for
the digital x-ray market since September 2000 until March 2007. From September 1999 until
September 2000, Ms. Sarid served as Chief Financial Officer and a member of the board of
directors of Forsoft Ltd., a software solutions provider and a subsidiary of the Formula
Group. From 1996 until August 1999, Ms. Sarid was Chief Financial Officer and a member of
the board of directors of ESC Medical Systems Ltd., a medical laser manufacturer that is
traded on the NASDAQ Stock Market. Ms. Sarid currently serves on the board of directors of
LanOptics Ltd. and as chair of its audit committee. Ms Sarid also serves on the board of
directors of Oridion Ltd. and Audiocodes Ltd. Ms. Sarid received a B.A. in Economics and
Accounting from Haifa University, and was awarded the CFO of the Year award in 1998 by the
Association of Chief Financial Officers in Israel.

50

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Izhak
Tamir has served on our board since July 2005. Mr. Tamir has been President
and a Director of Orckit since its founding in 1990. Orckit Communications Ltd. is a
leading provider of advanced telecom equipment targeting high capacity packetized
broadband services. Mr. Tamir has served on the board of directors of Scopus Video
Networks since 2005. From 1987 until 1989, Mr. Tamir was employed by Comstream Inc., in
San Diego, California. From 1985 until 1987, he was Vice President of A.T. Communication
Channels Ltd., a subsidiary of Bezeq. From 1978 to 1985, he was a senior engineer in the
Israeli government. Mr. Tamir holds an engineering degree from the Technion, and an M.B.A.
from Tel Aviv University. Mr. Tamir has been Chairman of the board of directors of Tikcro
Technologies Ltd. since January 2000 and its Chief Executive Officer since August 2003.

# Senior Management

The
executive officers and key executives of our company and its subsidiaries are as follows:

|Name                 | Age |  | Position(s)                                                        
|-------------------- | --- |  | -------------------------------------------------------------------
|
|
|
|
|Amiram Levinberg (1) | 51  |  | Chief Executive Officer and Chairman of the Board of Directors     
|Erez Antebi          | 47  |  | Chief Executive Officer, Gilat Networks Systems                    
|Rocio del Campo      | 43  |  | President, Spacenet Rural Communications                           
|Andreas Georghiou    | 57  |  | Chief Executive Officer, Spacenet Inc.                             
|Yoav Leibovitch      | 49  |  | Executive Vice President, Corporate Development                    
|Joshua Levinberg     | 52  |  | Executive Vice President, Corporate Business Development & Strategy
|Tal Payne            | 35  |  | Chief Financial Officer                                            

---

|(1) | Please
see biography under Directors above.
|--- | ---------------------------------------------

Erez
Antebi was appointed as Chief Executive Officer of Gilat Networks Systems
on June 1, 2005. Prior to that time, Mr. Antebi served as our Chief Operating Officer from
October 2002 until September 2003, when he left to serve as Chief Executive Officer of
Clariton Networks Ltd. From the beginning of 1998 until being appointed our Chief
Operating Officer, Mr. Antebi served as our Vice President, General Manager for Asia,
Africa and Pacific Rim. From September 1994 until the beginning of 1998, he served as Vice
President and General Manager of Gilat Inc. Mr. Antebi joined our company in May 1991 as
product manager for the Skystar Advantage VSAT product. From August 1993 until August
1994, he served as Vice President of Engineering and Program Management of Gilat Inc.
Prior to joining us, Mr. Antebi worked for a private importing business from 1989 to 1991,
after having served from 1987 to 1989 as marketing manager for high frequency radio
communications for Tadiran Limited, a defense electronics and telecommunications company,
and as a radar systems development engineer at Rafael, the research and development and
manufacturing arm of the Israel Defense Forces, from 1981 to 1987. Mr. Antebi holds a
B.Sc. and an M.Sc. Electrical Engineering from the Technion.

Rocio
del Carmen del Campo serves as President of Spacenet Rural Communications.
Ms. Del Campo joined Gilat in 2000, as General Manager of our subsidiary in Peru. In 2003
she became General Manager for the Andean Region. Prior to Spacenet Rural Communications,
Ms. Del Campo was General Manager of the Peru subsidiary of Acer (a technology company
that developed computers and information technology, headquartered in Taiwan). Before
this, Ms. Del Campo was an International Business Development Manager for INFOTEC (a
software development company). Ms. Del Campo holds a B.S. in Industrial Engineering with a
specialization in systems from the University of Lima, Peru

51

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Andreas
Georghiou joined Spacenet Inc. as its Chief Executive Officer in August
2006. Prior to joining Spacenet, Mr. Georghiou had been with SES Americom and its
predecessor, GE Americom, for over 20 years in various leadership roles. Immediately
preceding his assumption of CEO duties at Spacenet, Mr. Georghiou served as Chief
Commercial Officer at SES Americom and, prior to that and through July 2005 he served as
the Senior Vice President of Business Operations. From 2003 through July 2006, Mr.
Georghiou also served as President of Americom Asia Pacific, a regional satellite venture
of SES. From 1994 to 2003 he served as the Senior Vice President of Sales & Marketing
for Global Satellite Services, and from 1992 to 1994 he served as the Director of Business
Development. While at GE Americom, he also served as an officer of GE Capital. Prior to
1994, Mr. Georghiou held various positions at RCA Corporation including IT Manager,
Director of Treasury Planning and Manager of Operations Research, at the David Sarnoff
Research Center. Mr. Georghiou holds an undergraduate degree from the University of
Pennsylvania, and a masters degree from the Wharton School of Business, where he
studied as a Fulbright Scholar.

Yoav
Leibovitch rejoined our company in his current position as Executive Vice
President of Corporate Development in September 2005. Prior to rejoining us and during
2004, Mr. Leibovitch served as a consultant for business development in Kasamba Ltd. and
assisted in the initial public offering of Scopus Ltd. Mr. Leibovitch first joined our
company in early 1991 as Vice President of Finance and Administration and Chief Financial
Officer, a position he held until December 2003. From 1989 to 1990, Mr. Leibovitch worked
in the U.S. at Doubleday Books and Music Clubs, a subsidiary of Bertelsmann, A.G., as
special advisor for new business development. From 1985 to 1989, he was the Chief
Financial Officer of a partnership among Bertelsmann, A.G., a large German media and
communications company; Clal Corporation, a major Israeli industrial holding company; and
Yediot Aharonot, an Israeli daily newspaper. Mr. Leibovitch holds a B.A. (Economics and
Accounting) and a M.B.A. (Finance and Banking) from the Hebrew University of Jerusalem.
Mr. Leibovitch is a Certified Public Accountant in Israel.

Joshua
Levinberg, a co-founder of Gilat, rejoined our company as Executive Vice
President of Corporate Business Development & Strategy in August 2005. From June 1999
until 2003, he served as Senior Vice President for Business Development of our company,
having previously served in that position from 1994 to April 1998. At that time, Mr.
Levinberg became Chief Executive Officer of GTH LA Antilles, then the parent company of
Global Village Telecom, or GVT, until June 1999. From 1989 until September 1994, he served
as Executive Vice President and General Manager of Gilat Satellite Networks, Inc. in the
U.S. From 1987 until the formation of Gilat Satellite Networks, Inc. in 1989, Mr.
Levinberg was Vice President of Marketing & Business Development of our company. Mr.
Levinberg holds a B.Sc. (Electrical Engineering and Electronics) from Tel Aviv University.
Amiram Levinberg and Joshua Levinberg are brothers.

Tal
Payne was appointed our Chief Financial Officer in May 2005. Before that,
Ms. Payne served as our Vice President of Finance starting January 2004. Prior to that,
Ms. Payne served as our Financial Director since July 1999. Prior to joining us, Ms.
Payne, a CPA, was employed as a Manager for Kesselman & Kesselman,
PriceWaterhouseCoopers Israel office from 1994 to 1999. She holds a B.A. in
Economics and Accounting, as well as advanced studies in accounting from Tel Aviv
University.

# Compensation of
Directors and Officers

The
following table sets forth the aggregate compensation paid to or accrued on behalf of all
of our directors and officers as a group for the year ended December 31, 2006:

|                                                   | Salaries, Fees, Directors'Fees,Commissions andBonuses(1) | Pension, Retirement andSimilar Benefits
|-------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------
|
|
|
|
|All directors and officers as a group (18 persons) |                                                          |                                        

---

|(1) | Also
includes bonuses and stock option compensation accrued in 2006.
|--- | --------------------------------------------------------------------

52

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# Management Agreements

Prior
to the closing of the transaction pursuant to which Bank Hapoalim assigned its loan to our
company to York Capital Management, York, Bank Hapoalim and Mivtach Shamir Finance Ltd.,
paid $100,000 to a company controlled by Mr. Amiram Levinberg and his brother, Mr. Joshua
Levinberg, to perform due diligence on our company. In addition, Mr. Amiram Levinberg has
a right to certain benefits from options held by York in shares of our company owned by
Bank Hapoalim. For further information on Mr. Levinbergs relationship with York,
please see the Principal Shareholder table and the footnote on York.

Mr.
          Amiram Levinberg, our Chairman and Chief Executive Officer has a three year
          employment agreement with us which will terminate July 2008.Under this
          agreement, Mr. Levinberg is entitled to (i) a salary of 100,000 NIS per month;
          (ii) options to purchase 915,000 ordinary shares of our company; (iii) a
          transaction bonus equal to 0.82% of the market value of our company
          in a transaction or series of related transactions following which a company,
          person or a group of persons or companies acting together will purchase from
our           companys shareholders, in a bona fide, arms length transaction, 50%
or           more of our then outstanding share capital subject to Mr. Levinberg
complying           with certain prior conditions; and (iv) entitlement to participate in
our           companys annual bonus plan, subject to the specific approval of the
          shareholders.

# Board Compensation

By
resolutions adopted by our shareholders, directors who are not employees are entitled to
receive annual compensation of $20,000 and an additional $300 for each board or committee
meeting attended for up to four hours, and an additional $300 for each board or committee
meeting which extends beyond four hours. In addition, board members are compensated for
telephone participation in board and committee meetings in an amount of 50% of what would
be received for physical attendance. Each current and future non-employee director is
entitled to receive options to purchase 20,000 of our ordinary shares, which options vest
over a three-year period, and are exercisable for so long as such optionee remains a
director of our company.

# Board Composition and
Practices

Our
Articles of Association as adopted at a shareholders meeting on April 15, 2003, provide
that our board of directors shall consist of not less than five and not more than nine
directors as shall be determined from time to time by a majority vote at the general
meeting of our shareholders. Unless resolved otherwise by our shareholders, our board of
directors will be comprised of (i) nine directors, if four directors are appointed by
beneficial owners of 7% or more of our issued and outstanding ordinary shares (as set
forth below), or (ii) seven directors, if fewer than four directors are so appointed by
beneficial owners of 7% or more of our ordinary shares.

Pursuant
to our Articles of Association, each beneficial owner of 7% or more of our issued and
outstanding ordinary shares is entitled to appoint, at each annual general meeting of our
shareholders, one member to our board of directors, provided that a total of not more than
four directors are so appointed. In the event that more than four qualifying beneficial
owners notify us that they desire to appoint a member to our board of directors, only the
four shareholders beneficially owning the greatest number of shares shall each be entitled
to appoint a member to our board of directors. So long as our ordinary shares are listed
for trading on NASDAQ, we may require that any such appointed director qualify as an
independent director as provided for in the NASDAQ rules then in effect. Our
board of directors has the right to remove any such appointed director when the beneficial
ownership of the shareholder who appointed such director falls below 7% of our ordinary
shares.

Our
Articles of Association provide that a majority of the voting power at the annual general
meeting of our shareholders will elect the remaining members of the board of directors,
including external directors as required under the Companies Law. At any annual general
meeting at which directors are appointed pursuant to the preceding paragraph, the
calculation of the vote of any beneficial owner who appointed a director pursuant to the
preceding paragraph shall not take into consideration, for the purpose of electing the
remaining directors, ordinary shares constituting 7% of our issued and outstanding
ordinary shares held by such appointing beneficial owner.

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Each
of our directors (except external directors) serve, subject to early resignation or
vacation of office in certain circumstances as set forth in our Articles of Association,
until the adjournment of the next annual general meeting of our shareholders next
following the general meeting in which such director was elected. The holders of a
majority of the voting power represented at a general meeting of our shareholders in
person or by proxy will be entitled to (i) remove any director(s), other than external
directors and directors appointed by beneficial holders of 7% or more of our issued and
outstanding ordinary shares as set forth above, (ii) elect directors instead of directors
so removed, or (iii) fill any vacancy, however created, in the board of directors. Our
board of directors may also appoint additional directors, whether to fill a vacancy or to
expand the board of directors, who will serve until the next general meeting of our
shareholders following such appointment.

Our
Articles of Association further provide that the board of directors may delegate all of
its powers to committees of the board of directors as it deems appropriate, subject to the
provisions of applicable law.

# Alternate Directors

Our
Articles of Association provide that a director may appoint, by written notice to us and
subject to the consent of the board of directors, any person qualified to serve as a
director to serve as an alternate director (provided such person does not already serve as
a director or an alternate director). An external director may not be appointed as an
alternate director, unless otherwise permitted in the Companies Law. An alternate director
shall have all of the rights and obligations of the director appointing him or her, except
the power to appoint an alternate (unless otherwise specifically provided for in the
appointment of such alternate). An alternate director may not act at any meeting at which
the director appointing him or her is present and he is not entitled to remuneration.
Unless the time period or scope of any such appointment is limited by the appointing
director, such appointment is effective for all purposes and for an indefinite time, but
will expire upon the expiration of term or vacation of office of the appointing director.
Currently, no alternate directors have been appointed.

# External Directors

Under
the Companies Law, public companies are required to elect two external directors who must
meet specified standards of independence. Companies that are registered under the laws of
Israel and whose shares are listed for trading on a stock exchange outside of Israel, such
as Our company, are treated as public companies with respect to the external
directors requirement. External directors may not have during the two years
preceding their appointment, directly or indirectly through a relative, partner, employer
or controlled entity, any affiliation with (i) the public company, (ii) those of its
shareholders who are controlling shareholders at the time of appointment, or (iii) any
entity controlled by the company or by its controlling shareholders. The term
affiliation includes an employment relationship, a business or professional
relationship maintained on a regular basis, control and services as an office holder. No
person can serve as an external director if the persons other positions or business
creates or may create conflicts of interest with the persons responsibilities as an
external director. Until the lapse of two years from termination of office, a company may
not engage an external director as an employee or otherwise.

External
directors serve for a three-year term, which may be renewed for only one
additionalthree-year term. External directors can be removed from office only by the court
or by the same special percentage of shareholders that can elect them, and then only if
the external directors cease to meet the statutory qualifications with respect to their
appointment or if they violate their fiduciary duty to the company. The court may
additionally remove external directors from office if they were convicted of certain
offenses by a non-Israeli court or are permanently unable to fulfill their position. If,
when an external director is elected, all members of the board of directors of a company
are of one gender, the external director to be elected must be of the other gender.

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If
delegated any authority of the board of directors, any committee of the board of directors
must include at least one external director. An external director is entitled to
compensation as provided in regulations adopted under the Companies Law and is otherwise
prohibited from receiving any other compensation, directly or indirectly, in connection
with such service.

The
Companies Law requires external directors to submit to the company, prior to the date of
the notice of the general meeting convened to elect the external directors, a declaration
stating their compliance with the requirements imposed by Companies Law for the office of
external director. External Directors are required to have professional ability or
financial and accounting expertise, as long as at least one of the External Directors is a
financial and accounting expert.

The
election of external directors requires the affirmative vote of a majority of our ordinary
shares voted on in person or by proxy at a meeting of the shareholders, provided that such
majority includes at least one-third of the votes of the non-controlling shareholders of
the company who are voting on this matter at the meeting. This approval requirement need
not be met if the aggregate shareholdings of those non-controlling shareholders who vote
against the election of the external directors represent one percent or less of all the
voting power of the company. Controlling for the purpose of this provision
means the ability to direct the acts of the company. Any person holding one half or more
of the voting power of the company or of the right to appoint directors or the chief
executive officer is presumed to have control of the company.

Our
external directors are Dr. Leora Meridor and Mr. Haim Benjamini. Dr. Meridor was elected
at the Special General Meeting held on August 30, 2005, and Mr. Benjamini was elected at
the Special General Meeting held on February 10, 2005.

# Audit Committee

The
Companies Law provides that publicly traded companies must appoint an audit committee. The
responsibilities of the audit committee include identifying irregularities in the
management of the companys business and approving related party transactions as
required by law. An audit committee must consist of at least three members, and include
all of the companys external directors. However, the chairman of the board of
directors, any director employed by the company or providing services to the company on a
regular basis, any controlling shareholder and any relative of a controlling shareholder
may not be a member of the audit committee. An audit committee may not approve an action
or a transaction with an officer or director, a transaction in which an officer or
director has a personal interest, a transaction with a controlling shareholder and certain
other transactions specified in the Companies Law, unless at the time of approval two
external directors are serving as members of the audit committee and at least one of the
external directors was present at the meeting in which an approval was granted.

Pursuant
to the current listing requirements of the NASDAQ Stock Market, we are required to
maintain an audit committee, at least a majority of whose members are independent of
management. Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission, or the SEC, has issued rules which required NASDAQ to impose independence
requirements on each member of the audit committee. Such requirements came into effect
July 31, 2005.

Presently,
our audit committee consists of Mr. Benjamini, Dr. Meridor, Dr. Sarid and Mr. Tamir. We
believe that these appointments comply with the requirements of the Companies Law and with
the SEC and NASDAQ rules, and that Dr. Meridor qualifies to serve as the audit
committees financial expert, as required by the SEC and NASDAQ.

# Independent Directors

Pursuant
to the current listing requirements of the NASDAQ Global Market, we are required to have
at least a majority of our directors on our board of directors qualify as independent.
Effective March 3, 2005, NASDAQ revised the rules so that a foreign private issuer (such
as our company) may follow home country practice in lieu of complying with this rule.

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Based
on representations from our current directors, we believe that all of our directors except
Mr. Levinberg and Mr. Blank comply with the independence standards set forth above.

# Employees

As
of December 31, 2006, we had approximately 950 full-time employees, including 160
employees in engineering, research and development, 400 employees in manufacturing,
operations and technical support, 130 employees in marketing and sales, 140 employees in
administration and finance and 120 in other departments. Of these employees, 400 employees
were based in our facilities in Israel, 235 were employed in the United States, 250 were
employed in Latin America and 65 in Asia, the Far East and other parts of the world. We
also utilize temporary employees, as necessary, to supplement our manufacturing and other
capabilities. We believe that our relations with our employees are satisfactory.

As
of December 31, 2005, we had approximately 929 full-time employees, including 151
employees in engineering, research and development, 384 employees in manufacturing,
operations and technical support, 129 employees in marketing and sales, 146 employees in
administration and finance and 119 in other departments. Of these employees, 387 employees
were based in our facilities in Israel, 251 were employed in the United States, 235 were
employed in Latin America and 62 in Asia, the Far East and other parts of the world.

As
of December 31, 2004, we had approximately 980 full-time, including 159 employees in
engineering, research and development, 363 employees in manufacturing, operations and
technical support, 116 employees in marketing and sales, 109 employees in administration
and finance and 95 in other departments. This figure also includes 130 employees from
StarBand. Of these employees, 366 employees were based in our facilities in Israel, 183
were employed in the United States, 230 were employed in Latin America and 63 in Asia, the
Far East and other parts of the world.

We
and our employees are not parties to any collective bargaining agreements. However,
certain provisions of the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations
(including the Manufacturers Association of Israel) are applicable to all Israeli
employees by order of the Israeli Ministry of Labor and Welfare. These provisions
principally concern the length of the work day and the work week, minimum wages for
workers, contributions to a pension fund, insurance for work-related accidents, procedures
for dismissing employees, determination of severance pay and other conditions of
employment. Furthermore, pursuant to such provisions, the wages of most of our employees
are automatically adjusted based on changes in the Israeli CPI. The amount and frequency
of these adjustments are modified from time to time.

Israeli
law generally requires severance pay upon the retirement or death of an employee or
termination of employment without due cause. Our ongoing severance obligations are
partially funded by making quarterly payments to approved severance funds or insurance
policies, with the remainder accrued as a long-term liability in our consolidated
financial statements. In addition, Israeli employees and employers are required to pay
specified sums to the National Insurance Institute, which is similar to the U.S. Social
Security Administration. Since January 1, 1995, such amounts also include payments for
national health insurance. The payments to the National Insurance Institute are
approximately 16.31% of wages (up to a specified amount), of which the employee
contributes approximately 64% and the employer contributes approximately 36%. The majority
of our permanent employees are covered by life and pension insurance policies providing
customary benefits to employees, including retirement and severance benefits. For Israeli
employees, we contribute 13.33% to 15.83% (depending on the employee) of base wages to
such plans and the permanent employees contribute 5% of base wages.

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We
have a number of savings plans in the United States that qualify under Section 401(k) of
the U.S. Internal Revenue Code. Our U.S employees may contribute up to 100% of their
pretax salary, but not more than statutory limits. We contribute one dollar for each
dollar a participant contributes in this plan, in an amount of up to 3% of a
participants earnings and in addition, we contribute fifty cents for each dollar a
participant voluntarily contributes in this plan, up to an additional 3% of a
participants earnings. Matching contributions in 2004, 2005 and 2006 for all the
plans were $ 0.7 million, $ 0.7 million and $ 0.7 million, respectively. Matching
contributions are invested in proportion to each participants voluntary
contributions in the investment options provided under the plan.

In
January 2005, we provided certain Israeli employees with interest-free three-year loans in
amounts equal to thirty or one-hundred percent (30-100%) of the amount of the severance
compensation owing to them upon separation by us if their service is terminated without
cause. The loans were provided as a benefit to certain employees and are secured by a
contractual pledge over each respective employees severance payment. Loans were
granted to approximately 260 employees, none of whom are executive officers. The aggregate
amount of loans granted to was approximately $4 million and the highest amount loaned to
any single employee is approximately $130,000.

# Share Ownership

See
table under Item 7: Major Shareholders and Related Party Transactions below.

# Stock Option Plans

In
June 1995, we adopted the 1995 Stock Option Plan (Incentive and Restricted Stock Options),
or the 1995 ISO/RSO Plan, the 1995 Section 102 Stock Option/Stock Purchase Plan, or the
1995 Section 102 Plan, and the 1995 Advisory Board Stock Option Plan, or the 1995 Advisory
Board Plan. The 1995 Plans expired on June 29, 2005.

As
of December 31, 2006, we had granted options to purchase a total of 129,760 ordinary
shares under the 1995 Plans. The exercise prices for such options vary from $7.8 to
$3,197.5 and all such options expire at various times from November 2003 to February 2013.
As of December 31, 2005, a total of 41,963 options have been exercised under the 1995
Plan.

In
September 2003, we adopted the 2003 Stock Option Plan (Incentive and Restricted Stock
Options), or the 2003 ISO/RSO Plan and the Section 102 Stock Option Plan 2003, or the 2003
Section 102 Plan and collectively, the 2003 Plans. In February 2005, our
shareholders increased the pool for the 2003 Plans by 1,135,000 shares and in December
2005, our shareholders further increased the pool by 3,500,000 shares, such that the 2003
Plans provide for the granting of options of up to an aggregate of 6,135,000 ordinary
shares to our officers, directors, employees or service providers or any of the employees
of service providers of our subsidiaries. As of December 31, 2006, options to purchase a
total of 4,702,525 ordinary shares under the 2003 Plans were outstanding, and 734,437
shares were exercised.

The
purpose of the 2003 Plans is to enable us to attract and retain qualified persons as
employees, officers, directors, consultants and advisors and to motivate such persons by
providing them with an equity participation in our company. The 2003 Section 102 Plan is
designed to afford qualified optionees certain tax benefits under the Israel Income Tax
Ordinance.

The
2003 Plans are administered by the Compensation/Stock Option Committee appointed by our
board of directors. The Stock Option Committee, comprised of Dr. Meridor, Mr. Benjamini,
Mr. Tamir and Dr. Sarid, has broad discretion, subject to certain limitations, to
determine the persons entitled to receive options, the terms and conditions on which
options or rights to purchase are granted and the number of shares subject thereto. The
Stock Option Committee also has discretion to determine the nature of the consideration to
be paid upon the exercise of an option and/or right to purchase granted under the 2003
Plans. Such consideration generally may consist of cash or, at the discretion of the
Board, cash and a recourse promissory note.

Stock
options issued as incentive stock options pursuant to the 2003 ISO/RSO Plan will only be
granted to the employees (including directors and officers) of our company or its
subsidiaries. The exercise price of incentive stock options issued pursuant to the 2003
ISO/RSO Plan must be at least equal to the fair market value of the ordinary shares as of
the date of the grant (and, in the case of optionees who own more than 10% of the voting
stock, the exercise price must equal at least 110% of the fair market value of the
ordinary shares as of the date of the grant). Unless otherwise provided in an option
agreement, the exercise price per share under options awarded pursuant to the 2003 Plans
shall be the higher of (i) $5.00 per share; and (ii) the fair market value of the shares,
as of the date of the option grant.

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Options
are exercisable and restrictions on disposition of shares lapse according to the terms of
the individual agreements under which such options were granted or shares issued.

In
December 2005, our shareholders adopted a new plan, the 2005 Stock Incentive Plan with a
pool of 1.5 million shares. This plan is designed to enable the board of directors to
determine various forms of incentives for all forms of service providers and, when
necessary, adopt a Sub-plan in order to grant specific incentives. Among the incentives
that may be adopted are share options, performance share awards, performance share unit
awards, restructured shares, restricted share unit awards and other share based awards. To
date, we have granted 50,000 options under this plan.

As
of March 1, 2007, the 13 directors and executive officers listed above, as a group,
held options to purchase 3,244,650 of our ordinary shares at a weighted average exercise
price of $5.91 per share. Out of such options, 1,100 options expirein 2011, 850
expire in 2012, 154,000 options expire in 2013, 3,000 options expire in 2014 and 3,085,500
options expire in 2015.

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

|A. | Major
Shareholders
|-- | ------------------

The
following table sets forth certain information with respect to the beneficial ownership of
our ordinary shares as of March 1 2007 (including options exercisable within 60 days of
March 1, 2007) with respect to: (i) each person who is believed by us to be the beneficial
owner of more than 5% of the ordinary shares; (ii) each director or officer who holds more
than 1% of the ordinary shares, and (iii) all directors and officers as a group. Except
where otherwise indicated, we believe, based on information furnished by the owners, that
the beneficial owners of the ordinary shares listed below have sole investment and voting
power with respect to such shares, subject to any applicable community property laws. The
shareholders listed below do not have any different voting rights from any other
shareholders of our company, except to the extent that they hold more than 7% and as such,
they will have a right to appoint a director, subject to certain conditions in our
Articles of Association. None of the directors, officers or key executives listed in the
Directors and Senior Management table appearing in Item 6 above, owns 1% or more of our
outstanding share capital.

The
information in this table is based on 38,848,252 ordinary shares outstanding as of March
1, 2007. Except where otherwise indicated, we believe, based on information furnished by
the owners, that the beneficial owners of the ordinary shares listed below have sole
investment and voting power with respect to such shares, subject to any applicable
community property laws.

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|Name and Address                                      | Number of
Ordinary
Shares
Beneficially
Owned | Percent of
Ordinary
Shares
Outstanding
|----------------------------------------------------- | -------------------------------------------- | --------------------------------------
|
|
|
|
|York Capital Management(1)(2)                         |                                              |                                       
|Mivtach Shamir Finance Ltd. (3)                       |                                              |                                       
|All officers and directors as a group (13 persons)(4) |                                              |                                       

---

|(1) | Based
on a Schedule 13D filed on December 20, 2006, the shares are directly
          owned by or allocated for the benefit of (i) York Capital Management,
L.P.,           a Delaware limited partnership; (ii) York Investment Limited, a
corporation           established in the Commonwealth of the Bahamas; and (iii) York
Credit           Opportunities Fund, L.P., a Delaware limited partnership. These three
entities           are part of a family of pooled investment vehicles managed by JGD
Management           Corp., a Delaware corporation doing business as York Capital
Management. The           sole shareholder of JGD is James G. Dinan. Dinan Management is
the general           partner of York Capital Management L.P. and James G. Dinan and
Daniel A.           Schwartz are the controlling members of Dinan Management. York
Offshore Limited           is the investment manager of York Investment Limited. The
controlling principal           of York Offshore Limited is James G. Dinan. Daniel A.
Schwartz is a director of           York Offshore Limited. York Credit Opportunities
Domestic Holdings is the           general partner of York Credit Opportunities. James G.
Dinan and Daniel A.           Schwartz are the controlling members of York Credit
Opportunities Domestic           Holdings. The principal business address of each of
these entities and           individuals is c/o York Capital Management, 767 Fifth
Avenue, 17th          Floor, New York, New York, 10153.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In
addition to the shares held by York, Bank Hapoalim provided York with an           option
to purchase 1,000,809 shares at $6.30 per share for a period of two years
          beginning July 2005. York controls the option right but has agreed to
          participate in the upside of the option as follows: 35% to Bank Hapoalim,
16.68%           to Mr. Amiram Levinberg, 11.66% to his brother, Mr. Joshua Levinberg,
21.66% to           two other individuals and 15% remains with York. In addition, York
has a proxy           to vote 2,052,428 shares owned by Bank Hapoalim and an additional
1,250,000           owned by Mivtach Shamir Finance Ltd. until July 18, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based
on a Schedule 13D filed on July 28, 2005. Mr. Meir Shamir           and
Ashtrom Industries Ltd. share voting and dispositive power with respect           to
the shares held by Mivtach Shamir Holdings Ltd. The address of Mivtach
          Shamir Holdings Ltd. is Beit Sharvat, 4 Kaufman St., Tel Aviv 68012,
          Israel.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes
all existing directors and executive officers in possession of options           and/or
shares as of March 1, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------

# Significant Changes in
the Ownership of Major Shareholders

As
of January 1, 2004, our major shareholders were Bank Hapoalim, holding 3,302,428 shares
(approximately 15% ownership), Eliezer Fishman, holding 2,996,259 shares (approximately
13% ownership) and Israel Discount Bank, holding 1,833,518 shares  (approximately 8%
ownership). As of December 31, 2004, our major shareholders were Bank Hapoalim, holding
3,302,428 shares (approximately 15% ownership) and Eliezer Fishman, holding 2,996,259
shares (approximately 10% ownership. As of December 31, 2005, our major shareholders were
Bank Hapoalim, holding 2,052,428 shares (approximately 9% ownership), Eliezer Fishman,
holding 2,112,523 shares (approximately 9% ownership), Mivtach Shamir Finance Ltd.,
holding 2,216,945 shares (approximately 10% ownership), Joseph Harrosh, holding 1,146,274
shares (approximately 9% ownership) and York, holding 3,302,428 shares (approximately 15%
ownership). As of December 31, 2006, our major shareholders were York, holding 8,070,563
shares (approximately 20% ownership), Bank Hapoalim, holding 2,052,428 shares
(approximately 5% ownership) and Mivtach Shamir Finance Ltd., holding 2,216,945 shares
(approximately 6 % ownership).

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# Major Shareholders
Voting Rights

The
voting rights of our major shareholders do not differ from the voting rights of other
holders of our ordinary shares.

# Record Holders

Based
on a review of the information provided to us by our transfer agent, as of March 15,2007, there were 92 holders of record of our ordinary shares, of which 70 record
holders holding approximately 95.3% of our ordinary shares had registered addresses in the
United States and 13 record holders holding approximately 4.66% of our ordinary shares had
registered addresses in Israel. These numbers are not representative of the number of
beneficial holders of our shares nor is it representative of where such beneficial holders
reside since many of these ordinary shares were held of record by brokers or other
nominees, including CEDE & Co., the nominee for the Depositary Company (the central
depositary for the U.S. brokerage community), which held approximately 75% of our
outstanding ordinary shares as of said date.

|B. | Related
Party Transactions.
|-- | ---------------------------

York
Capital Management

In
July 2005, Bank Hapoalim assigned a $71.4 million loan owed by the Company to the bank, to
York Capital Management. In December 2005, we revised the terms of this loan. On
September 27, 2006, York exercised its right to have the Company issue it warrants in
the amount of the loan and accrued interest and immediately exercised its option to
convert the warrants into shares at $6.75 per share. This resulted in the issuance of
approximately 10.6 million ordinary shares to York. In December 2006, York
participated as a selling shareholder in our public offering and sold 3,033,333 ordinary
shares. Please see Item 5: Liquidity and Capital Resources  Financing
Activities.

|C. | Interests
of Experts and Counsel.
|-- | ---------------------------------

Not
applicable.

|ITEM 8: |  | FINANCIAL INFORMATION
|------- |  | ---------------------

# Consolidated Statements

See
Item 18: Financial Statements.

# Export Sales

Our
primary manufacturing facilities are based in Israel. Most of our products are exported
out of Israel. For information on our revenues breakdown for the past three years, see
Item 5: Operating and Financial Review and
Prospects.

# Legal Proceedings

We
are a party to various legal proceedings incident to our business. Except as noted below,
there are no material legal proceedings pending or, to our knowledge, threatened against
us or our subsidiaries, and we are not involved in any legal proceedings that our
management believes, individually or in the aggregate, would have a material adverse
effect on our business, financial condition or operating results.

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In
the first half of 2002, a number of securities class action lawsuits were filed against us
and certain of our officers and directors in the United States District Court for the
Eastern District of New York and in the United States District Court for the Eastern
District of Virginia, and a request to file a class action lawsuit was filed in the
Tel-Aviv, Israel District Court. The class action suits allege violations of the federal
securities laws and claim that we issued material misrepresentations to the market. The
class action suits in the U.S. have been consolidated into a single action in the United
States District Court for the Eastern District of New York and an amended complaint has
been filed In September 2005, the court rendered its decision to dismiss a number of the
claims listed in the complaint. In June, 2006, following a successful mediation, the
parties reached a settlement in the consolidated class action filed in the U.S. The entire
amount due would be covered by the Companys insurance carriers. The settlement
stipulates that the Company does not admit to any wrongdoing, fault or liability. The
Company and the plaintiffs filed the settlement papers with the court on November 13,
2006, and preliminary approval hearings have been held. If the court preliminarily
approves the proposed settlement, plaintiffs will provide notice to the class. After a
period of time in which class members will be given a chance to raise any objections to or
exclude themselves from the proposed settlement, the court will hold a final approval
hearing to determine the fairness of the proposed settlement. We believe that the
allegations against us and our officers and directors are without merit and we intend to
contest them vigorously in any event that the proposed settlement is not concluded
satisfactorily.

The
Israeli court granted a motion to stay the proceedings of the Israeli action pending the
outcome of the U.S. class action proceeding. We believe the allegations against us and our
officers and directors in the class action suits are without merit and are contesting them
vigorously.

In
September 2003, Nova Mobilcom S.A., or Mobilcom, filed a lawsuit against Gilat do Brasil
for specific performance of a Memorandum of Understanding which provided for the sale of
Gilat do Brasil, and specifically the GESAC project, a government education project
awarded to Gilat do Brazil, to Mobilcom for an unspecified amount. Gilat do Brasil does
not believe that this claim has any merit and is vigorously defending itself against the
claims presented therein.

The
Brazilian tax authority has filed a claim against a subsidiary of Spacenet Inc. in Brazil,
for alleged taxes due of approximately $4 million. In January 2004, the subsidiary
received notice of an administrative ruling reducing the amount of the claim, and the
subsidiary filed an appeal of such ruling. In December 2005, this appeal was denied and at
present, the subsidiary faces a payment of taxes in an amount of approximately $6.4
million (the amount has increased due to interest and the exchange rate of the Brazilian
Reias). The subsidiary denies such claims and has filed a petition known as a
Ação Anulatória in the State Courts of the State of
São Paulo, Brazil.

From
time to time, we are notified of claims that we may be infringing patents, copyrights or
other intellectual property rights owned by third parties. While we do not believe we are
currently infringing any intellectual property rights of third parties, we cannot assure
that other companies will not, in the future, pursue claims against us with respect to the
alleged infringement of patents, copyrights or other intellectual property rights owned by
third parties. In addition, litigation may be necessary to protect our intellectual
property rights and trade secrets, to determine the validity of and scope of the propriety
rights of others or to defend against third-party claims of invalidity. Any litigation
could result in substantial costs and diversion of resources and could have a material
adverse effect on our business, financial condition and operating results.

If
any claims or actions are asserted against us, we may seek to obtain a license under a
third partys intellectual property rights. We cannot assure, however, that a license
will be available under terms that are acceptable to us, if at all. The failure to obtain
a license under a patent or intellectual property right from a third party for technology
used by us could cause us to incur substantial liabilities and to suspend the manufacture
of the product covered by the patent or intellectual property right. In addition, we may
be required to redesign our products to eliminate infringement if a license is not
available. Such redesign, if possible, could result in substantial delays in marketing of
products and in significant costs. In addition, should we decide to litigate such claims,
such litigation could be extremely expensive and time consuming and could materially
adversely affect our business, financial condition and operating results, regardless of
the outcome of the litigation.

61

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We
are also a party to various regulatory proceedings incident to our business. To the
knowledge of our management, none of such proceedings is material to us or to our
subsidiaries.

# Dividend Policy

We
have never paid cash dividends on our ordinary shares and cannot anticipate paying any
cash dividends in the foreseeable future. We have decided to reinvest permanently the
amount of tax-exempt income derived from our Approved Enterprises and not to
distribute such income as dividends. See notes 12 and 14 of the notes to consolidated
financial statements included in this annual report on Form 20-F. We may only pay cash
dividends in any fiscal year out of profits, as determined under Israeli law.
In addition, the terms of some of our financing arrangements restrict us from paying
dividends to our shareholders.

In
the event we declare dividends in the future, we will pay those dividends in NIS. Because
exchange rates between NIS and the dollar fluctuate continuously, a U.S. shareholder will
be subject to currency fluctuation between the date when the dividends are declared and
the date the dividends are paid.

Significant
Changes

There
have not been any significant changes since the date of our annual financial statements.

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

|A. | Offer
and Listing Details
|-- | -------------------------

# Annual Stock Information

The
following table sets forth, for the periods indicated, the range of high and low closing
sale price for the ordinary shares, as reported by NASDAQ. All of the reported prices have
been adjusted to reflect a twenty for one share reverse stock split which became effective
April 16, 2003.

|                              | Price | Average Daily Trading Volume
|----------------------------- | ----- | ----------------------------
|
|
|
|
|Year Ended December 31, 2002: |       |                             
|                              |       |                             
|Year Ended December 31, 2003: |       |                             
|                              |       |                             
|Year Ended December 31, 2004: |       |                             
|                              |       |                             
|Year Ended December 31, 2005: |       |                             
|                              |       |                             
|First Quarter                 |       |                             
|Second Quarter                |       |                             
|Third Quarter                 |       |                             
|Fourth Quarter                |       |                             

62

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|                              | Price | Average Daily Trading Volume
|----------------------------- | ----- | ----------------------------
|
|
|
|
|Year Ended December 31, 2006: |       |                             
|                              |       |                             
|First Quarter                 |       |                             
|Second Quarter                |       |                             
|Third Quarter                 |       |                             
|Fourth Quarter                |       |                             
|                              |       |                             
|Most Recent Six Months:       |       |                             
|                              |       |                             
|September 2006                |       |                             
|October 2006                  |       |                             
|November 2006                 |       |                             
|December 2006                 |       |                             
|January 2007                  |       |                             
|February 2007                 |       |                             
|March 2007 (through March 26) |       |                             

|B. | Plan
of Distribution
|-- | --------------------

Not
applicable.

|C. | Markets
|-- | -------

Our
ordinary shares are quoted on the NASDAQ Global Market under the symbol GILT.

|D. | Selling
Shareholders
|-- | --------------------

Not
applicable.

|E. | Dilution
|-- | --------

Not
applicable.

|F. | Expense
of the Issue
|-- | --------------------

Not
applicable.

63

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|ITEM 10: |  | ADDITIONAL INFORMATION
|-------- |  | ----------------------

# Memorandum and Articles
of Association

# Registration and Purposes

Gilat
Satellite Networks Ltd. is an Israeli company registered with the Israel companies register, registration
No. 52-003893-6.

Under
the Companies Law, a company may define its purposes as to engage in any lawful business
and may broaden the scope of its purposes to the grant of reasonable donations for any
proper charitable cause, even if the basis for any such donation is not dependent upon
business considerations. Article 3A of our Articles of Association provides that our
purpose is to engage in any business permitted by law and that we can also grant
reasonable donations for any proper charitable cause.

# Amendment of the
Articles of Association

Under
the Companies Law, a company may amend its articles of association by the affirmative vote
of a majority of the shares voting and present at the general meeting of shareholders or
by a different voting if so provided by the companys articles of association.
Article 3 of our Articles of Association provides that the Articles of Association may be
amended by a resolution approved by holders of a majority of the shares represented at a
general meeting and voting on such resolution, if such amendment is recommended by the
board of directors; in any other case, by a resolution approved by holders of at least 75%
of the shares represented at a general meeting and voting on such resolution.

Israeli
law further provides that any amendment to the articles of association of a company that
obligates a shareholder to acquire additional shares or to increase the extent of his
liability shall not obligate the shareholder without his prior consent.

# Amendment of the
Memorandum

Companies
that were incorporated prior to the effective date of the Companies Law, such as our
company, may amend their memorandum of association to authorize future amendments to the
memorandum of association by any required voting. On November 9, 2000, our shareholders
approved an amendment to our Memorandum of Association, by adding a provision that will
authorize our company to amend its Memorandum of Association by the affirmative vote of a
majority of the ordinary shares present and voting at the meeting.

# Record Date for Notices
of General Meeting and Other Action

Under
the Companies Law, for the purpose of a shareholder vote, the record date for companies
traded outside of Israel, such as our company, can be set between four and twenty-one days
before the date of the meeting (see section 182(b)). Article 20 of our Articles of
Association provides that the board of directors may set in advance a record date, which
shall not be more than forty nor less than four days before the date of such meeting (or
any longer or shorter period permitted by law).

# Notice of General
Meetings; Omission to Give Notice

The
Companies Law provides that a company whose shares are traded on an exchange must give
notice of a general meeting to its shareholders of record at least twenty-one days prior
to the meeting, unless the companys articles provide that a notice need not be sent.
Accordingly, Article 25(a) of our Articles of Association provides that not less than 21
days prior notice shall be given to shareholders of record of every General Meeting
(i.e. Annual General Meetings and Special General Meetings). It further provides that
notice of a General Meeting shall be given in accordance with any law and otherwise as the
board of directors may determine. In addition, Article 25(c) of our Articles of
Association provides that no shareholder present, in person or by proxy, at the
commencement of a General Meeting shall be entitled to seek the revocation of any
proceedings or resolutions adopted at such General Meeting on grounds of any defect in the
notice of such meeting relating to the time or the place thereof.

64

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# Annual General Meetings
and Special General Meetings

Under
the Companies Law, an annual meeting of the shareholders should be held once in every
calendar year and not more than fifteen months from the last annual meeting. The Israeli
Companies Law provides that a special meeting of shareholders must be called by the board
of directors upon the written request of (i) two directors, (ii) one-fourth of the serving
directors, (iii) one or more shareholders who hold(s) at least five percent of the issued
share capital and at least one percent of the voting power of the company, or (iv) one or
more shareholders who have at least five percent of the voting power of the company.
Within twenty one days of receipt of such demand, the board of directors is required to
convene the special meeting for a time not later than thirty five days after notice has
been given to the shareholders. Article 24 of our Articles of Association provide that our
board of directors may call a special meeting of the shareholders at any time and shall be
obligated to call a special meeting as specified above.

# Quorum at General
Meetings

Under
Article 26(b) of our Articles of Association, the required quorum for any general meeting
of shareholders and for any class meeting is two or more shareholders present in person or
by proxy and holding at least twenty five percent (25%) of the issued shares (or of the
issued shares of such class in the event of a class meeting). The required quorum in a
meeting that was adjourned because a quorum was not present, shall be two shareholders
present in person or by proxy. Under Article 26(c) of our Articles of Association, if the
original meeting was called as a special meeting, the quorum in the adjourned meeting
shall be one or more shareholders, present in person or by proxy and holding the number of
shares required to call such a meeting.

# Adoption of Resolutions
at General Meetings

Article
28(b) of our Articles of Association provides for voting by a written ballot only. In
addition, Article 28(c), in accordance with the Companies Law, provides that the
declaration of the Chairman of the Meeting as to the results of a vote is not considered
to be conclusive, but rather prima facie evidence of the fact.

Under
our Articles of Association, any resolution of the shareholders, except a resolution for a
voluntary liquidation of the company and, in certain circumstances, a resolution to amend
our Articles of Association, shall be deemed adopted if approved by the vote of the
holders of a majority of the voting power represented at such meeting in person or by
proxy.

# Voting Power

Article
31 of our Articles of Association provides that every shareholder shall have one vote for
each share held by him of record or, in accordance with the definition of
shareholder in the Companies Law, in his name with an exchange
member and held of record by a nominee company, as such terms are
defined in the Companies Law.

We
do not have cumulative voting provisions for the election of directors or for any other
matter.

# Election and Removal of
Directors

Under
our Articles of Association, the ordinary shares do not have cumulative voting rights in
the election of directors. A director is not required to retire at a certain age and need
not be a shareholder of our company. Under the Companies Law, a person cannot serve as a
director if convicted of certain offenses or been declared bankrupt.

65

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Under
our Articles of Association, our board of directors shall consist of not less than five
and not more than nine directors as shall be determined from time to time by a majority
vote at the general meeting of our shareholders. Unless resolved otherwise, our board of
directors is be comprised of nine directors, if four directors are appointed by beneficial
owners of seven percent or more of our issued and outstanding ordinary shares as set forth
below, or seven directors, if fewer than four directors are appointed by beneficial owners
of seven percent or more of our issued and outstanding ordinary shares as set forth below.

Our
Articles further provide that each beneficial owner of seven percent or more of our issued
and outstanding ordinary shares shall be entitled to appoint, at each annual general
meeting of our shareholders, one member to our board of directors (an Appointed
Director), provided that a total of not more than four Appointed Directors are so
appointed. In the event more than four such qualifying beneficial owners notify us that
they desire to appoint an Appointed Director, only the four shareholders beneficially
owning the greatest number of shares shall each be entitled to appoint an Appointed
Director.

For
the purposes of the preceding paragraph, a beneficial owner of ordinary shares
means any person or entity who, directly or indirectly, has the power to vote, or to
direct the voting of, such ordinary shares. All ordinary shares beneficially owned by a
person or entity, regardless of the form which such beneficial ownership takes, shall be
aggregated in calculating the number of ordinary shares beneficially owned by such person
or entity. All persons and entities that are affiliates (as defined below) of each other
shall be deemed to be one person or entity for the purposes of this definition. For the
purposes of the preceding paragraph, an affiliate means, with respect to any
person or entity, any other person or entity controlling, controlled by, or under common
control with such person or entity. Control shall have the meaning ascribed to
it in the Israeli Securities Law  1968, i.e. the ability to direct the acts of a
company. Any person holding one half or more of the voting power of a company of the right
to appoint directors or to appoint the chief executive officer is presumed to have control
of the company.

The
Articles further stipulate that as a condition to the appointment of an Appointed
Director, any appointing shareholder that delivers to our company a letter of appointment
shall, prior to such delivery, be required to file with the SEC a Schedule 13D, or an
amendment to its Schedule 13D if there is any change in the facts set forth in its
Schedule 13D already on file with the SEC which discloses any such change in its holdings
of ordinary shares, regardless of whether any filing or amendment is required to be filed
under the rules of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder. In addition, any Appointing Shareholder shall be
obligated to notify us in writing of any sale, transfer, assignment or other disposition
of any kind of ordinary shares by such appointing shareholder that results in the
reduction of its beneficial ownership to below the percentage indicated above, immediately
after the occurrence of such disposition of shares but in any event not later than the
earliest of (i) ten (10) days thereafter, or (ii) the next Annual General Meeting. Without
derogating from the foregoing, so long as an Appointed Director serves on the board of
directors, the appointing shareholder which appointed such Appointed Director shall
provide us, upon our written request at any time and from time to time, with reasonable
evidence of its beneficial ownership in the our company.

Under
our Articles of Association, so long as our ordinary shares are listed for trading on
NASDAQ, we may require that any Appointed Director qualify as an independent
director as provided for in the NASDAQ, rules then in effect. In addition, in no
event may a person become an Appointed Director unless such person does not, at the time
of appointment, and did not, within two years prior thereto, engage, directly or
indirectly, in any activity which competes with us, whether as a director, officer,
employee, contractor, consultant, partner or otherwise.

Under
our Articles of Association, the annual general meeting of our shareholders, by the vote
of the holders of a majority of the voting power represented at such meeting in person or
by proxy, will elect the remaining members of the board of directors. At any annual
general meeting at which Appointed Directors are appointed as set forth above, the
calculation of the vote of any beneficial owner who appointed a director pursuant to the
preceding paragraph shall not take into consideration, for the purpose of electing the
remaining directors, ordinary shares constituting seven percent of our issued and
outstanding ordinary shares held by such appointing beneficial owner.

66

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Appointed
Directors, as set forth above, may be removed by our board of directors when the
beneficial ownership of the shareholder who appointed such Appointed Director falls below
seven percent of our ordinary shares. In addition, the office of an Appointed Director
will expire upon the removal of the Appointed Director by the shareholder who appointed
such Appointed Director or when the Appointed Director ceases to qualify as an
independent director as set forth above.

Article
39 of our Articles of Association further provides that the affirmative vote of a majority
of the shares then represented at a general meeting of shareholders shall be entitled to
remove director(s) other than Appointed Directors from office (unless pursuant to
circumstances or events prescribed under the Companies Law), to elect directors instead of
directors so removed or to fill any vacancy, however created, in the board of directors.
Subject to the foregoing and to early resignation or ipso facto termination of office as
provided in Article 42 of our Articles of Association, each director shall serve until the
adjournment of the of the Annual General Meeting next following the Annual General Meeting
or General Meeting at which such director was elected.

Our
directors may, at any time and from time to time, appoint a director to temporarily fill a
vacancy on the board of directors or in addition to their body (subject to the number of
directors in the board of directors as set forth above), except that if the number of
directors then in office constitutes less than a majority of the number provided for
entire board of directors, as set forth above, they may only act in an emergency, or to
fill the vacancy up to the minimum number required to effect corporate action or in order
to call a general meeting for the purpose of electing directors.

# Alternate Directors

See
Item 6: Directors and Senior Management  Alternate Directors.

# External Directors

See Item
6: Directors and Senior Management  External Directors.

# Qualification of
Directors

|Article
40 of our Articles of Association provides that no person shall be disqualified to serve
as a director by reason of him not holding shares in our company or by reason of him
having served as director in the past. Our directors are not subject under the Companies
Law or our Articles of Association to an age limit requirement. Under the Companies Law, a
person cannot serve as a director if he been convicted of certain offenses, unless
specifically authorized by the court, or has been declared bankrupt.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Proceedings of the Board
of Directors

Article
46 of our Articles of Association provides that the board of directors may meet and
adjourn its meetings and otherwise regulate such meetings and proceedings as the directors
think fit. Any director may convene a meeting of the board of directors, upon notice of
not less than 7 days.

Consistent
with the Companies Law,Article 46 of our Articles of Association provides that no
director present at the commencement of a meeting of the board of directors shall be
entitled to seek the revocation of any proceedings or resolutions adopted at such meeting
on account of any defect in the notice of such meeting relating to the time or the place
thereof.

67

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Article
47 of our Articles of Association provides that unless unanimously decided otherwise by
the board of directors, a majority of the directors then in office shall constitute a
quorum for meetings of the board of directors. No business shall be transacted at a
meeting of the board of directors unless the requisite quorum is present.

Our
board of directors may elect directors as a Chairman and a Co-Chairman. The Companies Law
provides that the Chairman of the Board of a company shall have a casting vote in the
event of a tied vote, unless the companys articles of association provides
otherwise. Article 48 of our Articles of Association provides that neither the Chairman
nor the Co-Chairman of the Board shall have a casting or additional vote.

# Borrowing Powers

The
Companies Law authorizes the board of directors of a company, among other things, to
determine the credit limit of the company and to issue bonds. Article 35(b) of our
Articles of Association states that our board of directors may, from time to time, at its
discretion, cause us to borrow or secure the payment of any sum or sums of money, and may
secure or provide for the repayment of such sum or sums in such manner, at such times and
upon such terms and conditions as it deems fit.

# Powers of Chief
Executive Officer

The
Companies Law provides that transactions between a company and its office
holders, which are not extraordinary transactions (as both terms are
defined below), require the approval of the board of directors, unless another manner of
approval is provided by the articles of association. See Item 10: Additional
InformationInterested Parties Transactions. Accordingly, to provide our Chief
Executive Officer flexibility in hiring officers (other than directors), Article 50(b) of
our Articles of Association authorizes our Chief Executive Officer to appoint our officers
and employees (other than directors) and to determine their remuneration as long as the
board of directors did not do so, and provides further that the remuneration of the four
highest salaried personnel of our company shall be approved by either the board of
directors, the Audit Committee or the Compensation Committee.

An
extraordinary transaction is defined in the Companies Law as a transaction
which is not in the companys ordinary course of business, or is not on market terms,
or that may materially affect the companys profitability, assets or liabilities.

An
office holder is defined in the Companies Law as a director, general manager,
chief business manager, deputy general manager, or any other person assuming the
responsibilities of any of the foregoing positions without regard to such persons
title, and any other manager directly subordinate to the general manager.

# Transfer of Shares

Fully
paid ordinary shares are issued in registered form and may be freely transferred pursuant
to the Articles of Association, unless such transfer is restricted or prohibited by
another instrument.

# Acquisition of Shares
Over Certain Thresholds

The
Companies Law provides that an acquisition of shares in our company must be made by means
of a tender offer, if, as a result of the acquisition, the purchaser would become a holder
of twenty five percent or more of the voting rights in our company. This rule does not
apply if there is already another holder of twenty five percent of the voting rights.
Similarly, the Companies Law provides that an acquisition of our shares must be made by
means of a tender offer, if, as a result of the acquisition, the purchaser would become a
holder of forty five percent of the voting rights in t our company, unless there is
another person holding at that time more than fifty percent of the voting rights of our
company.

68

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Regulations
under the Companies Law provide that the Companies Laws tender offer rules do not
apply to a company whose shares are publicly traded either outside of Israel or both in
and outside of Israel if, pursuant to the applicable foreign securities laws and stock
exchange rules, there is a restriction on the acquisition of any level of control of the
company or if the acquisition of any level of control of the company requires the
purchaser to make a tender offer to the public shareholders.

# Repurchase of Shares

The
Companies Law, subject to certain limitations, allows companies under certain
circumstances to repurchase their own shares. Article 10(b) of our Articles of Association
provides that we may at any time, and from time to time, subject to the Companies Law,
purchase back or finance the purchase of any shares or other securities issued by us, in
such manner and under such terms as our board of directors shall determine, whether from
one or more shareholders. Such purchase shall not be deemed a payment of dividends and no
shareholder will have the right to require us to purchase his shares or offer to purchase
shares from any other shareholders.

# Foreign Ownership

Neither
our Articles of Association nor Israeli law restrict in any way the ownership of our
ordinary shares by nonresidents of Israel, or restrict the voting or other rights of
nonresidents of Israel. Notwithstanding, nationals of certain countries that are, or have
been, in a state of war with Israel may not be recognized as owners of ordinary shares,
without a special government permit.

# Mergers

The
Companies Law provides for mergers between Israeli companies, if each party to the
transaction obtains the appropriate approval of its board of directors and shareholders. A
merger is defined in the Companies Law as a transfer of all assets and
liabilities (including conditional, future, known and unknown liabilities) of a target
company to another company, the consequence of which is the dissolution of the target
company in accordance with the provisions of the Companies Law. For purposes of the
shareholder vote of each merging entity, unless a court rules otherwise, the merger
requires the approval of a majority of the shares of that entity that are not held by the
other entity or are not held by any person who holds 25% or more of the shares or the
right to appoint 25% or more of the directors of the other entity. Article 69A of our
Articles of Association provides that a merger requires the approval of the holders of a
majority of the shares voting thereon.

# Distribution of
Dividends and Liquidation Rights

Our
ordinary shares are entitled to the full amount of any cash or share dividend declared, in
proportion to the paid up nominal value of their respective holdings. In the event of
liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of our ordinary shares in proportion to the paid up nominal
value of their respective holdings. Such rights may be affected by the grant of
preferential dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future by the shareholders.

Generally,
pursuant to the Companies Law, the decision to distribute dividends and the amount to be
distributed, whether interim or final, is made by the board of directors. Accordingly,
under Article 52 of our Articles of Association, our board of directors has the authority
to determine the amount and time for payment of interim dividends and final dividends.

Under
the Companies Law, dividends may be paid only out of its net profits for the two years
preceding the distribution of the dividends, calculated in the manner prescribed in the
Companies Law. Pursuant to the Companies Law, in any distribution of dividends, our board
of directors is required to determine that there is no reasonable concern that the
distribution of dividends will prevent us from meeting our existing and foreseeable
obligations as they become due. Our Articles of Association provide that no dividends
shall be paid otherwise than out of our profits and that any such dividend shall carry no
interest. In addition, upon the recommendation of our board of directors, approved by the
shareholders, we may cause dividends to be paid in kind.

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# Modification of Class
Rights

The
rights attached to any class of shares (unless otherwise provided by the terms of issue of
such class), such as voting, dividends and the like, may be modified by the affirmative
vote of a majority of the issued shares of the class at a general meeting of the holders
of the shares of such class.

# Interested Parties
Transactions

The
Companies Law requires that certain transactions, actions and arrangements be approved by
the Audit Committee as well as by our board of directors. In certain circumstances, in
addition to Audit Committee and board of directors approval, approval by our
shareholders at a general meeting is also required. Specifically, the approval of our
Audit Committee, board of directors and shareholders is required with respect to the
following:

| | (1) | a
directors terms of service and employment, including, among other
               things, grant of exemptions, insurance and indemnification;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | extraordinary
transactions (as defined above) with (i) controlling shareholders,                or (ii)
another person or entity in which transaction a controlling shareholder
               has a personal interest, including a private placement which is an
extraordinary                transaction; and
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | the
terms of engagement or employment with a controlling shareholder who is also
               an office holder or an employee of our company.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------

The
approval of our shareholders would be required in addition to the approval of our board of
directors, in (i) any transaction in which the majority of our directors have a personal
interest, and (ii) private offering which includes one of the following: (a) a private
placement of at least 20% of the Companys securities prior to the private offering
when the compensation for such placement is not in cash or in securities which are
registered for public trade, or when the transaction is not in the ordinary course of
business, and that as a result of such private offering the holdings of a shareholder that
holds five percent or more of our outstanding share capital shall increase, or that will
cause any person to become, as a result of the issuance, a holder of more than five
percent of our outstanding share capital; or (b) a private placement of securities that
will cause any person to become a controlling shareholder. (clause 270(5))

For
the purpose of approvals of interested parties transactions, a controlling
shareholder is defined under the Companies Law as: (i) a shareholder having the
ability to direct the acts of the company (for this purpose, any person holding one half
or more of the voting power of the company or of the right to appoint directors or the
Chief Executive Officer is presumed to have control of the company); or (ii) the holder of
twenty five percent or more of the voting rights at the general meeting of the company, if
there is no other person holding more than fifty percent of such rights (for this purpose,
two or more holders having a personal interest in the transaction shall be deemed to be
joint holders).

The
Companies Law requires a special majority of shareholder votes in approving the
transactions with a controlling shareholder referenced in paragraphs (2) and (3) above.
The special majority approval must comply with one of the following: (a) it must include
at least one-third of all of the votes of the shareholders voting at the meeting who do
not have a personal interest in the transaction, or (b) the total number of opposing votes
from amongst the shareholders who do not have a personal interest in the transaction does
not exceed one percent of all of the voting power of the Company.

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The
disclosure provisions of the Companies Law require certain disclosure to be made to our
company in connection with interested parties transactions, as follows:

| |  | an
office holder or a controlling shareholder promptly disclose any direct or indirect
personal interest (excluding personal interest caused by the holding of company shares)
that he may have, and all related information known to him, in connection with any
existing or proposed transaction by our company;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
the event of a private placement that will increase the holdings of any shareholder
holding more than five percent of our outstanding share capital, or that will cause any
person to become, as a result of the issuance, a holder of more than five percent of our
outstanding share capital, or that will cause any person to become, as a result of the
issuance, a controlling shareholder, such shareholder must promptly disclose to us any
personal interest he may have in such private placement; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
of our shareholders voting on any transaction with a controlling shareholder as set forth
above must inform us prior to the voting, or on the proxy card if applicable, of any
personal interest he has in the transaction. The vote of a shareholder who does not
inform us with respect to any such interest shall not be counted.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, a director who has a personal interest in a transaction, except a transaction
with an office holder or in which an office holder has a personal interest but which is
not an extraordinary transaction, may not be present or vote at a meeting of the Audit
Committee or the board of directors, unless a majority of directors in the Audit Committee
or the board of directors, as applicable, have a personal interest in the transaction.

# Exemption,
Indemnification and Insurance of Directors and Officers

The
Companies Law describes the fiduciary duty of an office holder as a duty to act in good
faith and for the benefit of the company, including by refraining from actions in which he
has a conflict of interest or that compete with the companys business, refraining
from exploiting a business opportunity of the company in order to gain a benefit for
himself or for another person, and disclosing to the company any information and documents
which are relevant to the company and that were obtained by him in his or her capacity as
an office holder. The duty of care is defined as an obligation of caution of an office
holder that requires the office holder to act at a level of competence at which a
reasonable office holder would have acted in the same position and under the same
circumstances, including by adopting reasonable means for obtaining information concerning
the profitability of the act brought for his approval.

Under
the Companies Law, a company may not exempt an office holder from liability with respect
to a breach of his fiduciary duty, but may exempt in advance an office holder from his
liability to the company, in whole or in part, with respect to a breach of his duty of
care.

Pursuant
to the Companies Law, a company may indemnify an office holder against a monetary
liability imposed on him by a court, including in settlement or arbitration proceedings,
and against reasonable legal expenses in a civil proceeding or in a criminal proceeding in
which the office holder was found to be innocent or in which he was convicted of an
offense which does not require proof of a criminal intent. The indemnification of an
office holder must be expressly allowed in the articles of association, under which the
company may (i) undertake in advance to indemnify its office holders with respect to
categories of events that can be foreseen at the time of giving such undertaking and up to
an amount determined by the board of directors to be reasonable under the circumstances,
or (ii) provide indemnification retroactively at amounts deemed to be reasonable by the
board of directors.

A
company may also procure insurance of an office holders liability in consequence of
an act performed in the scope of his office, in the following cases: (a) a breach of the
duty of care of such office holder, (b) a breach of the fiduciary duty, only if the office
holder acted in good faith and had reasonable grounds to believe that such act would not
be detrimental to the company, or (c) a monetary obligation imposed on the office holder
for the benefit of another person.

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A
company may not indemnify an office holder against, 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 fiduciary duty 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 duty of care if such breach was done intentionally or
              recklessly;
| | - | --------------------------------------------------------------------------------------------------------------------

| |  | any
act or omission done with the intent to derive an illegal personal gain; or
| | - | -------------------------------------------------------------------------------

| |  | any
fine or penalty levied against the office holder as a result of a criminal offense.
| | - | ---------------------------------------------------------------------------------------

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

Our
Articles of Association allow us to exempt any office holder to the maximum extent
permitted by law, before or after the occurrence giving rise to such exemption. Our
Articles of Association also provide that we may indemnify any office holder, to the
maximum extent permitted by law, against any liabilities he or she may incur in such
capacity, limited with respect (i) to the categories of events that can be foreseen in
advance by our board of directors when authorizing such undertaking and (ii) to the amount
of such indemnification as determined retroactively by our board of directors to be
reasonable in the particular circumstances. Similarly, we may also agree to indemnify an
office holder for past occurrences, whether or not we are obligated under any agreement to
provide such indemnification. We have obtained directors and officers
liability insurance covering our officers and directors and those of our subsidiaries for
certain claims. In addition, as of August 30, 2005, we have provided our directors and
officers with letters providing them with indemnification to the fullest extent permitted
under Israeli law.

Our
Articles of Association also allow us to procure insurance covering any past or present
officer holder against any liability which he or she may incur in such capacity, to the
maximum extent permitted by law. Such insurance may also cover the Company for
indemnifying such office holder.

# ISRAELI TAXATION

The
following is a summary of certain Israeli income tax and capital gains tax consequences
for nonresidents and residents of Israel holding our ordinary shares. The summary is based
on provisions of the Israeli Income Tax Ordinance (new version) and additional and
complementary tax regulations promulgated thereunder, and on administrative and judicial
interpretations, all as currently in effect, and all of which are subject to change
(possibly with retroactive effect) and to differing interpretations. There might be
changes in the tax rates and in the circumstances in which they apply, and other
modifications which might change the tax consequences to you. The summary is intended for
general purposes only, and is not exhaustive of all possible tax considerations. The
discussion is not intended and should not be construed as legal or professional tax advice
and is not exhaustive of all possible tax considerations. This summary does not discuss
all aspects of Israeli income and capital gain taxation that may be applicable to
investors in light of their particular circumstances or to investors who are subject to
special status or treatment under Israeli tax law.

FOR
THE FOREGOING AND OTHER REASONS, YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR REGARDING
THE TAX CONSEQUENCES OF YOUR HOLDINGS. WE ARE NOT MAKING ANY REPRESENTATIONS REGARDING THE
PARTICULAR TAX CONSEQUENCES AS TO ANY HOLDER, NOR IS WE OR OUR ADVISORS RENDERING ANY FORM
OF LEGAL OPINION OR PROFESSIONAL TAX ADVICE AS TO SUCH TAX CONSEQUENCES.

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Generally,
Israeli companies are subject to Corporate Tax on their worldwide income. On
July 25, 2005, the Knesset, Israels Parliament, approved the Law of the Amendment of
the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual
decrease in the corporate tax rate in Israel to the following tax rates: in 2005 
34%, in 2006  31%, in 2007  29%, in 2008  27%, in 2009  26% and in
2010 and thereafter  25%. However, the effective tax rate payable by a company which
derives income from an approved enterprise (as further discussed below) may be
considerably less.

# Tax Consequences to
Nonresidents of Israel

Nonresidents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
These sources of income include passive income such as dividends, royalties and interest,
as well as non-passive income from services rendered in Israel. We are required to
withhold income tax on such payments to non-residents. Israel presently has no estate or
gift tax.

# Capital Gains

Israeli
law imposes a capital gains tax on capital gains derived from the sale of securities and
other Israeli capital assets, including shares in Israeli resident companies, unless a
specific exemption is available or unless a treaty between Israel and the country of the
non-resident provides otherwise. The capital gain or loss amount is equal to the
consideration received by the holder for the shares less the holders tax basis in
the shares. Gains from sales of our ordinary shares will be tax exempt for nonresidents of
Israel if the shares are quoted on the NASDAQ Global Market or listed for trading on a
stock exchange so long as the gains are not derived through a permanent establishment that
the non-resident maintains in Israel.

For
residents of the United States holding less than 10% of our shares at any time in the
twelve months before the sale, under the treaty between Israel and the U.S., capital gains
from the sale of capital assets are generally exempt from Israeli capital gains tax with
respect to the exceptions stated in the treaty.

# Dividends

Nonresidents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
These sources of income may include dividends on our ordinary shares. As of January 1,
2006, income tax on distributions of dividends other than bonus shares (stock dividends)
is at the rate of 20% for dividends paid to an individual or a foreign corporation who is
not a substantial shareholder, 25% for dividends paid to a substantial shareholder, and
15% for dividends generated by an approved enterprise, a different rate is provided in a
treaty between Israel and shareholders country of residence.

Under
the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary
shares who is a U.S. resident will be 20%. However, the maximum tax rate on dividends not
generated by an approved enterprise paid to a US corporation holding at least 10% of our
voting power is 12.5%. For residents of other countries, unless a different rate is
provided in a treaty between Israel and the shareholders country of residence, the
maximum tax on dividends paid that we are required to withhold is 20%. As long as our
shares are listed on a stock exchange, the maximum withholding tax rate will be 20%.

# Interest

Nonresidents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
These sources of income may include passive income, such as interest paid on our
convertible notes. For residents of the United States, under the treaty between Israel and
the U.S., the maximum tax on interest paid to a U.S. resident (as defined in the treaty)
holding our convertible notes that we are required to withhold is 17.5%. For residents of
other countries who are not substantial shareholders, unless a different rate is provided
in a treaty between Israel and the country of residence of such holder of our convertible
notes, the maximum tax that we are required to withhold is 25% on all distributions of
interest. Substantial shareholders may be subject to an increased withholding tax rate, up
to the marginal tax rate.

73

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# Filing of Tax Returns in
Israel

A
nonresident of Israel who receives interest, dividend or royalty income derived from or
accrued in Israel, from which tax was withheld at the source, is generally exempt from the
duty to file tax returns in Israel with respect to such income, provided such income was
not derived from a business conducted in Israel by the taxpayer.

# Tax Consequences to
Residents of Israel

# Capital Gains

Israeli
law imposes a capital gains tax on capital gains derived from the sale of securities and
other Israeli capital assets, including shares by Israeli residents. The capital gain or
loss amount is equal to the consideration received by the holder for the shares less the
holders tax basis in the shares. Under current law, following Amendment 147 to the
Israeli Income Tax Ordinance (Amendment No. 147), effective commencing January
1, 2006, gains from sales of ordinary shares incurred after December 31, 2002, are subject
to 20% capital gains tax (25% for substantial shareholder) for individuals, Israeli
companies that were subject to the Income Tax Law (Inflation Adjustments)  1985 (the
Adjustment Law) prior to the publication of Amendment No. 147 are subject to
capital gains tax at the applicable tax rate in connection with the sale of our ordinary
shares, Israeli companies that were not subject to the Adjustment law prior to the
publication of Amendment No. 147 are subject to capital gain tax at a rate of 25% in
connection with the sale of our ordinary shares. If our ordinary shares were purchased
prior to January 1, 2003, different taxation will apply. Certain withholding obligations
may apply on the sale of our shares.

# Dividends

Dividend
income generated by an Approved Enterprise is subject to income tax at a rate of 15%.
Starting January 1, 2006, the distribution of dividend income generated by other sources,
other than bonus shares (stock dividends), to Israeli residents who purchased our Shares
will generally be subject to income tax at a rate of 20% for individuals (25% for
substantial shareholder) and will be exempt from income tax for corporations. We may be
required to withhold income tax at the maximum rate of up to 25% (0% for Israeli
corporations provided the dividend was paid out of income generated in Israel.) on all
such distributions (15% for dividends generated by an Approved Enterprise).

# Interest

Interest
accrued and paid after January 1, 2006, is generally subject to 20% tax for individuals
(the marginal tax rate for substantial shareholder) and the applicable corporate tax rate
for companies. On all distributions of interest, we may be required to withhold income tax
at a rate of up to the applicable corporate tax rate for companies, and up to the marginal
tax rate for individuals.

# Tax Benefits under the
Law for the Encouragement of Capital Investments (Taxes), 1959

The
Law for the Encouragement of Capital Investments, 1959, as amended (effective as of April
1, 2005), (the Investments Law), provides that a capital investment in
eligible facilities may, upon application to the Investment Center of the Ministry of
Industry, Trade and Labor of the State of Israel, be designated as an approved enterprise.
The Investment Center bases its decision as to whether or not to approve an application,
among other things, on the criteria set forth in the Investments Law and regulations, the
then prevailing policy of the Investment Center, and the specific objectives and financial
criteria of the applicant. Each certificate of approval for an approved enterprise relates
to a specific investment program delineated both by its financial scope, including its
capital sources, and by its physical characteristics, e.g., the equipment to be purchased
and utilized pursuant to the program.

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The
Investments Law provides that an approved enterprise is eligible for tax benefits on
taxable income derived from its approved enterprise programs. The tax benefits under the
Investments Law 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 related to such usage right or
royalties, provided that such income is generated within the approved enterprises
ordinary course of business. If a company has more than one approval or only a portion of
its capital investments are approved, its effective tax rate is in general the result of a
weighted average of the applicable rates. The tax benefits under the Investments Law might
be restricted with respect to income derived from products manufactured outside of Israel.
In addition, the tax benefits available to an approved enterprise are contingent upon the
fulfillment of conditions stipulated in the Investments Law and regulations and the
criteria set forth in the specific certificate of approval, as described above. In the
event that a company does not meet these conditions, it would be required to refund the
amount of tax benefits, plus a consumer price index linkage adjustment and interest.

The
Investments Law also provides that an approved enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved enterprise
program in the first five years of using the equipment.

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 rate, for the benefit period.
This period is ordinarily seven years commencing with the year in which the approved
enterprise first generates taxable income after the commencement of production, and is
limited to 12 years from commencement of production or 14 years from the date of approval,
whichever is earlier (the years limitation).

Should
we derive income from sources other than the approved enterprise during the
relevant period of benefits, such income will be taxable at the regular corporate tax
rates.

Under
certain circumstances (as further detailed below), the benefit period may extend to a
maximum of ten years from the commencement of the benefit period.

A
company may elect to receive an alternative package of benefits. Under the alternative
package of benefits, a companys undistributed income derived from the approved
enterprise will be exempt from corporate tax for a period of between 2 and 10 years from
the first year the company derives taxable income under the program, after the
commencement of production, depending on the geographic location of the approved
enterprise within Israel, and such company will be eligible for a reduced tax rate for the
remainder of the benefits period (but not more than a maximum of 7 to 10 years in total).
The limitation of years, as mentioned above, does not apply to the exemption period.

A
company that has elected the alternative package of benefits, such as us, that
subsequently pays a dividend out of income derived from the approved enterprise(s) during
the tax exemption period will be subject to corporate tax in the year the dividend is
distributed in respect of the gross amount distributed, at the rate which would have been
applicable had the company not elected the alternative package of benefits, (generally
10%-25%, depending on the percentage of the companys ordinary shares held by foreign
shareholders). The dividend recipient is subject to withholding tax at the reduced rate of
15% applicable to dividends from approved enterprises, if the dividend is distributed
during the tax exemption period or within 12 years thereafter. In the event, however, that
the company is qualifies as a Foreign Investors Company, there is no such time
limitation.

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 which,
among others, more than 25% of its share capital, including shareholders loans, 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 10 year benefit
period.

# Foreign
Investors Company

As
specified above, depending on the geographic location of the approved enterprise within
Israel, income derived from the approved enterprise program may be entitled to the
following:

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| |  | Extension
of the benefit period for up to ten years.
| | - | ----------------------------------------------------

| |  | An
additional period of reduced corporate tax liability at rates ranging between 10% and
25%, depending on the level of foreign (i.e., non-Israeli) ownership of shares. Those tax
rates and the related levels of foreign investment are as set forth in the following
table:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Region A

| | Percent of
Foreign
Ownership | Tax
Exemption
Period | Reduced Tax
Period | Rate of
Reduced
Tax
| | ---------------------------- | -------------------- | ------------------ | -------------------
|
|
|
|
| | 0-25%                        | 10 years             | 0 years            | 25                 
| | 25-48.99%                    | 10 years             | 0 years            | 25                 
| | 49-73.99%                    | 10 years             | 0 years            | 20                 
| | 74-89.99%                    | 10 years             | 0 years            | 15                 
| | 90-100%                      | 10 years             | 0 years            | 10                 

Region
B

| | Percent of
Foreign
Ownership | Tax
Exemption
Period | Reduced Tax
Period | Rate of
Reduced
Tax
| | ---------------------------- | -------------------- | ------------------ | -------------------
|
|
|
|
| | 0-25%                        | 6 years              | 1 years            | 25                 
| | 25-48.99%                    | 6 years              | 4 years            | 25                 
| | 49-73.99%                    | 6 years              | 4 years            | 20                 
| | 74-89.99%                    | 6 years              | 4 years            | 15                 
| | 90-100%                      | 6 years              | 4 years            | 10                 

Other Region

| | Percent of
Foreign
Ownership | Tax
Exemption
Period | Reduced Tax
Period | Rate of
Reduced
Tax
| | ---------------------------- | -------------------- | ------------------ | -------------------
|
|
|
|
| | 0-25%                        | 2 years              | 5 years            | 25                 
| | 25-48.99%                    | 2 years              | 8 years            | 25                 
| | 49-73.99%                    | 2 years              | 8 years            | 20                 
| | 74-89.99%                    | 2 years              | 8 years            | 15                 
| | 90-100%                      | 2 years              | 8 years            | 10                 

If
we utilize tax benefits under the law, we will be subject to the other benefits specified
above under Other Region.

Subject
to applicable provisions concerning income under the alternative route, dividends paid by
a company are considered to be attributable to income received from the entire company and
the companys effective tax rate is the result of a weighted average of the various
applicable tax rates, excluding any tax-exempt income. Under the Investments Law, a
company that has elected the alternative route is not obliged to distribute retained
profits, and may generally decide from which years profits to declare dividends.

Currently,
we have nine Approved Enterprise programs under the alternative route of the Investment
Law. The period of benefits for the first six programs has expired and we do not expect
substantial benefits from the other three programs.

# Tax benefits under the
2005 Amendment

On
April 1, 2005, a comprehensive amendment to the investment law came into effect, (the
Amendment). 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.

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However,
a company that was granted benefits according to section 51 of the Investment Law (prior
the amendment) would not be allowed to choose a new tax year as a Year of Election (as
described below) under the new amendment, for a period of 3 years from the companys
previous Year of Commencement under the old investment law.

As
a result of the Amendment, it is no longer necessary for a company to acquire approved
enterprise status in order to receive the tax benefits previously available under the
alternative route, and therefore such companies do not need to apply to the Investment
Center for this purpose. Rather, 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, provided that its facilities meet the criteria
for tax benefits set out by the Amendment, or a Benefited Enterprise. Companies are also
granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their
eligibility for benefits under the Amendment. The Amendment includes provisions attempting
to ensure that a company will not enjoy both Government grants and tax benefits for the
same investment program

Our
company is entitled to enjoy the tax benefits in accordance with the provisions of the
Investment Law prior to its revision, but if our company is granted any new benefits in
the future they will be subject to the provisions of the Amendment. The following
discussion is a summary of the Investment Law prior to its Amendment as well as the
relevant changes contained in the Amendment.

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.

The
Amendment does not apply to benefits included in any certificate of approval that was
granted before the Amendment came into effect, which will remain subject to the provisions
of the Investment Law as they were on the date of such approval.

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, or the Year of Election. If 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 in general the companys effective tax rate
will be the result of a weighted combination of the applicable tax rates. In this case,
the minimum investment required in order to qualify as a Benefited Enterprise is required
to exceed a minimum amount or a certain percentage of the companys production assets
at the end of the year before the expansion.

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

| |  | Similar
to the 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 or 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 grossed up
amount of the dividend that we may distribute. The company is required to withhold tax at
a rate of 15% from any dividends distributed from income derived from the Benefited
Enterprise; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | A
special tax route, which enables companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited
Enterprise. The benefits period is ten years. Upon payment of dividends, the company is
required to withhold tax at a rate of 15% for Israeli residents and at a rate of 4% for
foreign residents.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
we are granted new benefits in the future, we will be subject to the first route.

Generally,
a company that is Abundant in Foreign Investment (as defined in the
Investments Law) 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 aforementioned definition will
take effect retroactively from 2003.

The
Amendment will apply to approved enterprise programs in which the year of election under
the Investments Law is 2004 or later, unless such programs received approval from the
Investment Center on or prior to December 31, 2004, in which case the Amendment provides
that the 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.

As
a result of the Amendment, tax-exempt income generated under the provisions of the
Amendment will be subject to taxes upon distribution or liquidation and we may be required
in the future to record deferred tax liability with respect to such tax-exempt income.

# U.S. TAXATION

The
following discussion is a general summary of certain U.S. federal income tax
considerations applicable to U.S. Holders (as defined below) of ordinary shares, who hold
such ordinary shares as capital assets (generally, property held for investment). This
summary is based on provisions of the U.S. Internal Revenue Code, or the Code, existing
and proposed U.S. Treasury regulations and administrative and judicial interpretations in
effect as of the date of this annual report and the U.S.  Israel Tax Treaty. All of
these authorities are subject to change (possibly with retroactive effect) and to
differing interpretations. In addition, this summary does not discuss non-U.S. tax
implications or U.S. state tax implications, no does it discuss all aspects of U.S.
federal income taxation that may be applicable to investors in light of their particular
circumstances or to investors who are subject to special treatment under U.S. federal
income tax law, including:

| |  | insurance
companies;
| | - | --------------------

| |  | dealers
in stocks or securities;
| | - | --------------------------------

| |  | financial
institutions;
| | - | -----------------------

| |  | tax-exempt
organizations;
| | - | -------------------------

| |  | regulated
investment companies or real estate investment trusts;
| | - | ----------------------------------------------------------------

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| |  | persons
subject to the alternative minimum tax;
| | - | -----------------------------------------------

| |  | persons
who hold ordinary shares through partnerships or other pass-through entities;
| | - | -------------------------------------------------------------------------------------

| |  | persons
holding their shares as part of a straddle or appreciated financial position or as part
              of a  hedging or conversion transaction;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | persons
who acquired their ordinary shares through the exercise or cancellation of employee
              stock options or otherwise as compensation for services;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | non-residents
aliens of the U.S. or persons having a functional currency other than the U.S.
              dollar; or
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | direct,
indirect or constructive owners of 10% or more of the outstanding voting shares of our
              company.
| | - | ---------------------------------------------------------------------------------------------------------------------

If
a partnership or an entity treated as a partnership for U.S. federal income tax purposes
owns ordinary shares, the U.S. federal income tax treatment of a partner in such a
partnership will generally depend upon the status of the partner and the activities of the
partnership. A partnership that owns ordinary shares and the partners in such partnership
should consult their tax advisors about the U.S. federal income tax consequences of
holding and disposing of ordinary shares.

THE
FOLLOWING SUMMARY DOES NOT ADDRESS THE IMPACT OF A U.S. HOLDERS INDIVIDUAL TAX
CIRCUMSTANCES. ACCORDINGLY, EACH U.S. HOLDER IS URGED TO CONSULT HIS OR HER TAX ADVISOR AS
TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF AN INVESTMENT IN THE ORDINARY SHARES,
INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR NON-U.S. TAX LAWS AND POSSIBLE CHANGES
IN THE TAX LAWS.

As
used herein, the term U.S. Holder means a beneficial owner of an ordinary
share who is, for U.S. federal income tax purposes:

| |  | a
citizen or, for U.S. federal income tax purposes, a resident of the United States;
| | - | ------------------------------------------------------------------------------------

| |  | a
corporation created or organized in or under the laws of the United States or any
political               subdivision thereof;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate, the income of which is subject to U.S. federal income taxation regardless of its
              source; or
| | - | --------------------------------------------------------------------------------------------------------------------

| |  | a
trust if (i) (A) a U.S. court is able to exercise primary supervision over the trust's
              administration and (B) one or more U.S. persons have the authority to
control all of the               trust's substantial decisions, or (ii) it has a valid
election in effect under applicable               U.S. Treasury regulations to e treated
as a U.S. person.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Dividends Paid on
Ordinary Shares

Subject
to the discussion of the passive foreign investment company or PFIC rules below, a U.S.
Holder generally will be required to include in gross income as ordinary dividend income
the amount of any distributions paid on the ordinary shares (including the amount of any
Israeli taxes withheld) to the extent that such distributions are paid out of our current
or accumulated earnings and profits as determined for U.S. federal income tax purposes.
Distributions in excess of our earnings and profits as so determined will be applied
against and will reduce the U.S. Holders tax basis in its ordinary shares and, to
the extent they are in excess of such tax basis, will be treated as gain from a sale or
exchange of such ordinary shares. Our dividends will not qualify for the
dividends-received deduction otherwise available to U.S. corporations. In the event that
we pay cash dividends, such dividends will be paid in Israeli currency. Dividends paid in
NIS (including the amount of any Israeli taxes withheld therefrom) will be includible in
the gross income of a U.S. Holder in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the day they are received by the U.S. Holder. Any gain or loss
resulting from currency exchange fluctuations during the period from the date the dividend
is includible in the income of the U.S. Holder to the date such payment is converted into
U.S. dollars generally will be treated as U.S. source ordinary income or loss.

79

---

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Subject
to certain limitations, qualified dividend income received by a non-corporate
taxpayer generally is subject to U.S. federal income tax at a reduced maximum tax rate of
15 percent through December 31, 2010. Dividends received with respect to ordinary shares
should qualify for the 15 percent rate provided that either: (i) we are entitled to
benefits under the income tax treaty between the United States and Israel (the
Treaty); or (ii) the ordinary shares currently are readily tradeable on an
established securities market in the U.S.. We believe that we are entitled to benefits
under the Treaty and that the ordinary shares currently are readily tradable on an
established securities market in the U.S. No assurance can be given that the ordinary
shares will remain readily tradable. The rate reduction does not apply to dividends
received from PFICs, see discussion below, or in respect of certain short-term or hedged
positions in common stock or in certain other situations. The legislation enacting the
reduced tax rate contains special rules for computing the foreign tax credit limitation of
a taxpayer who receives dividends subject to the reduced tax rate, see discussion below.
U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect
of these rules in their particular circumstances.

Subject
to complex limitations, any Israeli withholding tax imposed on dividends paid by us will
be a foreign income tax eligible for credit against a U.S. Holders U.S. federal
income tax liability (or, alternatively, for deduction against income in determining such
tax liability). The limitations set out in the Code include computational rules under
which foreign tax credits allowable with respect to specific classes of income cannot
exceed the U.S. federal income taxes otherwise payable with respect to each such class of
income. Dividends generally will be treated as foreign-source passive category income or,
in the case of certain U.S. Holders, general category income for United States foreign tax
credit purposes. Further, there are special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends subject to a reduced tax, see discussion
above. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income
tax withheld from dividends received on the ordinary shares to the extent such U.S. Holder
has not held the ordinary shares for at least 16 days of the 31-day period beginning on
the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is
under an obligation to make related payments with respect to 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. The rules relating to the determination of the foreign tax
credit are complex, and you should consult with your personal tax advisors to determine
whether and to what extent you would be entitled to this credit.

# Sale or Disposition of
Ordinary Shares

Subject
to the discussion of passive foreign investment company rules below, upon the sale or
other disposition of ordinary shares, a U.S. Holder generally will recognize capital gain
or loss equal to the difference between the amount realized on the disposition and such
holders adjusted tax basis in the ordinary shares disposed of. Gain or loss upon the
disposition of ordinary shares will be long-term capital gain or loss if, at the time of
the disposition, the U.S. Holders holding period for the ordinary shares disposed of
exceeds one year. In general, any gain that you recognize on the sale or other disposition
of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation;
losses will generally be allocated against U.S. source income. Deduction of capital losses
is subject to certain limitations under the Code.

In
the case of a cash basis U.S. Holder who receives NIS in connection with the sale or
disposition of ordinary shares, the amount realized will be based on the U.S. dollar value
of the NIS received with respect to the ordinary shares as determined on the settlement
date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into
United States dollars at a conversion rate other than the rate in effect on the settlement
date may have a foreign currency exchange gain or loss that would be treated as ordinary
income or loss.

80

---

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An
accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers
with respect to a sale or disposition of ordinary shares, provided that the election is
applied consistently from year to year. Such election may not be changed without the
consent of the Internal Revenue Service, or the IRS. In the event that an accrual basis
U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the
Treasury regulations applicable to foreign currency transactions), such U.S. Holder may
have a foreign currency gain or loss for U.S. federal income tax purposes because of
differences between the U.S. dollar value of the currency received prevailing on the trade
date and the settlement date. Any such currency gain or loss would be treated as ordinary
income or loss and would be in addition to gain or loss, if any, recognized by such U.S.
Holder on the sale or disposition of such ordinary shares.

# Passive Foreign
Investment Company

For
U.S. federal income tax purposes, we will be considered a PFIC for any taxable year in
which either (i) 75% or more of its gross income is passive income, or (ii) at least 50%
of the average value of all of its assets for the taxable year produce or are held for the
production of passive income. For this purpose, passive income includes dividends,
interest, royalties, rents, annuities and the excess of gains over losses from the
disposition of assets which produce passive income. If we were determined to be a PFIC for
U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning
ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the
application of such rules.

Based
on our current and projected income, assets and activities, we believe that we are not
currently a PFIC. However, because the determination of whether we are a PFIC is based
upon the composition of our income and assets from time to time, there can be no
assurances that we will not become a PFIC for any future taxable year.

If
we were treated as a PFIC for any taxable year, dividends would not qualify for the
reduced maximum tax rate, discussed above, and, unless you elect either to treat your
investment in ordinary shares as an investment in a qualified electing fund,
or a QEF election, or to mark-to-market your ordinary shares, as described
below:

| |  | you
would be required to allocate income recognized upon receiving certain dividends or gain
recognized upon the disposition of ordinary shares ratably over the holding period for
such ordinary shares,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
amount allocated to each year during which we are considered a PFIC and subsequent years,
other than the year of the dividend payment or disposition, would be subject to tax at
the highest individual or corporate tax rate, as the case may be, in effect for that year
and an interest charge would be imposed with respect to the resulting tax liability
allocated to each such year,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
amount allocated to the current taxable year and any taxable year before we became a PFIC
would be taxable as ordinary income in the current year, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | you
would be required to make an annual return on IRS Form 8621 regarding distributions
received with respect to ordinary shares and any gain realized on your ordinary shares.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
you make either a timely QEF election or a timely mark-to-market election in respect of
your ordinary shares, you would not be subject to the rules described above. If you make a
timely QEF election, you would be required to include in your income for each taxable year
your pro rata share of our ordinary earnings as ordinary income and your pro rata share of
our net capital gain as long-term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we comply with
certain applicable information reporting requirements.

Alternatively,
if the ordinary shares are considered marketable stock and if you elect to
mark-to-market your ordinary shares, you will generally include in income any
excess of the fair market value of the ordinary shares at the close of each tax year over
your adjusted basis in the ordinary shares. If the fair market value of the ordinary
shares had depreciated below your adjusted basis at the close of the tax year, you may
generally deduct the excess of the adjusted basis of the ordinary shares over its fair
market value at that time. However, such deductions generally would be limited to the net
mark-to-market gains, if any, that you included in income with respect to such ordinary
shares in prior years. Income recognized and deductions allowed under the mark-to-market
provisions, as well as any gain or loss on the disposition of ordinary shares with respect
to which the mark-to-market election is made, is generally treated as ordinary income or
loss.

81

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# Backup Withholding and
Information Reporting

Payments
in respect of ordinary shares may be subject to information reporting to the U.S. Internal
Revenue Service and to U.S. backup withholding tax at a rate equal to the fourth lowest
income tax rate applicable to individuals (which, under current law, is 28%). Backup
withholding will not apply, however, if you (i) are a corporation or come within certain
exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct
taxpayer identification number and make any other required certification.

Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules
may be credited against a U.S. Holders U.S. tax liability, and a U.S. Holder may
obtain a refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.

Any
U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject
to certain additional United States information reporting requirements.

# Documents on Display

We
are subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, as applicable to foreign private issuers as defined in Rule 3b-4
under the Exchange Act, and in accordance therewith, we are required to file annual and
interim reports and other information with the Securities and Exchange Commission.

As
a foreign private issuer, we are exempt from certain provisions of the Exchange Act.
Accordingly, our proxy solicitations are not subject to the disclosure and procedural
requirements of Regulation 14A under the Exchange Act, transactions in our equity
securities by our officers and directors are exempt from reporting as are the
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. We make our Securities and Exchange Commission filings electronically and they are
available on the Securities and Exchange Commissions website. We began filing
through the EDGAR system beginning in November 2002. We are not required under the
Exchange Act to file periodic reports and financial statements as frequently or as
promptly as United States companies whose securities are registered under the Exchange
Act. However, we will distribute annually to our shareholders an annual report containing
financial statements that have been examined and reported on, with an opinion expressed by
an independent public accounting firm.

This
annual report and the exhibits thereto and any other document that we have to file
pursuant to the Exchange Act may be inspected without charge and copied at prescribed
rates at the Securities and Exchange Commission public reference room at 450 Fifth Street,
N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549. You may obtain information on
the operation of the Securities and Exchange Commissions public reference room in
Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330 and
may obtain copies of our filings from the public reference room by calling (202) 942-8090.

Information
about us is also available on our website at http://www.gilat.com. Information on
our website is not part of this annual report.

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

The
table below details the balance sheet exposure by currency and interest rates:

82

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|                                                                          | Expected Maturity Dates
|------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Assets:                                                                   |                        
|                                                                          |                        
|Restricted cash - in U.S. dollars                                         |                        
|Weighted interest rate                                                    |                        
|In other currency:                                                        |                        
|Weighted interest rate                                                    |                        
|                                                                          |                        
|Restricted cash held by Trustees     In U.S. dollars:                     |                        
|Weighted interest rate                                                    |                        
|In other currency                                                         |                        
|Weighted interest rate                                                    |                        
|                                                                          |                        
|Liabilities:                                                              |                        
|                                                                          |                        
|Short-term bank credit    In U.S. dollars:                                |                        
|Weighted interest rate                                                    |                        
|                                                                          |                        
|Long-term loans  (including
     current maturities)     In U.S. dollars: |                        
|Weighted interest rate                                                    |                        
|In other currency:                                                        |                        
|Weighted interest rate                                                    |                        
|                                                                          |                        
|Converted subordinated notes - in     U.S. dollars:                       |                        
|Weighted interest rate                                                    |                        

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

Not
Applicable.

PART II

|ITEM 13: | DEFAULTS,
DIVIDENDS, ARREARAGES AND DELINQUENCIES
|-------- | -------------------------------------------------

Not
Applicable.

83

---

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

Not
Applicable.

|ITEM 15: | CONTROLS
AND PROCEDURES
|-------- | -----------------------

Not
Applicable.

|ITEM 15T: | CONTROLS
AND PROCEDURES
|--------- | -----------------------

Disclosure
Controls and Procedures

We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in its Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is accumulated and
communicated to our chief executive officer and chief financial officer to allow timely
decisions regarding required disclosure. Our management, including our chief executive
officer and chief financial officer, conducted an evaluation of our disclosure controls
and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period
covered by this Annual Report on Form 20-F. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such date, our
disclosure controls and procedures were effective.

Managements
Annual Report on Internal Control over Financial Reporting

Our
management, including our chief executive officer and chief financial officer, is
responsible for establishing and maintaining adequate internal control over financial
reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal
control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally
accepted in the United States. Internal control over financial reporting includes those
policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of our
assets, (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that the our receipts and expenditures are being made only in
accordance with appropriate authorizations; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of our
assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become ineffective because of changes in
conditions or that the degree of compliance with the policies or procedures may
deteriorate.

Our
chief executive officer and chief financial officer assessed the effectiveness of our
internal control over financial reporting as of the end of the period covered by
this annual report. Their assessment included an evaluation of the design of our internal
control over financial reporting, testing of the operational effectiveness of our
internal control over financial reporting and an evaluation of the entity level controls
of our company. Based on their assessment, our chief executive officer and chief financial
officer believe that, as of such date, we maintained effective internal control over
financial reporting.

This
annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements report
was not subject to attestation by our independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that permit us to
provide only managements report in this annual report.

84

---

---



Changes
in Internal Control over Financial Reporting

There
was no change in our internal controls over financial reporting that occurred during the
period covered by this annual report that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.

# PART III

|ITEM 16: | RESERVED
|-------- | --------

|ITEM 16A: | AUDIT
COMMITTEE FINANCIAL EXPERT
|--------- | --------------------------------

Our
board of directors has determined that Dr. Meridor and Dr. Sarid meet the definition of an
audit committee financial expert, as defined in Item 401 of Regulation S-K.

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

We
have adopted a Code of Ethics for executive and financial officers, that also applies to
all of our employees. The Code of Ethics is publicly available on our website at
www.gilat.com. Written copies are available upon request. If we make any substantive
amendments to the Code of Ethics or grant any waivers, including any implicit waiver, from
a provision of this code to our chief executive officer, principal financial officer or
corporate controller, we will disclose the nature of such amendment or waiver on our
website.

|ITEM 16C: | PRINCIPAL
ACCOUNTING FEES AND SERVICES
|--------- | --------------------------------------

# Fees Billed by
Independent Auditors

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

|                  | Year Ended December 31,
|----------------- | -----------------------
|
|
|
|
|Audit (1)         |                        
|Audit-related (2) |                        
|Tax (3)           |                        
|Total             |                        

(1)    
          Audit fees consist of services that would normally be provided in connection
          with statutory and regulatory filings or engagements, including services that
          generally only the independent accountant can reasonably provide.

(2)    
          Audit-related fees relate to assurance and associated services that
          traditionally are performed by the independent auditor, including: accounting
          consultation and consultation concerning financial accounting and reporting
          standards.

(3)    
          Tax fees relate to tax compliance, planning and advice.

85

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# Policies and Procedures

Our
Audit Committee has adopted a policy and procedures for the approval of audit and
non-audit services rendered by our independent auditors, Kost Forer Gabbay & Kasierer,
a Member of Ernst & Young Global. The policy generally requires the Audit
Committees approval of the scope of the engagement of our independent auditor or on
an individual engagement basis. 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 REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE
|--------- | --------------------------------------------------------------------------

Not
applicable.

|ITEM 16E. | PURCHASE
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND PURCHASERS
|--------- | -------------------------------------------------------------------------

# Issuer Purchase of
Equity Securities

In
the year ended December 31, 2006, we did not engage in the purchase of any of our own
shares.

|ITEM 17: | FINANCIAL
STATEMENTS
|-------- | --------------------

Not
applicable.

|ITEM 18: | FINANCIAL
STATEMENTS
|-------- | --------------------

The Consolidated Financial Statements
and related notes required by this item are contained on pages F-1 through F-51 hereof.

| |                                                            |     
| | ---------------------------------------------------------- | ----
|
|
|
|
| | Index to Consolidated Financial Statements                 | PAGE
| | Reports of Independent Registered Public Accounting Firm   | F-2 
| | Consolidated Balance Sheets                                | F-3 
| | Consolidated Statements of Operations                      | F-5 
| | Consolidated Statements of Changes in Shareholders' Equity | F-6 
| | Consolidated Statements of Cash Flows                      | F-8 
| | Notes to Consolidated Financial Statements                 | F-11

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

|1.1 |  | Memorandum
of Association, as amended. Previously filed as Exhibit 1.1 to our Annual Report on
         Form 20-F for the fiscal year ending December 31, 2000, which Exhibit is
incorporated herein by          reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Articles
of Association, as amended and restated. Previously filed as Exhibit 1.2 to our Annual
         Report on Form 20-F for the fiscal year ending December 31, 2005, which Exhibit
is incorporated          herein by reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.1 |  | Form
of 4.00% Convertible Subordinated Note due 2012.  Previously filed as Exhibit T3C to our
         Registration Statement on Form F-3 (No.333-38667) which Exhibit is incorporated
herein by          reference  4.1. Sublease and Master Deed of Lease dated as of March
28, 2001 by and among BP          III Leasco, LLC as Sublessor, BP Tysons, LLC as
Landlord and Spacenet Real Estate Holdings, LLC          as Sublessee and Master Tenant.
Previously filed as Exhibit 4.7 to our Annual Report on Form          20-F for the fiscal
year ending December 31, 2000, which Exhibit is incorporated herein by          reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

86

---

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|8.1 |  | List
of subsidiaries.
|--- |  | ---------------------

|10.1 |  | Consent
Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
|---- |  | -----------------------------------------------------------------------

|10.2 |  | Consent
of Mayer Hoffman McCann P.C.
|---- |  | ------------------------------------

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

|12.2 |  | Certification
by Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act
         of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------

|13.1 |  | Certification
by Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of
         2002.
|---- |  | ------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
by Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act
         of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------

87

---

---



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

| |  | GILAT SATELLITE NETWORKS LTD.By: /s/ Amiram Levinberg
Amiram LevinbergChairman of the Board of Directors
| |  | ----------------------------------------------------------------------------------------------------------------------

Date:
   March 28, 2007

88

---

---



GILAT SATELLITE NETWORKS LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006

IN U.S. DOLLARS

INDEX

|                                                           |  |                
|---------------------------------------------------------- |  | ---------------
|                                                           |  | Page           
|                                                           |  |                
|                                                           |  |                
|Report of Independent Registered Public Accounting Firm    |  | F  2          
|                                                           |  |                
|Consolidated Balance Sheets                                |  | F  3  F  4  
|                                                           |  |                
|Consolidated Statements of Operations                      |  | F  5          
|                                                           |  |                
|Consolidated Statements of Changes in Shareholders Equity |  | F  6  F  7  
|                                                           |  |                
|Consolidated Statements of Cash Flows                      |  | F  8  F  10 
|                                                           |  |                
|Notes to Consolidated Financial Statements                 |  | F  11  F  51



---

---

---



(ERNST & YOUNG LOGO)

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

GILAT SATELLITE NETWORKS LTD.

We
have audited the accompanying consolidated balance sheets of Gilat Satellite
Networks Ltd. (the Company) and its subsidiaries as of December 31, 2006 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, 2006. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
StarBand Inc. a wholly owned subsidiary, which statements reflect total assets
of approximately 3.0% as of December 31, 2005, and total revenues of
approximately 12.5% and 11.7% for the years ended December 31, 2005 and 2004, respectively, of the
related consolidated totals. Those statements were audited by other auditors,
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for StarBand Inc., is based solely on the report of the
other auditors.

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 purpose 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.

In
our opinion, based on our audits and the report of other auditors, 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, 2006 and 2005, and the consolidated results of
their operations and cash flows, for each of the three years in the period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.

As discussed
in note 2v to the consolidated financial statements, in 2006, the Company
adopted Statement of Financial Accounting Standards Board No. 123 (revised
2004) share-based payment.

|                    |                                 
|------------------- | --------------------------------
|Tel-Aviv,
  Israel  | KOST FORER GABBAY & KASIERER    
|February 12,
  2007 | A Member of Ernst & Young Global

F  2

---

---



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

|                                                                                               |  |              |         |      |   |         | 
|---------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | 
|                                                                                               |  | December 31, |        
|                                                                                               |  |              |        
|                                                                                               |  | 2006         |         | 2005 |  
|                                                                                               |  |              |         |      |  
|                                                                                              
|ASSETS                                                                                         |  |              |         |      |   |         | 
|                                                                                               |  |              |         |      |   |         | 
|CURRENT ASSETS:                                                                                |  |              |         |      |   |         | 
|Cash and cash equivalents                                                                      |  | $            | 149,545 |      | $ | 74,929  | 
|Short-term bank deposits                                                                       |  |              | -       |      |   | 3,301   | 
|Short-term restricted cash                                                                     |  |              | 5,137   |      |   | 15,844  | 
|Restricted cash held by
trustees                                                               |  |              | 7,113   |      |   | 6,638   | 
|Trade receivables (net of allowance for
  doubtful accounts: 2006 - $ 12,709; 2005 - $ 12,311) |  |              | 29,612  |      |   | 33,683  | 
|Inventories                                                                                    |  |              | 26,368  |      |   | 23,253  | 
|Other current assets                                                                           |  |              | 40,428  |      |   | 27,215  | 
|                                                                                               |  |              |         |      |   |         | 
|                                                                                               |  |              |         |      |   |         | 
|Total current
  assets                                                                         |  |              | 258,203 |      |   | 184,863 | 
|                                                                                               |  |              |         |      |   |         | 
|                                                                                               |  |              |         |      |   |         | 
|LONG-TERM INVESTMENTS AND RECEIVABLES:                                                         |  |              |         |      |   |         | 
|Severance pay fund                                                                             |  |              | 10,534  |      |   | 8,467   | 
|Long-term restricted cash                                                                      |  |              | 6,337   |      |   | 6,699   | 
|Long-term restricted cash held by
trustees                                                     |  |              | 15,646  |      |   | 13,692  | 
|Long-term trade receivables,
receivables in
  respect of capital leases and other receivables  |  |              | 19,241  |      |   | 22,757  | 
|                                                                                               |  |              |         |      |   |         | 
|                                                                                               |  |              |         |      |   |         | 
|Total long-term
  investments and receivables                                                  |  |              | 51,758  |      |   | 51,615  | 
|                                                                                               |  |              |         |      |   |         | 
|                                                                                               |  |              |         |      |   |         | 
|PROPERTY AND EQUIPMENT, NET                                                                    |  |              | 121,366 |      |   | 124,245 | 
|                                                                                               |  |              |         |      |   |         | 
|                                                                                               |  |              |         |      |   |         | 
|INTANGIBLE ASSETS AND DEFERRED CHARGES, NET                                                    |  |              | 8,887   |      |   | 12,254  | 
|                                                                                               |  |              |         |      |   |         | 
|                                                                                               |  |              |         |      |   |         | 
|Total assets                                                                                   |  | $            | 440,214 |      | $ | 372,977 | 
|                                                                                               |  |              |         |      |   |         | 

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

F  3

---

---



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

|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | ---- | - | -------- | -
|                                                                                                                                                                                                                     |  | December 31, |         
|                                                                                                                                                                                                                     |  |              |         
|                                                                                                                                                                                                                     |  | 2006         |          | 2005 |  
|                                                                                                                                                                                                                     |  |              |          |      |  
|                                                                                                                                                                                                                    
|LIABILITIES AND SHAREHOLDERS
EQUITY                                                                                                                                                                                 |  |              |          |      |   |          |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                                                                 |  |              |          |      |   |          |  
|Short-term bank credit                                                                                                                                                                                               |  | $            | 1,200    |      | $ | 8,172    |  
|Current maturities of long-term
loans                                                                                                                                                                                |  |              | 6,537    |      |   | 7,712    |  
|Trade payables                                                                                                                                                                                                       |  |              | 21,258   |      |   | 24,180   |  
|Accrued expenses *)                                                                                                                                                                                                  |  |              | 21,400   |      |   | 22,418   |  
|Short-term advances from customer,
held by
  trustees                                                                                                                                                                |  |              | 15,045   |      |   | 15,502   |  
|Other accounts payable                                                                                                                                                                                               |  |              | 72,129   |      |   | 36,672   |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|Total current
  liabilities                                                                                                                                                                                          |  |              | 137,569  |      |   | 114,656  |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                               |  |              |          |      |   |          |  
|Long-term loans, net                                                                                                                                                                                                 |  |              | 22,318   |      |   | 29,143   |  
|Long-term convertible loan from a
related
  party, net                                                                                                                                                               |  |              | -        |      |   | 66,602   |  
|Long-term advances from customer, held
by
  trustees                                                                                                                                                                 |  |              | 16,863   |      |   | 27,835   |  
|Accrued severance pay                                                                                                                                                                                                |  |              | 10,640   |      |   | 8,396    |  
|Accrued interest related to
restructured
  debt                                                                                                                                                                      |  |              | 3,147    |      |   | 3,850    |  
|Convertible subordinated
notes                                                                                                                                                                                       |  |              | 16,333   |      |   | 16,333   |  
|Other long-term liabilities                                                                                                                                                                                          |  |              | 21,285   |      |   | 20,664   |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|Total long-term
  liabilities                                                                                                                                                                                        |  |              | 90,586   |      |   | 172,823  |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                        |  |              |          |      |   |          |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|SHAREHOLDERS EQUITY :                                                                                                                                                                                               |  |              |          |      |   |          |  
|Share capital -                                                                                                                                                                                                      |  |              |          |      |   |          |  
|Ordinary shares of NIS
0.2
  par value: Authorized - 60,000,000 shares as of December 31, 2006 and 2005; Issued
and
  outstanding -38,820,352 and 22,556,298
  shares as of December 31, 2006 and 2005, respectively |  |              | 1,757    |      |   | 995      |  
|Additional paid-in capital                                                                                                                                                                                           |  |              | 853,350  |      |   | 738,724  |  
|Accumulated other comprehensive
income                                                                                                                                                                               |  |              | 702      |      |   | 16       |  
|Accumulated deficit                                                                                                                                                                                                  |  |              | (643,750 | )    |   | (654,237 | )
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|Total
  shareholders equity                                                                                                                                                                                         |  |              | 212,059  |      |   | 85,498   |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  
|Total liabilities
  and shareholders equity                                                                                                                                                                         |  | $            | 440,214  |      | $ | 372,977  |  
|                                                                                                                                                                                                                     |  |              |          |      |   |          |  

|   |                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------
|*) | Includes
  accrued expenses of $ 0 and $ 2,684, from transactions with related parties as of
  December 31, 2006 and 2005, respectively.

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

F  4

---

---



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

|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                                         |  | Year ended December 31, |           
|                                                                                                         |  |                         |           
|                                                                                                         |  | 2006                    |            | 2005 |   | 2004       |  
|                                                                                                         |  |                         |            |      |   |            |  
|Revenues:                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Products *)                                                                                              |  | $                       | 126,093    |      | $ | 88,705     |   | $ | 100,122    |  
|Services *)                                                                                              |  |                         | 122,617    |      |   | 120,690    |   |   | 141,376    |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Total revenues                                                                                           |  |                         | 248,710    |      |   | 209,395    |   |   | 241,498    |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Cost of revenues:                                                                                        |  |                         |            |      |   |            |   |   |            |  
|Products *)                                                                                              |  |                         | 66,363     |      |   | 42,896     |   |   | 50,703     |  
|Services *)                                                                                              |  |                         | 91,982     |      |   | 90,323     |   |   | 113,692    |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Total cost of revenues                                                                                   |  |                         | 158,345    |      |   | 133,219    |   |   | 164,395    |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Gross profit                                                                                             |  |                         | 90,365     |      |   | 76,176     |   |   | 77,103     |  
|Operating expenses:                                                                                      |  |                         |            |      |   |            |   |   |            |  
|Research and development expenses, net
  *)                                                              |  |                         | 13,642     |      |   | 13,994     |   |   | 13,879     |  
|Selling and marketing expenses
*)                                                                        |  |                         | 36,475     |      |   | 31,329     |   |   | 33,282     |  
|General and administrative expenses
*)                                                                   |  |                         | 26,800     |      |   | 29,465     |   |   | 36,364     |  
|Impairment of tangible and intangible
  assets                                                           |  |                         | -          |      |   | -          |   |   | 2,161      |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Operating income (loss)                                                                                  |  |                         | 13,448     |      |   | 1,388      |   |   | (8,583     | )
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Financial expenses, net *)                                                                               |  |                         | 742        |      |   | 2,677      |   |   | 266        |  
|Other income (expenses)                                                                                  |  |                         | 138        |      |   | 299        |   |   | (274       | )
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Income (loss) before taxes on income                                                                     |  |                         | 12,844     |      |   | (990       | ) |   | (9,123     | )
|Taxes on income                                                                                          |  |                         | 2,357      |      |   | 3,126      |   |   | 4,429      |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Income (loss) after taxes on income                                                                      |  |                         | 10,487     |      |   | (4,116     | ) |   | (13,552    | )
|Equity in earnings of affiliated
  companies                                                             |  |                         | -          |      |   | 400        |   |   | 1,242      |  
|Minority interest in losses of a
  subsidiary                                                            |  |                         | -          |      |   | -          |   |   | 164        |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Income (loss) before cumulative effect
  of a change in an accounting
  principle                        |  |                         | 10,487     |      |   | (3,716     | ) |   | (12,146    | )
|Gain from cumulative effect of a change
  in an accounting principle                                     |  |                         |            |      |   | -          |   |   | 611        |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Net income (loss)                                                                                        |  | $                       | 10,487     |      | $ | (3,716     | ) | $ | (11,535    | )
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Net earnings (loss) per share before
  cumulative effect of a change in an
  accounting principle:       |  |                         |            |      |   |            |   |   |            |  
|Basic                                                                                                    |  | $                       | 0.41       |      | $ | (0.17      | ) | $ | (0.55      | )
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Diluted                                                                                                  |  | $                       | 0.38       |      | $ | (0.17      | ) | $ | (0.55      | )
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Basic and diluted net earnings per
  share from cumulative effect of a change in an accounting principle |  | $                       | -          |      | $ | -          |   | $ | 0.03       |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Net earnings (loss) per share:                                                                           |  |                         |            |      |   |            |   |   |            |  
|Basic                                                                                                    |  | $                       | 0.41       |      | $ | (0.17      | ) | $ | (0.52      | )
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Diluted                                                                                                  |  | $                       | 0.38       |      | $ | (0.17      | ) | $ | (0.52      | )
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Weighted average number of shares used
  in computing net earnings (loss) per share:                     |  |                         |            |      |   |            |   |   |            |  
|Basic                                                                                                    |  |                         | 25,799,077 |      |   | 22,439,551 |   |   | 22,241,907 |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  
|Diluted                                                                                                  |  |                         | 27,519,726 |      |   | 22,439,551 |   |   | 22,241,907 |  
|                                                                                                         |  |                         |            |      |   |            |   |   |            |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*) | Includes the
  following income (expenses) resulting from transactions with related parties
  for the years ended December 31, 2006, 2005 and 2004: revenues from products
  $ 0, $ 1,205 and $ 2,336, respectively; revenues from services - $ 0, $ 416 and
  $ 528, respectively; cost of services - $ 0, $ (8,349) and $ (16,802),
  respectively; research and development expenses, net - $ 0, $ (1,543) and
  $ $ (2,917), respectively; Selling and marketing expenses - $ 0, $ 468 and $ 156,
  respectively; General and administrative expenses - $ 0, $ (983) and $ (798),
  respectively ; financial expenses - $ (3,772), $ (3,759) and $ (1,786),
  respectively.

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

F  5

---

---



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

|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------------------------- | ------ | ------------ | - | ------------------------ |  | --------------------------------- | ------- | ------------------ | - | ------------------------------- | - | ------------------------ | -------- | - | - | ------- | - | - | ------- | -
|                                                                                           |  | Number ofOrdinaryshares(in thousands) |        | Sharecapital |   | Additionalpaid-incapital |  | Accumulatedothercomprehensiveloss |         | Accumulateddeficit |   | Totalcomprehensiveincome (loss) |   | Totalshareholdersequity |         
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |         
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|Balance as of January 1, 2004                                                              |  |                                       | 22,225 |              | $ | 980                      |  | $                                 | 718,225 |                    | $ | (3,818                          | ) | $                        | (638,986 | ) |   |         |   | $ | 76,401  |  
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|Exercise of options, net                                                                   |  |                                       | 87     |              |   | 4                        |  |                                   | 428     |                    |   | -                               |   |                          | -        |   |   |         |   |   | 432     |  
|Stock compensation related to purchased options in
a subsidiary                            |  |                                       | -      |              |   | -                        |  |                                   | (764    | )                  |   | -                               |   |                          | -        |   |   |         |   |   | (764    | )
|Stock compensation related to options issued to a
consultant                               |  |                                       | -      |              |   | -                        |  |                                   | 207     |                    |   | -                               |   |                          | -        |   |   |         |   |   | 207     |  
|Gain from extinguishment of Bank Hapoalim
loan                                             |  |                                       | -      |              |   | -                        |  |                                   | 15,486  |                    |   | -                               |   |                          | -        |   |   |         |   |   | 15,486  |  
|Foreign currency translation adjustments from the
disposal of a
  subsidiary               |  |                                       | -      |              |   | -                        |  |                                   | -       |                    |   | 3,428                           |   |                          | -        |   | $ | 3,428   |   |   | 3,428   |  
|Comprehensive loss - foreign currency translation
adjustments                              |  |                                       | -      |              |   | -                        |  |                                   | -       |                    |   | (2,234                          | ) |                          | -        |   |   | (2,234  | ) |   | (2,234  | )
|Net loss                                                                                   |  |                                       | -      |              |   | -                        |  |                                   | -       |                    |   | -                               |   |                          | (11,535  | ) |   | (11,535 | ) |   | (11,535 | )
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|Total comprehensive loss                                                                   |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   | $ | (10,341 | ) |   |         |  
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|Balance as of December 31, 2004                                                            |  |                                       | 22,312 |              |   | 984                      |  |                                   | 733,582 |                    |   | (2,624                          | ) |                          | (650,521 | ) |   |         |   |   | 81,421  |  
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|Exercise of options, net                                                                   |  |                                       | 244    |              |   | 11                       |  |                                   | 1,207   |                    |   | -                               |   |                          | -        |   |   |         |   |   | 1,218   |  
|Stock compensation related to options                                                      |  |                                       | -      |              |   | -                        |  |                                   | 137     |                    |   | -                               |   |                          | -        |   |   |         |   |   | 137     |  
|Fair value of change in conversion feature of a
related party
  long-term convertible loan |  |                                       | -      |              |   | -                        |  |                                   | 3,798   |                    |   | -                               |   |                          | -        |   |   |         |   |   | 3,798   |  
|Foreign currency translation adjustments from the
disposal of a
  subsidiary               |  |                                       | -      |              |   | -                        |  |                                   | -       |                    |   | 1,714                           |   |                          | -        |   | $ | 1,714   |   |   | 1,714   |  
|Comprehensive income - foreign currency translation
adjustments                            |  |                                       | -      |              |   | -                        |  |                                   | -       |                    |   | 926                             |   |                          | -        |   |   | 926     |   |   | 926     |  
|Net loss                                                                                   |  |                                       | -      |              |   | -                        |  |                                   | -       |                    |   | -                               |   |                          | (3,716   | ) |   | (3,716  | ) |   | (3,716  | )
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|Total comprehensive loss                                                                   |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   | $ | (1,076  | ) |   |         |  
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  
|Balance as of December 31, 2005                                                            |  |                                       | 22,556 |              | $ | 995                      |  | $                                 | 738,724 |                    | $ | 16                              |   | $                        | (654,237 | ) |   |         |   | $ | 85,498  |  
|                                                                                           |  |                                       |        |              |   |                          |  |                                   |         |                    |   |                                 |   |                          |          |   |   |         |   |   |         |  

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

F  6

---

---



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

|                                                                           |  |                                       |        |              |   |                          |  |                                     |         |                    |   |                          |  |                          |          |   |   |        |  |   |         | 
|-------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ------------ | - | ------------------------ |  | ----------------------------------- | ------- | ------------------ | - | ------------------------ |  | ------------------------ | -------- | - | - | ------ |  | - | ------- | 
|                                                                           |  | Number ofOrdinaryshares(in thousands) |        | Sharecapital |   | Additionalpaid-incapital |  | Accumulatedothercomprehensiveincome |         | Accumulateddeficit |   | Totalcomprehensiveincome |  | Totalshareholdersequity |         
|                                                                           |  |                                       |        |              |   |                          |  |                                     |         |                    |   |                          |  |                          |         
|                                                                           |  |                                       |        |              |   |                          |  |                                     |         |                    |   |                          |  |                          |         
|Balance as of December 31, 2005                                            |  |                                       | 22,556 |              | $ | 995                      |  | $                                   | 738,724 |                    | $ | 16                       |  | $                        | (654,237 | ) |   |        |  | $ | 85,498  | 
|                                                                           |  |                                       |        |              |   |                          |  |                                     |         |                    |   |                          |  |                          |          |   |   |        |  |   |         | 
|Exercise of options, net                                                   |  |                                       | 669    |              |   | 30                       |  |                                     | 3,604   |                    |   | -                        |  |                          | -        |   |   |        |  |   | 3,634   | 
|Stock compensation related to employees stock
options                      |  |                                       | -      |              |   | -                        |  |                                     | 3,757   |                    |   | -                        |  |                          | -        |   |   |        |  |   | 3,757   | 
|Conversion of long-term convertible loan from a
related party              |  |                                       | 10,578 |              |   | 492                      |  |                                     | 67,619  |                    |   | -                        |  |                          | -        |   |   |        |  |   | 68,111  | 
|Issuance of shares in a public offering, net of
$2,755 issuance
  expenses |  |                                       | 5,017  |              |   | 240                      |  |                                     | 39,646  |                    |   | -                        |  |                          | -        |   |   |        |  |   | 39,886  | 
|Comprehensive income - foreign currency translation
adjustments            |  |                                       | -      |              |   | -                        |  |                                     | -       |                    |   | 686                      |  |                          |          |   | $ | 686    |  |   | 686     | 
|Net income                                                                 |  |                                       | -      |              |   | -                        |  |                                     | -       |                    |   | -                        |  |                          | 10,487   |   |   | 10,487 |  |   | 10,487  | 
|                                                                           |  |                                       |        |              |   |                          |  |                                     |         |                    |   |                          |  |                          |          |   |   |        |  |   |         | 
|Total comprehensive income                                                 |  |                                       |        |              |   |                          |  |                                     |         |                    |   |                          |  |                          |          |   | $ | 11,173 |  |   |         | 
|                                                                           |  |                                       |        |              |   |                          |  |                                     |         |                    |   |                          |  |                          |          |   |   |        |  |   |         | 
|Balance as of December 31, 2006                                            |  |                                       | 38,820 |              | $ | 1,757                    |  | $                                   | 853,350 |                    | $ | 702                      |  | $                        | (643,750 | ) |   |        |  | $ | 212,059 | 
|                                                                           |  |                                       |        |              |   |                          |  |                                     |         |                    |   |                          |  |                          |          |   |   |        |  |   |         | 

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

F  7

---

---



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

|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                          |  | Year ended December 31, |        
|                                                                                                          |  |                         |        
|                                                                                                          |  | 2006                    |         | 2005 |   | 2004    |  
|                                                                                                          |  |                         |         |      |   |         |  
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Cash flows from operating activities:                                                                     |  |                         |         |      |   |         |   |   |         |  
|Net income (loss)                                                                                         |  | $                       | 10,487  |      | $ | (3,716  | ) | $ | (11,535 | )
|Adjustments required to reconcile net income (loss) to net cash
  provided by operating activities:       |  |                         |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                                             |  |                         | 20,728  |      |   | 19,116  |   |   | 31,674  |  
|Non cash cumulative effect relating to a subsidiary                                                       |  |                         | -       |      |   | -       |   |   | (198    | )
|Loss (gain) from disposal of subsidiaries (b)                                                             |  |                         | (137    | )    |   | (397    | ) |   | 192     |  
|Loss from deconsolidation of subsidiaries (a)                                                             |  |                         | -       |      |   | 171     |   |   | -       |  
|Stock compensation relating to options                                                                    |  |                         | 3,757   |      |   | 137     |   |   | 207     |  
|Stock compensation related to option in a subsidiary                                                      |  |                         | -       |      |   | -       |   |   | (764    | )
|Accretion of discount                                                                                     |  |                         | 504     |      |   | -       |   |   | -       |  
|Impairment of property and equipment and other tangible
assets                                            |  |                         | -       |      |   | -       |   |   | 2,161   |  
|Equity in earnings of affiliated company                                                                  |  |                         | -       |      |   | (400    | ) |   | (1,242  | )
|Accrued severance pay, net                                                                                |  |                         | 177     |      |   | (309    | ) |   | 431     |  
|Interest accrued on short and long-term restricted cash                                                   |  |                         | (896    | )    |   | (490    | ) |   | (1,943  | )
|Exchange rate differences on long-term loans                                                              |  |                         | 705     |      |   | (973    | ) |   | 449     |  
|Exchange rate differences on loans to employees                                                           |  |                         | (223    | )    |   | 213     |   |   | -       |  
|Minority interest in losses of a subsidiary                                                               |  |                         | -       |      |   | -       |   |   | (164    | )
|Capital loss from disposal of property and equipment                                                      |  |                         | 57      |      |   | 315     |   |   | -       |  
|Deferred tax liabilities                                                                                  |  |                         | (1,131  | )    |   | (473    | ) |   | 1,869   |  
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Decrease (increase) in trade receivables, net                                                             |  |                         | 4,120   |      |   | (2,440  | ) |   | 7,970   |  
|Increase in inventories                                                                                   |  |                         | (11,846 | )    |   | (5,188  | ) |   | (6,048  | )
|Decrease (increase) in other assets (including short-term, long-term
  and deferred charges)              |  |                         | (6,258  | )    |   | 6,711   |   |   | 11,649  |  
|Increase (decrease) in trade payables                                                                     |  |                         | (3,000  | )    |   | 2,941   |   |   | (5,330  | )
|Decrease in accrued expenses                                                                              |  |                         | (1,049  | )    |   | (4,652  | ) |   | (11,637 | )
|Increase (decrease) in advances from customer, held by trustees,
net                                      |  |                         | (11,430 | )    |   | (10,388 | ) |   | 14,207  |  
|Increase (decrease) in other accounts payable and other long-term
  liabilities, mainly deferred revenues |  |                         | 33,259  |      |   | 3,112   |   |   | (1,427  | )
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Net cash provided by operating activities                                                                 |  |                         | 37,824  |      |   | 3,290   |   |   | 30,521  |  
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                                     |  |                         |         |      |   |         |   |   |         |  
|Purchase of property and equipment                                                                        |  |                         | (6,519  | )    |   | (3,605  | ) |   | (6,163  | )
|Return on investment                                                                                      |  |                         | -       |      |   | 388     |   |   | -       |  
|Purchase of minority shares of a subsidiary                                                               |  |                         | -       |      |   | -       |   |   | (1,053  | )
|Disposal of subsidiary consolidated in previous periods
(a)                                               |  |                         | -       |      |   | (181    | ) |   | -       |  
|Disposal of subsidiary consolidated in previous periods
(b)                                               |  |                         | 137     |      |   | 397     |   |   | 600     |  
|Consolidation of a subsidiary (c)                                                                         |  |                         | -       |      |   | -       |   |   | 2,592   |  
|Investment in short-term bank deposits                                                                    |  |                         | -       |      |   | (3,301  | ) |   | (442    | )
|Proceeds from short-term bank deposits                                                                    |  |                         | 3,300   |      |   | -       |   |   | 442     |  
|Proceeds from sale and disposal of property and equipment                                                 |  |                         | 1,577   |      |   | 34      |   |   | -       |  
|Loans to employees, net                                                                                   |  |                         | 284     |      |   | (3,606  | ) |   | -       |  
|Investment in restricted cash (including long-term)                                                       |  |                         | (5,191  | )    |   | (13,759 | ) |   | (11,187 | )
|Proceeds from restricted cash (including long-term)                                                       |  |                         | 16,263  |      |   | 13,007  |   |   | 9,840   |  
|Investment in restricted cash held by trustees                                                            |  |                         | (3,520  | )    |   | (3,305  | ) |   | (23,501 | )
|Proceeds from restricted cash held by trustees                                                            |  |                         | 1,987   |      |   | 13,078  |   |   | 22,486  |  
|Investment in other assets                                                                                |  |                         | (6      | )    |   | (40     | ) |   | (78     | )
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  
|Net cash provided by (used in) investing activities                                                       |  | $                       | 8,312   |      | $ | (893    | ) | $ | (6,464  | )
|                                                                                                          |  |                         |         |      |   |         |   |   |         |  

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

F  8

---

---



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

|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|-------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ----------------------- | ------- | ------ | - | ------ | ----- | - | ------ | ------ | 
|                                                               |                                                                                                          | Year ended December 31, |        
|                                                               |                                                                                                          |                         |        
|                                                               |                                                                                                          | 2006                    |         | 2005   |   | 2004   |      
|                                                               |                                                                                                          |                         |         |        |   |        |      
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|Cash flows from financing activities:                          |                                                                                                          |                         |         |        |   |        |       |   |        |       
|Exercise of stock options, net                                 |                                                                                                          | $                       | 3,634   |        | $ | 1,218  |       | $ | 432    |       
|Issuance of shares, net of issuance
  expenses                 |                                                                                                          |                         | 40,210  |        |   | -      |       |   | -      |       
|Short-term bank credit, net                                    |                                                                                                          |                         | (6,972  | )      |   | 4,013  |       |   | 2,389  |       
|Repayments of long-term loans                                  |                                                                                                          |                         | (8,703  | )      |   | (7,823 | )     |   | (2,924 | )     
|Repayments of long-term convertible loan                       |                                                                                                          |                         | -       |        |   | (1,000 | )     |   | -      |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|Net cash provided by (used in) financing
  activities          |                                                                                                          |                         | 28,169  |        |   | (3,592 | )     |   | (103   | )     
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|Effect of exchange rate changes on cash and
  cash equivalents |                                                                                                          |                         | 311     |        |   | 353    |       |   | 36     |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|Increase (decrease) in cash and cash
  equivalents             |                                                                                                          |                         | 74,616  |        |   | (842   | )     |   | 23,990 |       
|Cash and cash equivalents at the beginning
  of the year       |                                                                                                          |                         | 74,929  |        |   | 75,771 |       |   | 51,781 |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|Cash and cash equivalents at the end of the
  year             |                                                                                                          | $                       | 149,545 |        | $ | 74,929 |       | $ | 75,771 |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|Supplementary cash flow activities:                            |                                                                                                          |                         |         |        |   |        |       |   |        |       
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |       
|(1)                                                            | Cash paid during the year for:                                                                           |                         |         |        |   |        |       |   |        |        | 
|                                                               | Interest                                                                                                 |                         | $       | 7,769  |   | $      | 6,196 |   | $      | 4,365  | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               | Income taxes                                                                                             |                         | $       | 787    |   | $      | 6,491 |   | $      | 1,276  | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|(2)                                                            | Non-cash transactions:                                                                                   |                         |         |        |   |        |       |   |        |        | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               | Conversion of long-term convertible loan
  from a related party                                          |                         | $       | 68,111 |   | $      | -     |   | $      | -      | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               | Classification between property and
  equipment and inventories                                          |                         | $       | 8,823  |   | $      | 5,263 |   | $      | 21,366 | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               | Purchase of property and equipment by
  assumption of loan                                               |                         | $       | 1,753  |   | $      | -     |   | $      | -      | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               | Issuance expense payable                                                                                 |                         | $       | 324    |   | $      | -     |   | $      | -      | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 
|                                                               | Gain from extinguishment of Bank Hapoalim
  loan - classified as additional paid-in capital (see Note 8) |                         | $       | -      |   | $      | -     |   | $      | 15,486 | 
|                                                               |                                                                                                          |                         |         |        |   |        |       |   |        |        | 

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

F  9

---

---



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

|    |                                                                        |  |                                  |      |  
|--- | ---------------------------------------------------------------------- |  | -------------------------------- | ---- | -
|    |                                                                        |  | Year ended
  December 31,
  2005 |     
|    |                                                                        |  |                                  |     
|(a) | Disposal of
  subsidiary consolidated in previous periods :            |  |                                  |      |  
|    |                                                                        |  |                                  |      |  
|    | Assets and
  liabilities of the subsidiary at date of deconsolidation: |  |                                  |      |  
|    |                                                                        |  |                                  |      |  
|    | Working capital (excluding cash and cash
  equivalents)                |  | $                                | (52  | )
|    | Property and equipment, net                                            |  |                                  | 42   |  
|    | Loss on disposal                                                       |  |                                  | (171 | )
|    |                                                                        |  |                                  |      |  
|    |                                                                        |  |                                  |      |  
|    |                                                                        |  | $                                | (181 | )
|    |                                                                        |  |                                  |      |  

|    |                                                                          |  |                         |     |      |   |      |  |   |      |  
|--- | ------------------------------------------------------------------------ |  | ----------------------- | --- | ---- | - | ---- |  | - | ---- | -
|    |                                                                          |  | Year ended December 31, |    
|    |                                                                          |  |                         |    
|    |                                                                          |  | 2006                    |     | 2005 |   | 2004 | 
|    |                                                                          |  |                         |     |      |   |      | 
|(b) | Disposal of
  subsidiaries consolidated in previous periods :            |  |                         |     |      |   |      |  |   |      |  
|    |                                                                          |  |                         |     |      |   |      |  |   |      |  
|    | Assets and
  liabilities of the subsidiaries at date of deconsolidation: |  |                         |     |      |   |      |  |   |      |  
|    |                                                                          |  |                         |     |      |   |      |  |   |      |  
|    | Working capital (excluding cash and cash
  equivalents)                  |  | $                       | -   |      | $ | -    |  | $ | 792  |  
|    | Gain (loss) on disposal of subsidiaries                                  |  | $                       | 137 |      | $ | 397  |  | $ | (192 | )
|    |                                                                          |  |                         |     |      |   |      |  |   |      |  
|    |                                                                          |  |                         |     |      |   |      |  |   |      |  
|    |                                                                          |  | $                       | 137 |      | $ | 397  |  | $ | 600  |  
|    |                                                                          |  |                         |     |      |   |      |  |   |      |  

|    |                                                                               |  |                                  |         |  
|--- | ----------------------------------------------------------------------------- |  | -------------------------------- | ------- | -
|    |                                                                               |  | Year ended
  December 31,
  2004 |        
|    |                                                                               |  |                                  |        
|(c) | Consolidation
  of a subsidiary :                                             |  |                                  |         |  
|    |                                                                               |  |                                  |         |  
|    | Assets and
  liabilities of a subsidiary at date of consolidation:            |  |                                  |         |  
|    |                                                                               |  |                                  |         |  
|    | Non-cash assets and liabilities
  consolidated                                |  | $                                | 3,431   |  
|    | Negative goodwill                                                             |  |                                  | 11,564  |  
|    | Property and equipment, net and deferred
  charges                            |  |                                  | (13,325 | )
|    | Other long-term liabilities                                                   |  |                                  | 922     |  
|    |                                                                               |  |                                  |         |  
|    |                                                                               |  |                                  |         |  
|    | Net cash and
  cash equivalents included in the consolidation of a subsidiary |  | $                                | 2,592   |  
|    |                                                                               |  |                                  |         |  

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

F  10

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|NOTE 1:    | GENERAL
|            |        
|            | a.      | Organization:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |         | Gilat
  Satellite Networks Ltd. (the Company or Gilat) and its subsidiaries (the
  Group) is a leading global provider of Internet Protocol, or IP, based
  digital satellite communication and networking products and services. The
  Company designs, produces and markets VSATs, or very small aperture
  terminals, and related VSAT network equipment. VSATs are earth based
  terminals that transmit and receive broadband, Internet, voice, data and
  video via satellite. VSAT networks combine a large central earth station,
  called a hub, with multiple remote sites (ranging from tens to thousands of
  sites), which communicate via satellite.                                                                
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |         | The Company
  currently operates three complementary, vertically integrated business units:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |        | Gilat
  Network Systems, (GNS), is a provider of VSAT-based networks and associated
  professional services, including turnkey and management services, to telecom
  operators worldwide.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |        | Spacenet
  Inc. provides satellite network services to enterprises, small office/home
  office (SOHOs) and residential customers in the U.S.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |        | Spacenet
  Rural Communications, (SRC), provides telephony, Internet and data services
  primarily for rural communities in emerging markets in Latin America under
  projects that are subsidized by government entities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |         | Gilat was
  incorporated in Israel in 1987 and launched its first generation VSAT in
  1989. For a description of principal markets and customers, see note 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | b.      | York Capital
  Management LP (York):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |         | In July
  2005, Bank Hapoalim, an Israeli bank, assigned its loan to the Company to
  York. The loan included the right to convert the aggregate amount of the loan
  plus accrued interest into the Companys ordinary shares. At that time, Bank
  Hapoalim also provided York with an option to purchase 1,000,809 of the Companys
  shares held by the bank at $ 6.30 per share for a period of two years. In
  addition, York was given a proxy to vote all 2,052,428 shares owned by Bank
  Hapoalim and an additional 1,250,000 shares owned by Mivtach Shamir Finance
  Ltd. until July 18, 2007. Following the above, York became a related party of
  the Company.                                                           
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |         | In December
  2005, the Company revised the terms of the loan that was assigned by Bank
  Hapoalim to York. Under the amendment, York agreed to defer $19,350 of
  principal payments due and established a new payment schedule. In
  consideration, the Company agreed to reduce the exercise price of the warrant
  issuable to York (assigned by Bank Hapoalim) to $6.75 per share for the
  period ending September 30, 2006. In addition, during that period, the
  Company was granted the right to require the conversion of the outstanding
  loan from York at $6.75 per share under certain circumstances. Beginning
  October 1, 2006, the exercise price of the warrant was to revert to the
  original terms (see note 8).

F  11

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)                                                                                                                                             
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                              | On September
  27, 2006, York converted its entire loan and accrued interest into warrants
  and immediately exercised its option to convert the warrants into shares at
  $ 6.75 per share. This resulted in the issuance of approximately 10,600,000 of
  the Companys ordinary shares to York.                                                                                                                                                                                                                                                           
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                              | Based on Interpretation
  1 of Opinion 26 and EITF No. 85-17, Accrued Interest upon Conversion of
  Convertible Debt, the net carrying amount of the convertible debt and
  accrued interest unpaid, including the unamortized discount, in the total
  amount of $ 68,100 was credited to shareholders equity upon conversion.                                                                                                                                                                                                                           
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | c.                                                                                                                                                           | Issuance of
  ordinary shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                              | In December,
  2006, the Company consummated a public offering of 8,050,000 of its ordinary
  shares at a price of $8.50 per share. Of such shares, 5,016,667 ordinary shares
  were sold by the Company and the remaining shares were sold by a selling
  shareholder, see also note 7.                                                                                                                                                                                                                                                                     
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                             
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | The
  consolidated financial statements have been prepared in accordance with
  generally accepted accounting principles in the United States (U.S. GAAP).
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | a.                                                                                                                                                           | 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.                                                                                                                                                                                                                                                     
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | b.                                                                                                                                                           | Financial
  statements in U.S. dollars:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                              | The majority
  of the revenues of the Company and certain of its subsidiaries are generated
  in U.S. dollars (dollar) or linked to the dollar. In addition, a
  substantial portion of the Companys and certain of its subsidiaries costs
  are incurred in dollars. The Companys management believes that the dollar is
  the primary currency of the economic environment in which the Company and
  certain of its subsidiaries operate. Thus, the functional and reporting
  currency of the Company and certain of its subsidiaries is the dollar.
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                              | Accordingly,
  monetary accounts maintained in currencies other than the dollar are
  remeasured into dollars in accordance with SFAS No. 52, Foreign Currency
  Translation. All transaction gains and losses of the remeasurement of
  monetary balance sheet items are reflected in the consolidated statements of
  operations as financial income or expenses, as appropriate.                                                                                                                                                                        
|            |                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                              | The
  financial statements of foreign subsidiaries, whose functional currency has
  been determined to be their local currency, have been translated into
  dollars. Assets and liabilities have been translated using the exchange rates in
  effect at the balance sheet date. Statements of operations amounts have been
  translated using a specific exchange rate for each transaction. The resulting
  translation adjustments are reported as a component of shareholders equity
  in accumulated other comprehensive income (loss).                

F  12

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | c.                                      | Principles
  of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | The
  consolidated financial statements include the accounts of the Company and its
  wholly owned subsidiaries. The accounts for Variable Interest Entities
  (VIEs), as prescribed by FASB Interpretation No. 46, Consolidation of Variable Interest
  Entities and related interpretations, are included in the consolidated
  financial statements. Intercompany balances and transactions,
  including profits from intercompany sales not yet realized outside the Group,
  have been eliminated upon consolidation.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | d.                                      | Cash
  equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | Cash
  equivalents are short-term highly liquid investments that are not restricted
  as to withdrawals or use with maturities of three months or less at the date
  acquired.                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | e.                                      | Short-term
  restricted cash:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | Short-term
  restricted cash is primarily invested in certificates of deposit, which
  mature within one year. As of December 31, 2006, 93% of the total amount is linked to the dollar and 7% of the total
  amount is linked to the other currencies. It is used as collateral for the
  lease of the Groups offices and performance guarantees to customers and
  loans and bears weighted average interest of 5.02% and 3.56% in 2006 and
  2005, respectively.                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | f.                                      | Restricted
  cash held by trustees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | Short-term
  and long-term restricted cash held by trustees is primarily invested in
  certificates of deposits. As of year end, 94% of the
  total amount is linked to the dollar and6% of the
  total amount is linked to the Colombian Peso. The amounts held by trustees
  bear interest at rates of4.6% and5.9%, respectively, and are released based upon
performance
  milestones as stipulated in the Groups agreements with the government of
  Colombia.                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | g.                                      | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | Inventories
  are stated at the lower of cost or market value. Inventory write-offs are
  provided to cover risks arising from slow-moving items, excess inventories,
  discontinued products, new products introduction and for market prices lower
  than cost. Any write-off is recognized in the consolidated statement of
  operations as cost of revenues.                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | Cost is
  determined as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | Raw
  materials, parts and supplies - with the addition of allocable indirect
  manufacturing costs using the average cost method.                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         | Work-in-progress
  - represents the cost of manufacturing with the addition of allocable
  indirect manufacturing costs, using the average cost method.                                                                                                                                                                                                                                                                                                                                                                       

F  13

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | Finished
  products - calculated on the basis of direct manufacturing costs with the
  addition of allocable indirect manufacturing costs, using the average cost
  method.                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | h.                                      | Long-term
  restricted cash:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | Long-term
  restricted cash is primarily invested in certificates of deposit, which
  mature in more than one year. As of December 31, 2006, 92% of the total amount is linked to the dollar and 8% of the
  total amount is linked to the other currencies. It bears an annual weighted
  average interest rate of 4.94% and 3.63% as of December 31, 2006 and 2005,
  respectively. This long-term restricted cash is used as collateral for the
  lease of the Groups offices, a sale and lease back transaction and
  performance guarantees to customers and loans.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | i.                                      | Investment
  in affiliated companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | In these
  consolidated financial statements, affiliated companies are companies in which
  the Group holds 20% or greater equity interest (which are not subsidiaries)
  and where the Group can exercise significant influence over operating and
  financial policies of the affiliate. The investment in affiliated companies
  is accounted for by the equity method. Profits on intercompany sales, not
  realized outside the Group, were eliminated.                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | The Groups
  investments in affiliates are reviewed for impairment, in accordance with APB
  18, whenever events or changes in circumstances indicate that the carrying
  amount of an investment may not be recoverable.                                                                                                                                                                                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | j.                                      | Investment
  in other companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | The
  investment in these companies is stated at cost, since the Group does not
  have the ability to exercise significant influence over operating and financial
  policies of the investments.                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | The Groups
  investments in other companies are reviewed for impairment whenever events or
  changes in circumstances indicate that the carrying amount of an investment
  may not be recoverable in accordance with APB 18. Any impairment loss is
  recognized in the consolidated statement of operations.                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | k.                                      | Long-term
  trade receivables:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         | Long-term
  receivables from long-term payment agreements are recorded at estimated
  present values determined based on current rates of interest and reported at
  the net amounts in the accompanying consolidated financial statements.
  Imputed interest is recognized, using the effective interest method, as a
  component of financial income (expenses) in the statments of operations.                                                                                                                                                                       

F  14

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                           
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | l.                                      | Property and
  equipment, net:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Property and
  equipment are stated at cost, net of accumulated depreciation. Depreciation
  is calculated by the straight-line method over the estimated useful lives of
  the assets as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | Years                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                           
|            |                                         | Buildings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 50                                                                                        
|            |                                         | Computers
  and electronic equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 3 - 8                                                                                     
|            |                                         | Office
  furniture and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 5 - 17                                                                                    
|            |                                         | Vehicles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 5 - 7                                                                                     
|            |                                         | Leasehold
  improvements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Over the term of the lease or the useful life of the improvements,
  whichever is shorter.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Equipment
  leased to others under operating leases is carried at cost less accumulated
  depreciation and depreciated using the straight-line method over the useful
  life of the assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | During the
  year ended December 31, 2006, no such impairment loss was recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | m.                                      | Intangible
  assets and deferred charges:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Intangible
  assets subject to amortization are stated at amortized cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The assets
  are amortized using the straight-line method over their estimated useful
  lives, which are five to fifteen years, in accordance with Statement of
  Financial Accounting Standards No. 142, Goodwill and Other Intangible
  Assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Deferred
  charges represent costs related to the deferred revenues. Such costs are
  recognized when the related revenues are recognized and are presented under
  other current assets for deferred charges that will be recognized within a
  year and under Intangible assets and deferred charges for deferred charges
  which will be recognized in more than one year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | n.                                      | Impairment
  of long-lived assets and long-lived assets to be disposed of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The Groups
  long-lived assets are reviewed for impairment in accordance with 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 assets. Such
  measurement includes significant estimates. If such assets are considered to
  be impaired, the impairment to be recognized is measured by the amount by
  which the carrying amount of the assets exceeds the fair value of the assets. However, the carrying amount of a
  group of assets would not be reduced below its fair value. Assets to
  be disposed of are reported at the lower of the carrying amount or fair value
  less costs to sell.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Any
  impairment loss is recognized in the consolidated statement of operations
  (see Note 9b).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F  15

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | o.                                      | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Goodwill
  represents the excess of the cost over the fair value of the net assets of
  businesses acquired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | SFAS 142
  requires goodwill to be tested for impairment at least annually or between
  annual tests in certain circumstances, and written down when impaired, rather
  than being amortized as previous accounting standards required. Goodwill is
  tested for impairment by comparing the fair value of each of the Companys
  reporting units with its carrying value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Fair values
  are determined using discounted cash flows, market multiples and market
  capitalization. Significant estimates used in the methodologies include
  estimates of future cash flows, future short-term and long-term growth rates,
  weighted average cost of capital and estimates of market multiples.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | During the
  year ended December 31, 2006, no such impairment loss was recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | p.                                      | Revenue
  recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The Group
  generates revenues mainly from the sale of products and services for
  satellite-based communications networks. Sale of products includes mainly the
  sale of VSATs and hubs. Service revenues include access to and communication
  via satellites (space segment), installation of network equipment,
  telephone services, internet services, consulting, on-line network
  monitoring, network maintenance and repair services. The Group sells its
  products primarily through its direct sales force and indirectly through
  resellers. Sales consummated by the Groups sales force and sales to
  resellers are considered sales to end-users.                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Revenues
  from product sales are recognized in accordance with SEC Staff Accounting
  Bulletin (SAB) No. 104, Revenue Recognition (SAB No. 104), when
  delivery has occurred, persuasive evidence of an agreement exists, the
  vendors fee is fixed or determinable, no further obligation exists and
  collectability is probable. When significant acceptance provision is included
  in the arrangement revenues are deferred until the acceptance occur.
  Generally the Group does not grant rights of return. Service revenues
  are  recognized ratably over the
  period of the contract or as services are performed, as applicable.                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | In
  accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue
  Arrangements with Multiple Deliverables (EITF 00-21) a multiple-element
  arrangement (an arrangement that involves the delivery or performance of
  multiple products, services and/or rights to use assets) is separated into
  more than one unit of accounting, if the functionality of the delivered
  element(s) is not dependent on the undelivered element(s), there is
  vendor-specific objective evidence (VSOE) of fair value of the undelivered
  element(s) and delivery of the delivered element(s) represents the
  culmination of the earnings process for those element(s). If these criteria
  are not met, the revenue is deferred until such criteria are met or until the
  period in which the last undelivered element is delivered. If there is VSOE
  for all units of accounting in an arrangement, the arrangement consideration
  is allocated to the separate units of accounting based on each units
  relative VSOE.

F  16

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Revenues
  from products under sales-type-lease contracts are recognized in accordance
  with SFAS No. 13, Accounting for Leases (SFAS No. 13) upon installation
  or upon shipment, in cases where the customer obtains its own or others
  installation services. The net investments in sales-type-leases are
  discounted at the interest rates implicit in the leases. The present values
  of payments due under sales-type-lease contracts are recorded as revenues at
  the time of shipment or installation, as appropriate. Future interest income
  is deferred and recognized over the related lease term as financial income.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Revenues
  from products and services under operating leases of equipment are recognized
  ratably over the lease period, in accordance with SFAS No. 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Deferred
  revenues represent amounts when the criteria for revenue recognition as
  described above are not met. In general, when deferred revenues are
  recognized as revenues, the associated deferred costs are also recognized as
  cost of sales.                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | q.                                      | Shipping
  expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Under EITF
  00-10, selling and marketing expenses include shipping expenses in the
  amounts of $ 3,800, $1,600 and $1,700 for the years ended December 31, 2006,
  2005 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | r.                                      | Advertising
  expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Advertising
  costs are expensed as incurred. Advertising expenses for the years ended
  December 31, 2006, 2005 and 2004 amounted to $ 600 $ 600 and $ 900 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | s.                                      | Warranty
  costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Generally,
  the Company provides product warranties for periods between twelve to
  eighteen months at no extra charge. A provision is recorded for estimated
  warranty costs based on the Companys experience. Warranty expenses for the
  years ended December 31, 2006, 2005 and 2004 were immaterial.                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | t.                                      | Research and
  development expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Research and
  development expenses, net of grants received, are charged to expenses as
  incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | u.                                      | Grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The Company
  received royalty-bearing grants and non-royalty-bearing grants from the
  Government of Israel, the U.S.-Israel Science and Technology Foundation
  (USISTF), SES Global S.A and from other funding sources, for approved
  research and development projects. These grants are recognized at the time
  the Company is entitled to such grants on the basis of the costs incurred or
  milestones achieved as provided by the relevant agreement and included as a
  deduction from research and development expenses.                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Research and
  development grants deducted from research and development expenses amounted
  to $2,000, $3,000 and $5,300 in 2006, 2005 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F  17

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | v.                                      | Accounting
  for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | On January
  1, 2006, the Company adopted Statement of Financial Accounting Standards No.
  123 (revised 2004), Share-Based Payment (SFAS 123(R)) which requires the
  measurement and recognition of compensation expense based on estimated fair
  values for all share-based payment awards made to employees and directors.
  SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25,
  Accounting for Stock Issued to Employees (APB 25), for periods beginning
  in fiscal 2006. In March 2005, the Securities and Exchange Commission issued
  Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The
  Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | SFAS 123(R)
  requires companies to estimate the fair value of equity-based payment awards
  on the date of grant using an option-pricing model. The value of the portion
  of the award that is ultimately expected to vest is recognized as an expense
  over the requisite service periods in the Companys consolidated income
  statement. Prior to the adoption of SFAS 123(R), the Company accounted for
  equity-based awards to employees and directors using the intrinsic value
  method in accordance with APB 25 as allowed under Statement of Financial
  Accounting Standards No. 123, Accounting for Stock-Based Compensation
  (SFAS 123).                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | The Company
  adopted SFAS 123(R) using the modified prospective transition method, which
  requires the application of the accounting standard starting from January 1,
  2006, the first day of the Companys fiscal year 2006. Under that transition
  method, compensation cost recognized in the year ended December 31, 2006,
  includes: (a) compensation cost for all share-based payments granted prior
  to, but not yet vested as of January 1, 2006, based on the grant date fair
  value estimated in accordance with the original provisions of Statement 123,
  and (b) compensation cost for all share-based payments granted subsequent to
  January 1, 2006, based on the grant-date fair value estimated in accordance
  with the provisions of Statement 123(R). Results for prior periods have not
  been restated.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | The Company
  has three stock option plans, the 1995 and the 2003 Stock Option and
  Incentive Plans and the 2005 Stock Incentive Plan (the plans). The 1995
  Plan was amended in 1997, 1998 and 1999, and expired although there are still
  options outstanding under this plan. Under the 2003 Plan, options may be
  granted to employees, officers, directors and consultants of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | In 2005, the
  shareholders approved two increases in the number of options available for
  grant of the 2003 Plan for an aggregate of 4,635,000 shares to a total of
  6,135,000 shares available for future grants. As of December 31, 2006, an
  aggregate of 698,038 ordinary shares of the Company are still available for
  future grants from the 2003 Stock Option Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | Options
  granted under the 1995 and 2003 Plans generally vest quarterly over two to
  four years. The options expire seven or ten years from the date of grant. Any
  options, which are forfeited or canceled before expiration, become available
  for future grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F  18

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The exercise
  price per share under the 1995 Plan was not less than the market price of an
  ordinary share at the date of grant. The exercise price for the 2003 Plan is
  the higher of (i) $5.00 per share; and (ii) the market value of the shares as
  of the date of the option grant, unless otherwise provided in the stock
  option agreement.                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | In December
  2005, the Companys shareholders approved the adoption of a new plan, the
  2005 Stock Incentive Plan with a number of options available for grant of
  1,500,000 shares. This Plan is designed to enable the Companys Board of
  Directors to determine various forms of incentives for all forms of service
  providers and, when necessary, adopt a sub-plan in order to grant specific
  incentives. Among the incentives that may be adopted are share options,
  performance share awards, performance share unit awards, restricted shares,
  restricted share unit awards and other share-based awards. As of December 31,
  2006, the Company granted 50,000 performance based options under this Plan.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The Company
  recognizes compensation expenses for the value of its awards, which have
  graded vesting, granted prior to January 1, 2006, based on the accelerated
  attribution method and for awards granted subsequent to January 1, 2006,
  based on the straight line method over the requisite service period of each
  of the awards, net of estimated forfeitures. Estimated forfeitures are based
  on actual historical pre-vesting forfeitures.                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | As a result
  of adopting SFAS 123(R) on January 1, 2006, the Companys income before
  income taxes and net income for the year ended December 31, 2006, is
  approximately $3,750 lower than if it had continued to account for
  stock-based compensation under APB 25. Basic and diluted net earnings per
  share for the year ended December 31, 2006, are $0.14 and $0.13 respectively,
  lower than if the Company had continued to account for share-based
  compensation under APB 25.                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Prior to
  January 1, 2006, the Company applied the intrinsic value method of accounting
  for stock options as prescribed by APB 25, 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. During the years ended
  December 31, 2005 and 2004, the Company recognized stock-based compensation
  expense related to employee stock options under the plans in the amounts of
  $120 and $0, respectively.                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The Company
  estimates the fair value of stock options granted using the
  Black-Scholes-Merton option-pricing model. The option-pricing model requires
  a number of assumptions, of which the most significant are expected stock
  price volatility and the expected option term. Expected volatility was
  calculated based upon actual historical stock price movements.                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The expected
  option term represents the period that the Companys stock options are
  expected to be outstanding and was determined based on the simplified method
  permitted by SAB 107 as the average of the vesting period and the contractual
  term. The risk-free interest rate is based on the yield from U.S. Treasury
  zero-coupon bonds with an equivalent term. The Company has historically not
  paid dividends and has no foreseeable plans to pay dividends.                                                                                                                                                                                                                                                

F  19

---

---



|                                                            
|------------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES          
|                                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  
|                                                            
|U.S. dollars
  in thousands, except share and per share data

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

| |  |                                                                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The fair
  value of the Companys stock options granted to employees and directors for
  the years ended December 31, 2006, 2005 and 2004 was estimated using the
  following weighted average assumptions:

| |  |                          |  |  |                           |   |      |     |      |  |      |  
| |  | ------------------------ |  |  | ------------------------- | - | ---- | --- | ---- |  | ---- | -
| |  |                          |  |  | Year ended
  December 31,
| |  |                          |  |  |                          
| |  |                          |  |  | 2006                      |   | 2005 |     | 2004
| |  |                          |  |  |                           |   |      |     |     
| |  |                          |  |  |                           |   |      |     |      |  |      |  
| |  | Risk free interest       |  |  | 4.7                       | % |      | 4.2 | %    |  | 3    | %
| |  | Dividend yields          |  |  | 0                         | % |      | 0   | %    |  | 0    | %
| |  | Volatility               |  |  | 47                        | % |      | 48  | %    |  | 57.4 | %
| |  | Expected term (in years) |  |  | 5.4                       |   |      | 5.5 |      |  | 5.5  |  

| |  |                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A summary of
  employee option activity under the Companys Stock Option Plans as of
  December 31, 2006 and changes during the year ended December 31, 2006 are as
  follows:

| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |     |  |   |        | 
| |  | ------------------------------------------------ |  | ------------------- | --------- | --------------------------------------- | - | ------------------------------------------------------------------ |  | ---------------------------------------------- | --- |  | - | ------ | 
| |  |                                                  |  | Number of
  options |           | Weighted-
  average 
  exercise
  price |   | Weighted-
  average
  remaining
  contractual 
  term
  (in years) |  | Aggregate
  intrinsic
  value
  (in thousands) |    
| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |    
|
| |  | Outstanding at January 1, 2006                   |  |                     | 5,159,835 |                                         | $ | 8.6                                                                |  |                                                |     |  |   |        | 
| |  | Granted                                          |  |                     | 312,000   |                                         | $ | 7.2                                                                |  |                                                |     |  |   |        | 
| |  | Exercised                                        |  |                     | (521,851  | )                                       | $ | 5.6                                                                |  |                                                |     |  |   |        | 
| |  | Expired                                          |  |                     | (499      | )                                       | $ | 346.3                                                              |  |                                                |     |  |   |        | 
| |  | Forfeited                                        |  |                     | (109,163  | )                                       | $ | 10.9                                                               |  |                                                |     |  |   |        | 
| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |     |  |   |        | 
| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |     |  |   |        | 
| |  | Outstanding at December 31, 2006                 |  |                     | 4,840,322 |                                         | $ | 8.8                                                                |  |                                                | 8.4 |  | $ | 13,731 | 
| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |     |  |   |        | 
| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |     |  |   |        | 
| |  | Exercisable at December 31, 2006                 |  |                     | 3,514,823 |                                         | $ | 9.8                                                                |  |                                                | 8.3 |  | $ | 10,104 | 
| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |     |  |   |        | 
| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |     |  |   |        | 
| |  | Vested and expected to vest at December 31, 2006 |  |                     | 4,725,159 |                                         | $ | 8.8                                                                |  |                                                | 8.4 |  | $ | 13,513 | 
| |  |                                                  |  |                     |           |                                         |   |                                                                    |  |                                                |     |  |   |        | 

| |  |                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A summary of
  the employee option activity under the Companys Stock Option Plans as of
  December 31, 2004 and 2005, and changes during the years ended on those
  dates, are as follow:

| |  |                                                    |  |                         |           |                              |   |                  |  |                              |           |   |   |       | 
| |  | -------------------------------------------------- |  | ----------------------- | --------- | ---------------------------- | - | ---------------- |  | ---------------------------- | --------- | - | - | ----- | 
| |  |                                                    |  | Year ended December 31, |          
| |  |                                                    |  | 2005                    |           | 2004                         |  
| |  |                                                    |  |                         |           |                              |  
| |  |                                                    |  | Numberof options        |           | Weightedaverageexerciseprice |   | Numberof options |  | Weightedaverageexerciseprice |          
| |  |                                                    |  |                         |           |                              |   |                  |  |                              |          
| |  | Options outstanding at the beginning of
  the year |  |                         | 1,438,644 |                              | $ | 17.1             |  |                              | 1,591,602 |   | $ | 24.2  | 
| |  | Changes during the year:                           |  |                         |           |                              |   |                  |  |                              |           |   |   |       | 
| |  | Granted                                            |  |                         | 4,069,000 |                              | $ | 6.0              |  |                              | 242,766   |   | $ | 6.1   | 
| |  | Exercised                                          |  |                         | (125,245  | )                            | $ | 5.0              |  |                              | (87,341   | ) | $ | 5.0   | 
| |  | Expired                                            |  |                         | (490      | )                            | $ | 240.0            |  |                              | (125      | ) | $ | 180.0 | 
| |  | Forfeited and cancelled                            |  |                         | (222,074  | )                            | $ | 17.3             |  |                              | (308,258  | ) | $ | 48.4  | 
| |  |                                                    |  |                         |           |                              |   |                  |  |                              |           |   |   |       | 
| |  | Options outstanding at the end of the year         |  |                         | 5,159,835 |                              | $ | 8.6              |  |                              | 1,438,644 |   | $ | 17.1  | 
| |  |                                                    |  |                         |           |                              |   |                  |  |                              |           |   |   |       | 
| |  | Options exercisable at the end of the year         |  |                         | 3,016,242 |                              | $ | 10.5             |  |                              | 973,780   |   | $ | 22.0  | 
| |  |                                                    |  |                         |           |                              |   |                  |  |                              |           |   |   |       | 

F  20

---

---



|                                                            
|------------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES          
|                                                            
|NOTES TO
  CONSOLIDATED FINANCIAL STATEMENTS                
|                                                            
|U.S. dollars
  in thousands, except share and per share data

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

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  weighted-average grant-date fair value of options granted during the years
  ended December 31, 2006 and 2005 was $ 3.55 and $ 2.93, respectively. The
  aggregate intrinsic value in the table above represents the total intrinsic
  value (the difference between the Companys closing stock price on the last
  trading day of the fourth quarter of fiscal 2006 and the exercise price,
  multiplied by the number of in-the-money options) that would have been
  received by the option holders had all option holders exercised their options
  on December 31, 2006. This amount changes based on the fair market value
  of the Companys stock. Total intrinsic value of options exercised for the
  year ended December 31, 2006 was approximately $ 1,600. As of December 31,
  2006, there was approximately $ 2,200 of total unrecognized compensation costs
  related to non-vested share-based compensation arrangements granted under the
  Companys stock option plans.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | That cost is
  expected to be recognized over a weighted-average period of 1.2 years. Total
  grant-date fair value of vested options for the year ended December 31, 2006
  was approximately $ 17,600.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | The options
  outstanding under the Companys Stock Option Plans as of December 31, 2006,
  have been separated into ranges of exercise price as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |  |                              |  |                                                     |           |                                                     |         |                                       |  |                                                      |       |                                                                 |  |           |  |   |       | 
| |  | ---------------------------- |  | --------------------------------------------------- | --------- | --------------------------------------------------- | ------- | ------------------------------------- |  | ---------------------------------------------------- | ----- | --------------------------------------------------------------- |  | --------- |  | - | ----- | 
| |  | Ranges of
  exercise
  price |  | Options
  outstanding
  as of
  December 31,
  2006 |           | Weighted
  average
  remaining
  contractual
  life |         | Weighted
  average
  exercise
  price |  | Options
  exercisable
  as of
  December 31, 
  2006 |       | Weighted 
  average exercise
  price of
  exercisable
  options | 
| |  |                              |  |                                                     |           |                                                     |         |                                       |  |                                                      |       |                                                                 | 
| |  |                              |  |                                                     |           |                                                     | (Years) |                                       |  |                                                      |       |                                                                 |  |           |  |   |      
| |  | $ 5
  -7.5                   |  |                                                     | 4,527,525 |                                                     |         | 8.6                                   |  | $                                                    | 5.8   |                                                                 |  | 3,388,521 |  | $ | 5.8   | 
| |  | $ 7.8
  -9.2                 |  |                                                     | 225,950   |                                                     |         | 7.4                                   |  | $                                                    | 8.0   |                                                                 |  | 39,511    |  | $ | 7.1   | 
| |  | $ 42.4
  -79                 |  |                                                     | 74,302    |                                                     |         | 5.0                                   |  | $                                                    | 77.5  |                                                                 |  | 74,259    |  | $ | 77.5  | 
| |  | $ 240.4
  -3,197.5           |  |                                                     | 12,545    |                                                     |         | 2.1                                   |  | $                                                    | 675.6 |                                                                 |  | 12,532    |  | $ | 675.6 | 
| |  |                              |  |                                                     |           |                                                     |         |                                       |  |                                                      |       |                                                                 |  |           |  |   |       | 
| |  |                              |  |                                                     |           |                                                     |         |                                       |  |                                                      |       |                                                                 |  |           |  |   |       | 
| |  |                              |  |                                                     | 4,840,322 |                                                     |         | 8.4                                   |  | $                                                    | 8.8   |                                                                 |  | 3,514,823 |  | $ | 9.8   | 
| |  |                              |  |                                                     |           |                                                     |         |                                       |  |                                                      |       |                                                                 |  |           |  |   |       | 

| |  |                                                                                                                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  following table illustrates the effect on the net income (loss) and net
  earnings (loss) per share, assuming that the Company had applied the fair
  value recognition provision of SFAS 123 on its stock-based employee
  compensation:

| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | -------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | -
| |  |                                                                                                    |  | Year ended December 31, |        
| |  |                                                                                                    |  |                         |        
| |  |                                                                                                    |  | 2005                    |         | 2004 |  
| |  |                                                                                                    |  |                         |         |      |  
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | Net loss as reported                                                                               |  | $                       | (3,716  | )    | $ | (11,535 | )
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | Add: stock-based employee compensation
  expenses included in reported net loss - intrinsic value  |  |                         | 120     |      |   | -       |  
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | Deduct: total stock-based employee
  compensation expense determined under fair value based method |  |                         | (6,964  | )    |   | (1,017  | )
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | Pro forma net loss                                                                                 |  | $                       | (10,560 | )    | $ | (12,552 | )
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | Basic net loss per share as reported                                                               |  | $                       | (0.17   | )    | $ | (0.52   | )
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | Diluted net loss per share as reported                                                             |  | $                       | (0.17   | )    | $ | (0.52   | )
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | Pro forma basic loss per share                                                                     |  | $                       | (0.47   | )    | $ | (0.56   | )
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  |                                                                                                    |  |                         |         |      |   |         |  
| |  | Pro forma diluted loss per share                                                                   |  | $                       | (0.47   | )    | $ | (0.56   | )
| |  |                                                                                                    |  |                         |         |      |   |         |  

F  21

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | w. | Income
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Group
  accounts for income taxes in accordance with SFAS No. 109, Accounting for
  Income Taxes. SFAS 109 prescribes the use of the liability method whereby
  deferred tax assets and liability account balances are determined based on
  differences between the financial reporting and the tax basis of assets and
  liabilities and are measured using the enacted tax rates and laws that will
  be in effect when the differences are expected to reverse. The Group provides
  a valuation allowance, if necessary, to reduce deferred tax assets to their
  estimated realizable value, if it is more likely than not that a portion or
  all of the deferred tax assets will not be realized.                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | x. | Concentrations
  of credit risks:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Financial
  instruments that potentially subject the Group to concentrations of credit
  risk consist principally of cash and cash equivalents, short-term bank
  deposits, short-term and long-term restricted cash, short-term and long-term
  restricted cash held by trustees, trade receivables, short-term and long-term
  receivables relating to capital leases and long-term trade receivables.                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The majority
  of the Groups cash and cash equivalents, short-term bank deposits, and
  short-term and long-term restricted cash are invested in dollars with major
  banks in Israel and in the United States. Such 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 Groups investments are financially sound and, accordingly, minimal
  credit risk exists with respect to these investments.                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Group
  also has restricted cash held by trustees, which is invested in U.S. dollar
  deposits and in Colombian Peso deposits with major banks in Colombia and in
  the U.S. As of December 31, 2006, restricted cash held by the trustees
  amounted to approximately $22,800. The Company is entitled to receive the
  cash held by the trustee in stages based upon operational milestones. The
  cash held in trust is reflected in the Companys balance sheet as Restricted
  cash held by trustees. If the Company does not meet certain milestones, or
  if the government of Colombia terminates the contracts unilaterally, the
  Company may be unable to receive this restricted cash.                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Trade
  receivables, short-term and long-term receivables relating to capital leases
  and long-term trade receivables of the Group are mainly derived from sales to
  major customers located in the U.S., Europe, Far East and South America
  (mainly one customer in Peru and one customer in Brazil in the amount of
  $10,100 and $4,200, respectively, as of December 31, 2006). The Group
  performs ongoing credit evaluations of its customers and obtains letters of
  credit and bank guarantees for certain receivables. An allowance for doubtful
  accounts is determined with respect to those amounts that the Group has
  determined to be doubtful of collection and a general allowance is provided
  to cover additional potential exposures.

F  22

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | A
  significant portion of the Groups restricted cash held by trustees,
  trade receivables and long-term trade receivables is from three countries in
  Latin America - Colombia, Peru and Brazil. Any instability in the political
  or economic situation or otherwise in those countries, could have a
  significant adverse impact on the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | As of December
  31, 2006, the Group has no significant off-balance-sheet concentration of
  credit risk such as foreign exchange contracts, option contracts or other
  foreign hedging arrangements. In 2007, the Company entered into a hedging
  agreement to cover certain of its exchange rate exposures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | y.                                      | Employee
  related benefits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Severance
  Pay                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The
  Companys liability for severance pay for its Israeli employees is calculated
  pursuant to Israeli severance pay law based on the most recent salary of the
  employees multiplied by the number of years of employment, as of the balance
  sheet date. Employees whose employment is terminated by the Company or who
  are otherwise entitled to severance pay in accordance with Israeli law or
  labor agreements are entitled to one months salary for each year of
  employment or a portion thereof. The Companys liability for all of its
  Israeli employees is partly provided by monthly deposits for insurance
  policies and the remainder by an accrual. The value of these policies is recorded
  as an asset in the Companys consolidated balance sheet.                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The
  deposited funds for the Companys employees include profits accumulated up to
  the balance sheet date. The deposited funds may be withdrawn only upon the
  fulfillment of the obligation pursuant to Israeli severance pay law or labor
  agreements. The value of the deposited funds is based on the cash surrendered
  value of these policies, and includes profits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Severance
  pay expenses for the years ended December 31, 2006, 2005 and 2004, amounted
  to approximately $2,400, $2,000 and $3,400, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | 401K profit
  sharing plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The Company
  has a number of savings plans in the United States that qualify under Section
  401(k) of the Internal Revenue Code. U.S employees may contribute up to 15%
  or 100% of their pretax salary, but not more than statutory limits. The
  Company contributes either a) one dollar for each dollar a participant
  contributes in this plan, in an amount of up to 3% of a participants
  earnings and in addition, it contributes fifty cents for each dollar a
  participant contributes in this plan, for an additional 3% of a participants
  earnings or b) 25% of the first 6% a participant contributes in this
  plan. Matching contributions in 2006, 2005 and 2004 for all the plans
  were $700, $700 and $700, respectively. Matching contributions are invested
  in proportion to each participants voluntary contributions in the investment
  options provided under the plan.

F  23

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | z.                                      | Fair value
  of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | The
  following methods and assumptions were used by the Group in estimating their
  fair value disclosures for financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | The carrying
  amounts of cash and cash equivalents, short-term restricted cash, restricted
  cash held by trustees, trade receivables, short-term bank credit and trade
  payables approximate their fair value due to the short-term maturity of such
  instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | The carrying
  amounts of the Groups long-term borrowing arrangements, long-term trade
  receivables and long-term restricted cash approximate their fair value. The
  fair value was estimated using discounted cash flow analysis, based on the
  Groups incremental borrowing rates for similar borrowing or investing
  arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | The fair
  value of the convertible subordinated notes, which was determined according
  to market value, and the carrying amount of the Companys convertible
  subordinated notes was $12,100 and $16,300 as of December 31, 2006,
  respectively and $10,000 and $16,300 as of December 31, 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | aa.                                     | Net earnings
  (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         | Basic net
  earnings (loss) per share are computed based on the weighted average number
  of ordinary shares outstanding during each period. Diluted net earnings
  (loss) per share are computed based on the weighted average number of
  ordinary shares outstanding during each period, plus dilutive potential
  ordinary shares considered outstanding during the period, in accordance with
  SFAS No. 128, Earnings per Share. 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, as they would have
  been anti-dilutive, was 9,276,286, 13,390,669 and 9,990,282 for the years
  ended December 31, 2006, 2005 and 2004, respectively.

F  24

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                                                                        |           
|----------- | ------------------------------------------------------------------------------------------------------ | ----------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                               
|            |                                                                                                        |           
|            | The
  following table sets forth the computation of basic and diluted net earnings
  (loss) per share:
|            |                                                                                                        |           
|            | 1.                                                                                                     | Numerator:

| |                                                                   |  |                         |        |      |   |        |   |   |         |  
| | ----------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------- | -
| |                                                                   |  | Year ended December 31, |       
| |                                                                   |  |                         |       
| |                                                                   |  | 2006                    |        | 2005 |   | 2004   |  
| |                                                                   |  |                         |        |      |   |        |  
| |                                                                   |  |                         |        |      |   |        |   |   |         |  
| | Numerator for basic and diluted net
  earnings (loss) per share - |  |                         |        |      |   |        |   |   |         |  
| |                                                                   |  |                         |        |      |   |        |   |   |         |  
| | Net income (loss) available to holders
  of  Ordinary Shares      |  | $                       | 10,487 |      | $ | (3,716 | ) | $ | (11,535 | )
| |                                                                   |  |                         |        |      |   |        |   |   |         |  

| |    |                              
| | -- | -----------------------------
| | 2. | Denominator
  (in thousands):

| |                                                                                                                         |  |  |        |  |  |        |  |  |        | 
| | ----------------------------------------------------------------------------------------------------------------------- |  |  | ------ |  |  | ------ |  |  | ------ | 
| | Denominator for basic net earnings (loss)
  per share -                                                                 |  |  |        |  |  |        |  |  |        | 
| | Weighted average number of shares                                                                                       |  |  | 25,799 |  |  | 22,440 |  |  | 22,242 | 
| | Add -employee stock options and convertible
  notes                                                                     |  |  | 1,721  |  |  | -      |  |  | -      | 
| |                                                                                                                         |  |  |        |  |  |        |  |  |        | 
| | Denominator for diluted net earnings (loss)
  per share - adjusted weighted average shares assuming exercise of options |  |  | 27,520 |  |  | 22,440 |  |  | 22,242 | 
| |                                                                                                                         |  |  |        |  |  |        |  |  |        | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ab. | Impact of
  recently issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | In June
  2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
  Income Taxes (FIN 48). FIN 48 creates a single model to address uncertainty
  in tax positions. FIN 48 clarifies the accounting for income taxes by
  prescribing the minimum recognition threshold a tax position is required to
  meet before being recognized in the financial statements. FIN 48 also
  provides guidance on derecognition, measurement, classification, interest and
  penalties, accounting in interim periods, disclosure and transition. In
  addition, FIN 48 clearly scopes out income taxes from Financial Accounting
  Standards Board Statement No. 5, Accounting for Contingencies. FIN 48
  utilizes a two-step approach for evaluating tax positions. Recognition (step
  one) occurs when an enterprise concludes that a tax position, based solely on
  its technical merits, is more-likely-than-not to be sustained upon
  examination. Measurement (step two) is only addressed if step one has been
  satisfied (i.e., the position is more-likely-than-not to be sustained). FIN
  48 applies to all tax positions related to income taxes subject to Financial
  Accounting Standards Board Statement No. 109, Accounting for Income Taxes.
  This includes tax positions considered to be routine as well as those with
  a high degree of uncertainty. Derecognition of a tax position that was
  previously recognized would occur when a company subsequently determines that
  a tax position no longer meets the more-likely-than-not threshold of being
  sustained. FIN 48 specifically prohibits the use of a valuation allowance as
  a substitute for derecognition of tax positions. FIN 48 is effective for
  fiscal years beginning after December 15, 2006. Management is in the process
  of evaluating the possible impact of the adoption of FIN 48 on its
  consolidated financial statements.

F  25

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         | In September
  2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
  Fair Value Measurements. This Standard defines fair value, establishes a
  framework for measuring fair value in generally accepted accounting
  principles and expands disclosures about fair value measurements. SFAS No.
  157 is effective for financial statements issued for fiscal years beginning
  after November 15, 2007 and interim periods within those fiscal years.
  Management believes this Standard will not have a material effect on its
  consolidated financial statements.                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         | In February
  2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
  Assets and Financial Liabilities (SFAS No. 159), which permits companies
  to choose to measure certain financial instruments and other items at fair
  value that are not currently required to be measured at fair value. SFAS No.
  159 is effective for fiscal years beginning after November 15, 2007. The
  Company will adopt SFAS No. 159 no later than January 1, 2008. The Company
  has not yet determined the effect that the adoption of SFAS No. 159 will have
  on its consolidated financial statements.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | ac.                                     | Reclassification:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         | Certain 2004
  and 2005 figures have been reclassified to conform to the 2006 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE 3:    | INVENTORIES                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | a.                                      | Inventories are comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                     |  |              |        |      |   |        | 
| | ----------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
| |                                     |  | December 31, |       
| |                                     |  |              |       
| |                                     |  | 2006         |        | 2005 |  
| |                                     |  |              |        |      |  
| |                                     |  |              |        |      |   |        | 
| | Raw
  materials, parts and supplies |  | $            | 6,947  |      | $ | 5,715  | 
| | Work in
  progress                  |  |              | 2,595  |      |   | 5,212  | 
| | Finished
  products                 |  |              | 16,826 |      |   | 12,326 | 
| |                                     |  |              |        |      |   |        | 
| |                                     |  |              |        |      |   |        | 
| |                                     |  | $            | 26,368 |      | $ | 23,253 | 
| |                                     |  |              |        |      |   |        | 

| |    |                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------
| | b. | Inventory
  write-offs totaled $ 1,200, $ 600 and $ 2,000 in 2006, 2005 and 2004,
  respectively.

F  26

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                             |                                                                                          
|----------- | --------------------------- | -----------------------------------------------------------------------------------------
|NOTE 4:    | PROPERTY AND EQUIPMENT, NET
|            |                             |                                                                                          
|            | a.                          | Composition
  of property and equipment, grouped by major classifications, is as follows:

| |                                                            |  |                |         |      |   |         | 
| | ---------------------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | 
| |                                                            |  | December
  31,
| |                                                            |  |               
| |                                                            |  | 2006           |         | 2005 |  
| |                                                            |  |                |         |      |  
|
| | Cost:                                                      |  |                |         |      |   |         | 
| | Buildings and land                                         |  | $              | 91,666  |      | $ | 91,527  | 
| | Computers and electronic equipment                         |  |                | 78,754  |      |   | 106,478 | 
| | Equipment leased to others                                 |  |                | 96,799  |      |   | 84,223  | 
| | Office furniture and equipment                             |  |                | 8,734   |      |   | 8,787   | 
| | Vehicles                                                   |  |                | 270     |      |   | 208     | 
| | Leasehold improvements                                     |  |                | 4,302   |      |   | 4,257   | 
| |                                                            |  |                |         |      |   |         | 
| |                                                            |  |                |         |      |   |         | 
| |                                                            |  |                | 280,525 |      |   | 295,480 | 
| | Accumulated depreciation and provision for
  impairment *) |  |                | 159,159 |      |   | 171,235 | 
| |                                                            |  |                |         |      |   |         | 
| |                                                            |  |                |         |      |   |         | 
| | Depreciated cost                                           |  | $              | 121,366 |      | $ | 124,245 | 
| |                                                            |  |                |         |      |   |         | 

|            |                                             |                                                                                                             |                                                                                                                                        
|----------- | ------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|            |                                             | *)                                                                                                          | The
  accumulated depreciation of equipment leased to others as of December 31,
  2006 and 2005 is $ 21,896 and $ 19,000, respectively.
|            |                                             |                                                                                                            
|            | b.                                          | Depreciation
  expenses totaled $ 19,800, $ 17,700 and $ 30,000 in 2006, 2005 and 2004,
  respectively.    
|            |                                             |                                                                                                            
|            | c.                                          | As for
  impairment of property and equipment and other charges, see Note 9b.                              
|            |                                             |                                                                                                            
|            | d.                                          | As for
  pledges and securities, see Note 11g.                                                             
|            |                                            
|NOTE 5:    | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
|            |                                             |                                                                                                            
|            | a.                                          | Composition
  of intangible assets and deferred charges, grouped by major classifications,
  is as follows:

| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| | ---------------------------------------------------------------------------- |  | ----------------------------------------- | ---- | -------------- | ---- | ------ |  | - | ------ | 
| |                                                                              |  | Weighted
  average
  amortization
  years |      | December
  31, |     
| |                                                                              |  |                                           |      |               
| |                                                                              |  |                                           | 2006 |                | 2005 |       
| |                                                                              |  |                                           |      |                |      |       
| |                                                                              |  |                                           |      |                |      |        |  |   |       
| | Cost:                                                                        |  |                                           |      |                |      |        |  |   |        | 
| | Identifiable intangible assets resulting
  from acquisitions of a subsidiary |  |                                           | 12.8 |                | $    | 21,138 |  | $ | 21,138 | 
| | Customer acquisition costs                                                   |  |                                           | 6.3  |                |      | 3,776  |  |   | 3,776  | 
| | Other                                                                        |  |                                           | 2.8  |                |      | 1,662  |  |   | 1,794  | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| |                                                                              |  |                                           |      |                |      | 26,576 |  |   | 26,708 | 
| | Accumulated amortization and provision for
  impairment                      |  |                                           |      |                |      | 21,486 |  |   | 20,577 | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| | Amortized cost                                                               |  |                                           |      |                |      | 5,090  |  |   | 6,131  | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| | Deferred charges                                                             |  |                                           |      |                |      | 3,797  |  |   | 6,123  | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 
| |                                                                              |  |                                           |      |                | $    | 8,887  |  | $ | 12,254 | 
| |                                                                              |  |                                           |      |                |      |        |  |   |        | 

F  27

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                     |                                                                                                                                     
|----------- | --------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:    | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET (Cont.)
|            |                                                     |                                                                                                                                     
|            | b.                                                  | Amortization
  expenses amounted to $ 960, $ 1,400 and $ 1,700 for the years ended December 31,
  2006, 2005 and 2004, respectively.
|            |                                                     |                                                                                                                                     
|            | c.                                                  | As for
  impairment of intangible assets and deferred charges, see Note 9b.                                                         
|            |                                                     |                                                                                                                                     
|            | d.                                                  | Estimated amortization
  expenses for the following years is as follows:                                                            

| |                            |  |   |       |  | 
| | -------------------------- |  | - | ----- |  | 
| | Year
  ending December 31, |  |   |       |  | 
| |                            |  |   |       |  | 
| |                            |  |   |       |  | 
| | 2007                       |  | $ | 952   | 
| | 2008                       |  |   | 926   | 
| | 2009                       |  |   | 642   | 
| | 2010                       |  |   | 642   | 
| | 2011                       |  |   | 642   | 
| | 2012 and
  thereafter      |  |   | 1,286 | 
| |                            |  |   |       | 
| |                            |  |   |       | 
| |                            |  | $ | 5,090 | 
| |                            |  |   |       | 

|            |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | ----------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 6:    | COMMITMENTS AND CONTINGENCIES
|            |                              
|            | a.                            | On March 29,
  2001, Spacenet Inc. completed a transaction for the sale and leaseback of its
  corporate headquarters building. The sale price of the property was
  approximately $ 31,500 net of certain fees and commissions. Concurrently with
  the sale, Spacenet Inc. entered into an operating leaseback contract for a
  period of fifteen years at an initial annual rent of approximately $ 3,500
  plus escalation. The capital gain resulting from the sale and leaseback
  amounting to $ 5,600 was deferred and is being amortized over the fifteen year
  term of the lease. In accordance with the lease terms, Spacenet Inc. made a
  security deposit consisting of a $ 5,500 fully cash collateralized letter of
  credit for the benefit of the lessor. The lease is accounted for as an
  operating lease in accordance with SFAS No. 13.
|            |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | b.                            | Lease
  commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                               | Minimum
  lease commitments of certain subsidiaries under non-cancelable operating
  lease agreements with respect to premises occupied by them, at rates in
  effect subsequent to December 31, 2006, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                                                                                                                                                                            |  |   |                             |  |                              |       |                   |   |        |  | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | --------------------------- |  | ---------------------------- | ----- | ----------------- | - | ------ |  | 
| |                                                                                                                                                                                            |  |   | Gross
  commitments         |  | Receivables
  from subleases |       | Net
  commitments |  
| |                                                                                                                                                                                            |  |   |                             |  |                              |       |                   |  
| | Year ending December 31,                                                                                                                                                                   |  |   | U.S.
  dollars in thousands | 
| |                                                                                                                                                                                            |  |   |                             | 
| |                                                                                                                                                                                            |  |   |                             |  |                              |       |                   |   |        | 
| | 2007                                                                                                                                                                                       |  | $ | 5,280                       |  | $                            | 728   |                   | $ | 4,552  | 
| | 2008                                                                                                                                                                                       |  |   | 4,716                       |  |                              | 502   |                   |   | 4,214  | 
| | 2009                                                                                                                                                                                       |  |   | 4,447                       |  |                              | 483   |                   |   | 3,964  | 
| | 2010                                                                                                                                                                                       |  |   | 4,525                       |  |                              | 382   |                   |   | 4,143  | 
| | 2011                                                                                                                                                                                       |  |   | 4,661                       |  |                              | 128   |                   |   | 4,533  | 
| | 2012 and
  thereafter                                                                                                                                                                      |  |   | 21,405                      |  |                              | -     |                   |   | 21,405 | 
| |                                                                                                                                                                                            |  |   |                             |  |                              |       |                   |   |        | 
| |                                                                                                                                                                                            |  |   |                             |  |                              |       |                   |   |        | 
| |                                                                                                                                                                                            |  | $ | 45,034                      |  | $                            | 2,223 |                   | $ | 42,811 | 
| |                                                                                                                                                                                            |  |   |                             |  |                              |       |                   |   |        | 
| |                                                                                                                                                                                            |  |   |                             |  |                              |       |                   |   |        | 
| | Gross rent
  expenses and income from subleases were $ 6,642 and $ 1,416,
  respectively in 2006, $ 6,400 and $ 900, respectively in 2005 and
  $ 8,000 and $ 1,500, respectively in 2004.

F  28

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                       |                                                                                                                                                                                                                                    
|----------- | ------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 6:    | COMMITMENTS AND CONTINGENCIES (Cont.)
|            |                                      
|            |                                       | Out of the
  above commitment, $743 is included as restructuring accrual in other accounts
  payable and other long-term liabilities. Some of the Groups lease agreements
  do not include renewal options.                       
|            |                                       |                                                                                                                                                                                                                                    
|            | c.                                    | Commitments
  with respect to space segment services:                                                                                                                                                                              
|            |                                       |                                                                                                                                                                                                                                    
|            |                                       | All the
  required space segment services necessary to meet the terms of the current
  customer contracts are obtained from either SES Americom or from unrelated
  third parties under contracts ranging from one to twelve years.
|            |                                       |                                                                                                                                                                                                                                    
|            |                                       | Future
  minimum payments due for space segment services mainly to SES Americom, (a
  related party until July 2005), subsequent to December 31, 2006, are as
  follows:                                                           

| |                            |  |   |        |  | 
| | -------------------------- |  | - | ------ |  | 
| | Year
  ending December 31, |  |   |        |  | 
| |                            |  |   |        |  | 
| |                            |  |   |        |  | 
| | 2007                       |  | $ | 19,602 | 
| | 2008                       |  |   | 13,046 | 
| | 2009                       |  |   | 7,216  | 
| | 2010                       |  |   | 5,760  | 
| | 2011                       |  |   | 5,760  | 
| | 2011 and
  thereafter      |  |   | 23,040 | 
| |                            |  |   |        | 
| |                            |  |   |        | 
| |                            |  | $ | 74,424 | 
| |                            |  |   |        | 

| |    |                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Space
  segment services expenses, mainly to SES Americom, totaled $ 23,698, $ 24,200
  and
  $ 27,400 in 2006, 2005 and 2004, respectively.
| |    |                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | d. | Legal and
  tax contingencies:                                                                                                              
| |    |                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | 1.                                                                                                                                           | In the first
  half of 2002, a number of securities class action lawsuits were filed against
  the Company and certain of its officers and directors. The litigation
  includes actions filed in the United States District Court and a request to
  file a class action lawsuit in the Tel-Aviv District Court, Israel. With
  respect to the request in Israel, in 2002, the Israeli court granted a motion
  for stay the proceedings of the Israeli action pending the outcome of the
  U.S. class action proceeding. The class action suits allege violations of the
  federal securities laws and claim that the Company issued material
  misrepresentations to the market. The class action suits in the U.S. have
  been consolidated into a single action in the United States District Court
  for the Eastern District of New York. An amended complaint was filed on May
  13, 2003. The Company filed an amended motion to dismiss the complaint. In
  September 2005, the court rendered its decision to dismiss a number of the
  claims listed in the complaint.
| |    |                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                              | In June, 2006,
  following a successful mediation, the parties reached a settlement in the
  consolidated class action filed in the U.S. Based on the terms of the
  settlement, the entire amount due would be covered by the Companys insurance
  carriers. The settlement stipulates that the Company does not admit to any
  wrongdoing, fault or liability. The Company and the plaintiffs filed the
  settlement papers with the court on November 13, 2006 and preliminary
  approval hearings have been held. If the court preliminarily approves the
  proposed settlement, plaintiffs will provide notice to the class. After a
  period of time in which class members will be given a chance to raise any
  objections to or exclude themselves from the proposed settlement, the court
  will hold a final approval hearing to determine the fairness of the proposed
  settlement.                                                                                                                                                                                

F  29

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                       |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | ------------------------------------- | ---------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 6:    | COMMITMENTS AND CONTINGENCIES (Cont.)
|            |                                      
|            |                                       |                                          | The Company
  believes the allegations against it and its officers and directors are
  without merit and intends to contest them vigorously and in any event that
  the proposed settlement is not concluded satisfactorily.                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                       |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                       | 2.                                       | In September
  2003, Nova Mobilcom S.A. (Mobilcom) filed a lawsuit against Gilat do
  Brasil, a wholly-owned subsidiary of the Company, for specific performance of
  a memorandum of understandings which provided for the sale of Gilat do
  Brazil, and specifically the GESAC project, a government education project
  awarded to Gilat do Brazil, to Mobilcom for an unspecified amount. The
  Company does not believe that this claim has any merit and is vigorously
  defending itself against the claims presented therein.                                                                                                                   
|            |                                       |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                       | 3.                                       | In 2003, the
  Brazilian Tax Authority filed a claim against a subsidiary of Spacenet Inc.
  in Brazil, for alleged taxes due in the amount of approximately $ 4,000. The
  subsidiary received notice of an administrative ruling against it in this
  regard and has filed a petition challenging this ruling in the state courts
  of the State of Sao Paulo, Brazil. At present, due to interest rates and the
  exchange rate of the Brazilian Reias, the Companys management believes that
  the maximum subsidiarys exposure is the payment of taxes in an amount of
  approximately $ 6,400. The Company intends to contest the claim vigorously.
|            |                                       |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                       | 4.                                       | The Company
  has certain tax exposures in some of the jurisdictions in which it conducts
  business. Specifically, in certain jurisdictions in the United States and in
  Latin America the Company is in the midst of different stages of audits and
  has received some tax assessments. The tax authorities in these and in other
  jurisdictions in which the Company operates as well as the Israeli Tax
  Authorities may raise additional claims, which might result in increased
  exposures and ultimately, payment of additional taxes.                                                                                                         
|            |                                       |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                       | 5.                                       | The
  Companys management believes that it has provided adequate provisions to
  cover these exposures described above in accordance with SFAS 5. Liabilities
  related to legal proceedings and income taxes, demands and claims are
  recorded when it is probable that a liability has been incurred and the
  associated amount can be reasonably estimated. The Companys management,
  based on its legal counsel opinion, believes that it had provided an adequate
  accrual to cover the costs to resolve the aforementioned legal proceedings,
  demands and claims.                                                                            
|            |                                       |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                       |                                          | The Company
  has accrued approximately, $ 12,000 and $ 10,100 as of December 31, 2006 and
  2005, respectively, for the expected implications of such legal and tax
  contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                       |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | e.                                    | Pledges and
  securities - see Note 11g.

F  30

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | ------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 6:    | COMMITMENTS AND CONTINGENCIES (Cont.)
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | f.                                    | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                       | The Group
  guarantees its performance to certain customers (generally to government
  entities) through bank guarantees and corporate guarantees. Guarantees are
  often required for the Groups performance during the installation and
  operational periods of long-term rural telephony projects such as in Latin
  America, and for the performance of other projects (government and corporate)
  throughout the rest of the world. The guarantees typically expire when
  certain operational milestones are met.
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                       | At December
  31, 2006, the aggregate amount of bank guarantees provided in order to secure
  the Groups performance obligations is approximately $ 12,200, comprised
  mainly of performance guarantees provided on behalf of the Companys
  subsidiary in Peru in an amount of approximately $ 7,600. The Group has
  restricted cash as collateral for these guarantees in an amount of
  approximately $ 4,000.                                                                                                     
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                       | In addition,
  the Group has provided bank guarantees for certain leases throughout the
  world for an aggregate amount of approximately $ 5,700. The Group has
  restricted cash as collateral for these guarantees in an amount of
  approximately $ 5,700.                                                                                                                                                                                                                                                             
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                       | The Group
  also provided few other guarantees amounted to approximately $ 1,600 as of
  December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                       | In
  accordance with FIN 45, paragraph 4, as the guarantees above are performance
  guarantees for the Companys own performance, such guarantees are excluded
  from the scope of FIN 45. The Company has not recorded any liability for such
  amounts, since the Company expects that its performance will be acceptable.
  To date, no guarantees have ever been exercised against the Company.                                                                                                                       
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|NOTE 7:    | SHAREHOLDERS EQUITY                 
|            |                                      
|            | a.                                    | Share
  capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                       | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Ordinary
  shares confer upon their holders voting rights, the right to receive cash
  dividends and the right to share in excess assets upon liquidation of the
  Company.                                                                                                                                                                                                                        
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                       | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | In September
  2006, the Company issued 10,578,474 ordinary shares to York upon conversion
  of its long-term convertible note, see also Note 11g.                                                                                                                                                                                                                                                 
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                       | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | In December,
  2006, the Company consummated a public offering of 8,050,000 ordinary shares
  at a price of $8.50 per share. Of such shares, 5,016,667 ordinary shares were
  sold by the Company and the remaining shares were sold by a selling
  shareholder (York). Through this offering the Company raised a gross amount
  of $ 42,401. Issuance expenses amounted to approximately $ 2,755.
|            |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                       | 4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | During the
  year ended December 31, 2006, 668,913 options were exercised into the
  Companys ordinary shares.                                                                                                                                                                                                                                                                                    

F  31

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|----------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 7:    | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | b.                           | Stock Option
  Plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                              | See detailed
  information in Note 2v.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | c.                           | In August
  2003, rStar, currently, a wholly owned subsidiary of the Company, granted
  options to purchase 2,800,000 shares options of rStar common stock to its
  former CEO in accordance with the terms of his employment agreement. The
  exercise price was $ 0.16 per share of common stock. rStar followed APB No. 25
  as variable plan and compensation expense of $ 764 was recorded in the year
  ended December 31, 2003, using the accelerated method of accounting for
  incentive stock options. The Company recorded the amount in its equity
  accounts as stock compensation related to options issued in a subsidiary. The
  compensation expense was included in selling, marketing, general and
  administrative expenses. As part of the acquisition of the minority interest
  of rStar, rStar purchased the vested options of its former CEO, in
  consideration of $ 440 ($0.60 less the exercise price for each option). The
  difference between the $ 764 compensation expenses and the cash consideration
  was recorded as a reduction of selling and marketing, general and
  administrative expenses.                                                                                                             
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | d.                           | In 2005, the
  Company recruited new management and as part of their recruitment package, an
  aggregate of 2,445,000 options were granted under the 2003 Stock Plan. At the
  same time, other executives were granted options for an aggregate of 490,000
  shares under the 2003 Stock Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | e.                           | In August
  2005, the Companys shareholders approved the accelerated vesting of all of
  the options granted to non-employee directors in an aggregate amount of
  90,330 options. The compensation expense in connection with the accelerated
  vesting was approximately $ 26.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | f.                           | In 2003, the
  Company granted 150,000 stock options to its former Chairman of the Board of
  Directors, who was considered at that time a related party, in accordance
  with the terms of his consultancy agreement. The exercise price is $ 5.00 per
  share. The Company accounted for these options under the fair value method of
  SFAS No. 123 and EITF No. 96-18. The fair value of these options was
  estimated using a Black-Scholes option-pricing valuation model with the
  following weighted-average assumptions for 2005, 2004 and 2003: risk-free
  interest rates of 3%, dividend yields of 0%, volatility factor of the
  expected market price of the Companys ordinary shares of 84%, and a
  weighted-average expected life of the options of three and a half years.
  Changes in the fair value of the options prior to completion of performance
  are reflected as an adjustment to the expense to be included in future
  periods over the vesting period. In 2005, 2004 and 2003, the Company recorded
  compensation expenses of $ 17, $ 207 and $ 233, respectively which are included
  in selling, marketing, general and administrative expenses. All options shall
  expire over a period ending in July 2008.

F  32

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7:    | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | g.                           | In 2003, the
  Company granted 225,000 stock options to a former CEO in accordance with the
  terms of his employment agreement. The exercise price was $ 5.00 per share.
  The options were treated under APB No. 25 as a variable plan. No compensation
  expense was recorded in the year ended December 31, 2004 since the market
  price of the underlying shares was lower than the exercise price of the
  option. All such options vested upon the former CEOs leaving the Company in
  July 2004. All options shall expire if not earlier exercised by July 14,
  2007.
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | h.                           | Dividends:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                              | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | In the event
  that cash dividends are declared by the Company, such dividends will be
  declared and paid in Israeli currency. Under current Israeli regulations, any
  cash dividend in Israeli currency paid in respect of ordinary shares
  purchased by non-residents of Israel with non-Israeli currency, may be freely
  repatriated in such non-Israeli currency, at the exchange rate prevailing at
  the time of repatriation.
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                              | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Pursuant to
  the terms of a credit line from a bank (see Note 11), the Company is
  restricted from paying cash dividends to its shareholders without initial
  approval from the bank.                                                                                                                                                                                                                                                
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|NOTE 8:    | RESTRUCTURING OF DEBTS      
|            |                             
|            | a.                           | In April
  2004, the Company further revised the terms of its loan from Bank Hapoalim,
  to which it owed a principal debt amount of $ 71,400. The new loan terms reduced
  the principal installments due on July 1, 2005 and January 1, 2006 from
  $ 4,463 to $ 1,000 and $ 1,500, respectively, with the remainder due for payment
  in 2012. Other principal payments of $ 4,463 due semi-annually thereafter
  remained unchanged and the last installment of $ 15,300 was due on July 2,
  2012. In addition, the interest rate on the loan was also revised.             
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                              | In
  consideration for the Bank Hapoalim agreement to amend the interest rates,
  defer principal payments and modify certain covenants, the bank was entitled
  to convert loan owed by the Company to Bank Hapoalim into ordinary shares of
  the Company.                                                                                                                                                                                                                                                                                                                     
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                              | The
  modification of the loan terms was accounted for as debt extinguishment due
  to the addition of a conversion option to the debt instrument which was
  considered substantial. The fair value of the amended loan was recorded, and the book value of the old loan was
  removed from the Companys financial statements. Since Bank Hapoalim
  was a related party, the extinguishment gain of approximately $ 15,500 was
  recorded as an equity contribution in the year ended December 31, 2004.                                                                      
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | b.                           | In July
  2005, Bank Hapoalim assigned its loan to the Company to York. Following the
  assignment, York is considered a related party. At that time of the assignment,
  certain board members of the Company resigned and were replaced by new board
  members. In addition, the Companys CEO and Chairman of the Board Of
  Directors resigned and a co-founder of the Company rejoined the Company as
  President and Chief Executive Officer.                                                                                                                              

F  33

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- | ------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8:    | RESTRUCTURING OF DEBTS (Cont.)
|            |                               
|            | c.                             | In December
  2005, the Company and York further revised the terms of the loan. The new
  loan terms deferred $ 19,350 in principal payments due in installments from
  January 5, 2006 through January 1, 2008. The new payment schedule provided
  that: (i) no principal payments be due in 2006, 2007 or January 2008 (with
  those payments being deferred until July 2012) (ii) approximately $ 4,500 was
  to be paid on July 1, 2008; (iii) approximately $ 9,000 was to be paid in
  semi-annual installments on January 1 and July 1 of 2009, 2010 and 2011; (iv)
  approximately $ 4,500 was to be paid on January 1, 2012; and (v) approximately
  $ 34,500 was to be paid on July 1, 2012. In addition, the amendment modified
  the terms of the conversion option until September 30, 2006. The amendment
  lowered and set the conversion price to $ 6.75 per share until September 30,
  2006. In addition, during this period, the Company was granted the right to
  require the conversion of the outstanding loan from York at the same exercise
  price in the event that the closing share price of the Companys ordinary
  shares as published by NASDAQ over twenty consecutive trading days will
  exceed $ 9.00, provided that the aggregate trading volume during this period
  is a minimum of 1,700,000 ordinary shares. Beginning October 1, 2006, the conversion
  price will revert to the original price.
|            |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                | The
  modification of the loan was not considered substantial based on the
  measurement method prescribed by EITF 96-19, Debtors Accounting for a
  Modification or Exchange of Debt Instruments. In accordance with EITF 05-7,
  Accounting for Modifications to Conversion Options Embedded in Debt
  Instruments and Related Issues which was early adopted by the Company, the
  change in the fair value of the conversation option immediately before and
  after the modification in the amount of $ 3,800 was recorded as a discount on
  the loan and increase to shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | d.                             | In September
  2006, York converted the loan into the Companys ordinary shares. Based on
  Interpretation 1 of Opinion 26 and EITF No. 85-17, Accrued Interest upon
  Conversion of Convertible Debt, the net carrying amount of the convertible
  debt and accrued interest unpaid, including the unamortized discount, in the
  total amount of $ 68,100 was credited to shareholders equity upon conversion.
  See also Note 1b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F  34

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                                 |                                                                                                                                                                                                                                                                                                                                                                     
|----------- | --------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9:    | RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES
|            |                                                                
|            | a.                                                              | Restructuring
  charges:                                                                                                                                                                                                                                                                                                                                            
|            |                                                                 |                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                 | In 2001, the
  Group recorded restructuring charges of approximately $30,300, pursuant to
  restructuring plans committed to by management, of which until December 31,
  2006, $21,200 were paid in cash and $8,600 were treated as a non-cash
  expenses. As of December 31, 2006 and 2005 $500 and $1,400 were accrued as a
  short-term liability, respectively.
|            |                                                                 |                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                 | Restructuring
  charges were accounted for in accordance with EITF 94-3, Liability
  Recognition for Certain Employee Termination Benefits and Other Costs to Exit
  an Activity (Including Certain Costs Incurred in a Restructuring) (EITF
  94-3) and SAB No. 100, Restructuring and Impairment Charges.                                                   

| |                                                     |  |                                                                 |        |                                            |   |     | 
| | --------------------------------------------------- |  | --------------------------------------------------------------- | ------ | ------------------------------------------ | - | --- | 
| |                                                     |  | Restructuring
  
  charges in the 
  year ended 
  December 31, |        | Accrued 
  liability as of 
  December 31, |  
| |                                                     |  | 2001                                                            |        | 2006                                       |  
| |                                                     |  |                                                                 |       
| |                                                     |  |                                                                 |        |                                            |   |     | 
| | Employee
  terminations, including potential claims |  | $                                                               | 11,785 |                                            | $ | -   | 
| | Termination
  of lease commitments                  |  |                                                                 | 7,826  |                                            |   | 16  | 
| | Compensation
  to customers and suppliers           |  |                                                                 | 9,167  |                                            |   | 57  | 
| | Other                                               |  |                                                                 | 1,506  |                                            |   | 411 | 
| |                                                     |  |                                                                 |        |                                            |   |     | 
| |                                                     |  |                                                                 |        |                                            |   |     | 
| |                                                     |  | $                                                               | 30,284 |                                            | $ | 484 | 
| |                                                     |  |                                                                 |        |                                            |   |     | 

F  35

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                                           |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | ------------------------------------------------------------------------- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9:    | RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES
  (Cont.)
|            |                                                                           |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                           | 2. | In June
  2003, the Group recorded additional restructuring charges of approximately
  $3,900 of which until December 31, 2006, $1,600 were paid in cash and $1,600
  were treated as a non-cash expenses. As of December 31, 2006 and 2005 $800
  and $1,700 were accrued as a short-term liability, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                                           |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                           |    | Restructuring
  charges in the year ended December 31, 2003 were accounted for in accordance
  with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
  Activities. SFAS 146 requires that a liability for a cost associated with an
  exit or disposal activity be recognized and measured, initially at fair
  value, only when the liability is incurred; thereby, nullifying EITF 94-3,
  that required a liability for an exit cost to be recognized at the date of an
  entitys announcement and commitment to an exit plan. The adoption of SFAS
  146 resulted in delaying recognition for certain types of costs as compared
  to the provisions of EITF 94-3, especially for facility closure costs.

| |                                    |  |                                                                         |       |                                                    |   |     | 
| | ---------------------------------- |  | ----------------------------------------------------------------------- | ----- | -------------------------------------------------- | - | --- | 
| |                                    |  | Restructuring
  
  charges in the 
  year ended 
  December 31, 
  2003 |       | Accrued 
  liability as of 
  December 31, 
  2006 |  
| |                                    |  |                                                                         |      
| |                                    |  |                                                                         |       |                                                    |   |     | 
| | Employee
  terminations            |  | $                                                                       | 1,682 |                                                    | $ | -   | 
| | Termination
  of lease commitments |  |                                                                         | 1,614 |                                                    |   | 726 | 
| | Other                              |  |                                                                         | 609   |                                                    |   | 30  | 
| |                                    |  |                                                                         |       |                                                    |   |     | 
| |                                    |  |                                                                         |       |                                                    |   |     | 
| |                                    |  | $                                                                       | 3,905 |                                                    | $ | 756 | 
| |                                    |  |                                                                         |       |                                                    |   |     | 

| |    |                                             |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Write-offs
  and other significant charges:
| |    |                                            
| |    |                                             | In 2004, the
  Company decreased the carrying value of an asset and recorded an impairment
  of property and equipment in an amount of approximately $2,200, as a result
  of decreased future undiscounted cash flows from a certain customer and in
  accordance with SFAS 144. The impairment is included as impairment of
  tangible and intangible assets in the consolidated statement of operations.

F  36

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                 |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | --------------- | ------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME
|            |                
|            | a.              | The Company:
|            |                
|            |                 | 1.           | Tax benefits
  under the Law for the Encouragement of Capital Investments, 1959:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                
|            |                 |              | The Company
  has been granted an Approved Enterprise status for nine investment programs
  in the alternative program, by the Israeli Government under the Law for
  Encouragement of Capital Investments, 1959 (the Law).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |              | Since the
  Company is a foreign investors company, as defined by the above-mentioned
  law, it is entitled to a ten-year period of benefits, for enterprises
  approved after April 1993. The main tax benefits from the said status are a
  tax exemption for two to four years and a reduced tax rate (based on the
  percentage of foreign shareholding in each tax year) on income from all of
  its Approved Enterprises, for the remainder of the benefit period. These
  tax benefits are subject to a limitation of the earlier of 12 years from
  commencement of operations, or 14 years from receipt of approval. The periods
  of benefits of the approved enterprises will expire between 2006 and 2009.
|            |                 |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |              | If tax-exempt
  profits earned by the Companys Approved Enterprises are distributed to
  shareholders, such distributions would be taxed at the corporate tax rate
  applicable to such profits as if the Company had not elected the alternative
  program of benefits (depending on the level of foreign investment in the
  Company), currently between 15% to 25% for an Approved Enterprise.                                                                                                                                                                                                                                                                                                                     
|            |                 |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |              | The Company
  is entitled to claim accelerated depreciation with respect to equipment used
  by Approved Enterprises during the first five tax years of the operations
  of these assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                 |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |              | The
  entitlement to the above mentioned benefits is dependent upon the Company
  fulfilling the conditions stipulated by the Law, regulations published
  thereunder and the certificates 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, with the addition of
  linkage differences to the Israeli Consumer Price Index (CPI) and interest.                                                                                                                                                                   
|            |                 |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                 |              | On April 1,
  2005, an amendment to the Law came into effect (the Amendment) and has
  significantly changed the provisions of the 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 an Approved Enterprise,
  such as provisions generally requiring that at least 25% of the Approved
  Enterprise income will be derived from export. Additionally, the Amendment
  enacted major changes in the manner in which tax benefits are awarded under
  the Law so that companies no longer require Investment Center approval in
  order to qualify for tax benefits.                                        

F  37

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                         |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | ----------------------- | --------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME (Cont.)
|            |                        
|            |                         |                                                                                         | However, the
  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
  Enterprises programs will generally not be subject to the provisions of the
  Amendment. As a result of the Amendment, 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 in the future to
  record deferred tax liability with respect to such tax-exempt income. As of December
  31, 2006, the Company did not generate income under the provisions of the new
  law.
|            |                         |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                         |                                                                                         | Income from
  sources other than an Approved Enterprise during the benefit period is
  subject to tax at the regular corporate tax rate. Until December 31, 2003,
  the corporate tax rate was 36%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                         |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                         |                                                                                         | In June 2004
  and in July 2005, the Knesset (Israels parliament) adopted 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 as follows: 31% in 2006, 29% in 2007, 27%
  in 2008, 26% in 2009 and 25% in 2010 and thereafter.                                                                                                                                                                                                                                                                                                                                                          
|            |                         |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                         |                                                                                         | The
  entitlement to the above mentioned benefits is dependent upon the Company
  fulfilling the conditions stipulated by the Law, regulations published there
  under and the certificates 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, with the addition of
  linkage differences to the Israeli Consumer Price Index (CPI) and interest.                                                                                                                                                                                               
|            |                         |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                         | 2.                                                                                      | Measurement
  of results for tax purposes under the Income Tax (Inflationary Adjustments)
  Law, 1985:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                         |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                         |                                                                                         | Under this
  law, results for tax purposes are measured and reflected in terms of earnings
  in NIS. As explained in Note 2b, the financial statements are measured in
  U.S. dollars. The annual changes in the NIS / dollar exchange rate causes a
  further difference between taxable income and the income before taxes shown
  in the financial statements. In accordance with paragraph 9(f) of SFAS No.
  109, the Company has not provided deferred income taxes on the difference
  between the cost of assets and liabilities in the reporting currency and
  their tax base.                                                                                                                                                                
|            |                         |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | b.                      | Non-Israeli
  subsidiaries:                                                            
|            |                         |                                                                                        
|            |                         | Non-Israeli
  subsidiaries are taxed based on tax laws in their countries of residence.

F  38

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | ----------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME (Cont.)
|            |                        
|            | c.                      | Carryforward
  tax losses and credits:                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                         | At December
  31, 2006, the Company had operating loss carry forwards for Israeli income
  tax purposes of approximately $55,000, which may be offset indefinitely
  against future taxable income indefinitely.                                                                                                                                                                                                                                                     
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                         | Carryforward
  tax losses in the U.S. subsidiaries amount to approximately $217,000.
  Utilization of U.S. net operating losses may be subject to substantial annual
  limitation due to the change in ownership provisions of Internal Revenue
  Code of 1986 and similar state provisions. The annual limitations may result
  in the expiration of net operating loss before utilization. In the U.S,
  carryforward tax losses can be utilized within 20 years.
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                         | In addition
  the Group has carryforward tax losses relating to other subsidiaries of
  approximately $10,000.                                                                                                                                                                                                                                                                                                                                                       
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | d.                      | 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
  Groups deferred tax liabilities and assets are as follows:                                                                                                                                                   

| |    |                                                                                  |  |                |          |      |   |          |  
| | -- | -------------------------------------------------------------------------------- |  | -------------- | -------- | ---- | - | -------- | -
| |    |                                                                                  |  | December
  31, |         
| |    |                                                                                  |  |                |         
| |    |                                                                                  |  | 2006           |          | 2005 |  
| |    |                                                                                  |  |                |          |      |  
| | 1. | Provided in respect of the following:                                            |  |                |          |      |   |          |  
| |    | Carryforward tax losses                                                          |  | $              | 95,931   |      | $ | 97,304   |  
| |    | Temporary differences relating to property
  and equipment                       |  |                | 22,665   |      |   | 26,557   |  
| |    | Other                                                                            |  |                | 15,036   |      |   | 12,897   |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    | Gross deferred tax assets                                                        |  |                | 133,632  |      |   | 136,758  |  
| |    | Valuation allowance                                                              |  |                | (124,909 | )    |   | (123,694 | )
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    | Net deferred tax assets                                                          |  |                | 8,723    |      |   | 13,064   |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    | Gross deferred tax liabilities                                                   |  |                |          |      |   |          |  
| |    | Temporary differences relating to property
  and equipment                       |  |                | (4,256   | )    |   | (6,920   | )
| |    | Other                                                                            |  |                | (4,644   | )    |   | (7,341   | )
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  |                | (8,900   | )    |   | (14,261  | )
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    | Net deferred tax liabilities                                                     |  | $              | (177     | )    | $ | (1,197   | )
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    | Domestic                                                                         |  | $              | -        |      | $ | -        |  
| |    | Foreign                                                                          |  |                | (177     | )    |   | (1,197   | )
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  | $              | (177     | )    | $ | (1,197   | )
| |    |                                                                                  |  |                |          |      |   |          |  
| | 2. | Deferred taxes are included in the
  consolidated  balance sheets, as
  follows: |  |                |          |      |   |          |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    | Current liabilities                                                              |  | $              | (113     | )    | $ | (352     | )
| |    | Non-current liabilities                                                          |  |                | (64      | )    |   | (845     | )
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  |                |          |      |   |          |  
| |    |                                                                                  |  | $              | (177     | )    | $ | (1,197   | )
| |    |                                                                                  |  |                |          |      |   |          |  

F  39

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                         |                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | ----------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME (Cont.)
|            |                        
|            |                         | 3.                                                                                              | As of
  December 31, 2006, the Group increased the valuation allowance by
  approximately $ 1,215, resulting from changes in other temporary differences
  and in carry forward tax losses. Management currently believes that it is
  more likely than not that the deferred tax regarding the loss carry forwards
  and other temporary differences for which valuation allowance was provided
  will not be realized in the foreseeable future.
|            |                         |                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | e.                      | Reconciling
  items between the statutory tax rate of the Company and the effective tax
  rate:

| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  | ------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | - | ------------------------- | ----- | ---- | ------ | ----- | - | ------ | ----- | -
| |  |                                                                                            |                                                                             |   | Year ended
  December 31, |      
| |  |                                                                                            |                                                                             |   |                           |      
| |  |                                                                                            |                                                                             |   | 2006                      |       | 2005 |        | 2004  |  
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |  
| |  | Income (loss) before taxes, as reported in
  the consolidated statements of operations     |                                                                             | $ | 12,844                    |       | $    | (990   | )     | $ | (9,123 | )    
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  | Statutory tax rate                                                                         |                                                                             |   | 31                        | %     |      | 34     | %     |   | 35     | %    
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  | Theoretical tax expenses (benefit) on the
  above amount at the Israeli statutory tax rate |                                                                             | $ | 3,982                     |       | $    | (337   | )     | $ | (3,193 | )    
| |  | Currency differences                                                                       |                                                                             |   | (1,392                    | )     |      | 1,834  |       |   | (176   | )    
| |  | Tax adjustment in respect of different tax
  rates and Approved Enterprise status (1)    |                                                                             |   | (3,981                    | )     |      | (971   | )     |   | (3,324 | )    
| |  | Reduction in deferred taxes due to
  reduction in future tax rates                         |                                                                             |   | -                         |       |      | 2,509  |       |   | -      |      
| |  | Changes in valuation allowance                                                             |                                                                             |   | 1,215                     |       |      | (9,798 | )     |   | (4,034 | )    
| |  | Forfeiture of carry forward tax losses                                                     |                                                                             |   | -                         |       |      | 4,762  |       |   | 4,029  |      
| |  | Taxes paid in respect of prior years                                                       |                                                                             |   | 898                       |       |      | 2,546  |       |   | 288    |      
| |  | Stock compensation relating to options per
  SFAS 123(R)                                   |                                                                             |   | 1,141                     |       |      | -      |       |   | -      |      
| |  | Nondeductible expenses and other permanent
  differences                                   |                                                                             |   | 494                       |       |      | 2,581  |       |   | 10,839 |      
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  |                                                                                            |                                                                             |   | $                         | 2,357 |      | $      | 3,126 |   | $      | 4,429 |  
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  | (1)                                                                                        | Per share
  amounts (basic) of the tax benefit results from the exemption   |   | $                         | (0.08 | )    | $      | (0.04 | ) | $      | (0.15 | )
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  
| |  |                                                                                            | Per share
  amounts (diluted) of the tax benefit results from the exemption |   | $                         | (0.07 | )    | $      | (0.04 | ) | $      | (0.15 | )
| |  |                                                                                            |                                                                             |   |                           |       |      |        |       |   |        |       |  

F  40

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                         |                                                                         
|----------- | ----------------------- | ------------------------------------------------------------------------
|NOTE 10:   | TAXES ON INCOME (Cont.)
|            |                        
|            | f.                      | Taxes on
  income included in the consolidated statements of operations:

| |  |  |                         |  |                           |        |      |   |       |   |   |       | 
| |  |  | ----------------------- |  | ------------------------- | ------ | ---- | - | ----- | - | - | ----- | 
| |  |  |                         |  | Year ended
  December 31, |       
| |  |  |                         |  |                           |       
| |  |  |                         |  | 2006                      |        | 2005 |   | 2004  |  
| |  |  |                         |  |                           |        |      |   |       |  
| |  |  |                         |  |                           |        |      |   |       |   |   |       | 
| |  |  | Tax expenses            |  |                           | 3,488  |      |   | 3,599 |   |   | 2,560 | 
| |  |  |                         |  |                           |        |      |   |       |   |   |       | 
| |  |  | Deferred
  income taxes |  |                           | (1,131 | )    |   | (473  | ) |   | 1,869 | 
| |  |  |                         |  |                           |        |      |   |       |   |   |       | 
|
| |  |  |                         |  | $                         | 2,357  |      | $ | 3,126 |   | $ | 4,429 | 
| |  |  |                         |  |                           |        |      |   |       |   |   |       | 
|
| |  |  | Domestic                |  | $                         | 684    |      | $ | 1,549 |   | $ | 134   | 
| |  |  | Foreign                 |  |                           | 1,673  |      |   | 1,577 |   |   | 4,295 | 
| |  |  |                         |  |                           |        |      |   |       |   |   |       | 
|
| |  |  |                         |  | $                         | 2,357  |      | $ | 3,126 |   | $ | 4,429 | 
| |  |  |                         |  |                           |        |      |   |       |   |   |       | 

| |    |                                                                   
| | -- | ------------------------------------------------------------------
| | g. | Income
  (loss) before taxes on income from continuing operations:

| |  |          |  |                           |        |      |   |         |   |   |         |  
| |  | -------- |  | ------------------------- | ------ | ---- | - | ------- | - | - | ------- | -
| |  |          |  | Year ended
  December 31, |       
| |  |          |  |                           |       
| |  |          |  | 2006                      |        | 2005 |   | 2004    |  
| |  |          |  |                           |        |      |   |         |  
| |  |          |  |                           |        |      |   |         |   |   |         |  
| |  | Domestic |  | $                         | 21,628 |      | $ | 9,111   |   | $ | (39,117 | )
| |  | Foreign  |  |                           | (8,784 | )    |   | (10,101 | ) |   | 29,994  |  
| |  |          |  |                           |        |      |   |         |   |   |         |  
|
| |  |          |  | $                         | 12,844 |      | $ | (990    | ) | $ | (9,123  | )
| |  |          |  |                           |        |      |   |         |   |   |         |  

|            |                                           |                        
|----------- | ----------------------------------------- | -----------------------
|NOTE 11:   | SUPPLEMENTARY
  BALANCE SHEET INFORMATION
|            |                                           |                        
|            | a.                                        | Other
  current assets:

| |  |                                                          |  |                |        |      |   |        | 
| |  | -------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ | 
| |  |                                                          |  | December
  31, |       
| |  |                                                          |  |                |       
| |  |                                                          |  | 2006           |        | 2005 |  
| |  |                                                          |  |                |        |      |  
|
| |  | Receivables
  in respect of capital leases (see c below) |  | $              | 6,157  |      | $ | 9,529  | 
| |  | VAT
  receivables                                        |  |                | 5,854  |      |   | 5,437  | 
| |  | Prepaid
  expenses                                       |  |                | 6,535  |      |   | 2,951  | 
| |  | Deferred
  charges                                       |  |                | 16,921 |      |   | 3,213  | 
| |  | Tax
  receivables                                        |  |                | 1,178  |      |   | 2,310  | 
| |  | Employees                                                |  |                | 203    |      |   | 200    | 
| |  | Other                                                    |  |                | 3,580  |      |   | 3,575  | 
| |  |                                                          |  |                |        |      |   |        | 
|
| |  |                                                          |  | $              | 40,428 |      | $ | 27,215 | 
| |  |                                                          |  |                |        |      |   |        | 

F  41

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                 |    |                                                                                                 
|----------- | ----------------------------------------------- | -- | ------------------------------------------------------------------------------------------------
|NOTE 11:   | SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)
|            |                                                 |    |                                                                                                 
|            | b.                                              | 1. | Long-term
  trade receivables, receivables in respect of capital leases and other
  receivables:

| |  |  |                                                                    |  |              |        |      |   |        | 
| |  |  | ------------------------------------------------------------------ |  | ------------ | ------ | ---- | - | ------ | 
| |  |  |                                                                    |  | December 31, |       
| |  |  |                                                                    |  |              |       
| |  |  |                                                                    |  | 2006         |        | 2005 |  
| |  |  |                                                                    |  |              |        |      |  
|
| |  |  | Long-term receivables in respect of capital
  leases (see c below) |  | $            | 5,558  |      | $ | 8,721  | 
| |  |  | Long-term trade receivables                                        |  |              | 8,291  |      |   | 8,282  | 
| |  |  | Other receivables                                                  |  |              | 5,392  |      |   | 5,754  | 
| |  |  |                                                                    |  |              |        |      |   |        | 
|
| |  |  |                                                                    |  | $            | 19,241 |      | $ | 22,757 | 
| |  |  |                                                                    |  |              |        |      |   |        | 

| |  |    |                                                                                                                                             
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2. | The
  following amounts represent the unbilled amounts of the long-term receivables
  as of December 31, 2006 (excluding other receivables):

| |  |  |                            |  |   |        |  
| |  |  | -------------------------- |  | - | ------ | -
| |  |  | Year
  ending December 31, |  |   |        |  
| |  |  |                            |  |   |        |  
|
| |  |  | 2008                       |  | $ | 8,828  |  
| |  |  | 2009                       |  |   | 4,826  |  
| |  |  | 2010                       |  |   | 2,084  |  
| |  |  | 2011                       |  |   | 541    |  
| |  |  |                            |  |   |        |  
|
| |  |  |                            |  |   | 16,279 |  
| |  |  |                            |  |   |        |  
|
| |  |  | Unearned
  interest income |  |   | (2,430 | )
| |  |  |                            |  |   |        |  
|
| |  |  |                            |  | $ | 13,849 |  
| |  |  |                            |  |   |        |  

| |    |                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | Receivables
  in respect of capital and operating leases:                                                                                                                                            
| |    |                                                                                                                                                                                                      
| |    | The Groups
  contracts with customers contain long-term commitments, for remaining periods
  ranging from one to five years, to provide network services, equipment,
  installation and maintenance.

F  42

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                
|----------- | -----------------------------------------------
|NOTE
11:   | SUPPLEMENTARY
BALANCE SHEET INFORMATION (Cont.)

The
  aggregate minimum future payments to be received by the Group under these
  contracts as of December 31, 2006, are as follows (including unearned
  interest income in the amount of $ 1,000):


Capital
  lease

Operating 
  lease

TotalYear ending December 31,2007




$
6,419

$
4,929

$
11,3482008





3,392


4,231


7,6232009





1,505


3,668


5,1732010





976


3,868


4,8442011





486


781


1,267$
12,778

$
17,477

$
30,255


The net
  investments in capital lease receivables as of December 31, 2006, are $
  11,715. Total revenues from capital and operating leases amounted to $ 7,996,
  $ 5,700 and $ 16,800 in the years ended December 31, 2006, 2005 and 2004,
  respectively.d.
Short-term
  bank credit:The
  following is classified by currency and interest rates:


Weighted average
  interest rateDecember 31,

December 31,2006

2005

2006

2005%

U.S. dollars in thousandsLinked to
  the dollar


6.50


4.20

$
1,200

$
8,172


e.
Other
  accounts payable:


December 31,2006

2005Deferred revenue








39,382


11,752Payroll and related employees accruals








10,807


8,689Taxes payables







$
10,069

$
8,579Advances from customers








4,393


1,839Provision for vacation pay








3,876


3,234VAT payable








708


1,148Deferred taxes








113


352Current maturities of long-term liabilities
  with respect to capital lease agreements






74


87Other








2,707


992$
72,129

$
36,672


F  43

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                 |                   
|----------- | ----------------------------------------------- | ------------------
|NOTE 11:   | SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)
|            |                                                
|            | f.                                              | Long-term
  loans:

|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|------------------------------ |  | ---------- |  | ----------------- |  | ----------- |  | ------------ |  | ---- | ------ | ---- | - | ------ | 
|                               |  |            |  | Interest rate for |  |             |  | December 31, | 
|                               |  |            |  |                   |  |             |  |              | 
|                               |  |            |  | 2006              |  | 2005        |  |              |  | 2006 |        | 2005 |  
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |  
|                               |  | Linkage    |  | %                 |  | %           |  | Maturity     |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|Restructured loans (a):        |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|Loan from Bank Leumi (b)(d)(g) |  | U.S.dollar |  | LIBOR +1.6%       |  | LIBOR +2.5% |  | 2007-2011    |  | $    | 20,000 |      | $ | 24,000 | 
|Other long-term loans (e)      |  | U.S.dollar |  | 5.0%              |  | 5.0%        |  | 2007-2008    |  |      | 1,829  |      |   | 3,569  | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      | 21,829 |      |   | 27,569 | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|Other loans:                   |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|Loans from a bank (f)          |  | Euro       |  | 6.3%              |  | 5.86%-6.3%  |  | 2007-2021    |  |      | 6,665  |      |   | 6,153  | 
|Loans from a bank              |  | U.S.dollar |  |                   |  | 5.7%        |  | 2007-2008    |  |      | -      |      |   | 1,473  | 
|Other long-term loans          |  | U.S.dollar |  | 0%                |  | 0%          |  | 2007         |  |      | 309    |      |   | 1,551  | 
|Other long-term loans          |  | U.S.dollar |  | 5%                |  | 3.0%-5.0%   |  | 2007-2008    |  |      | 52     |      |   | 109    | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      | 7,026  |      |   | 9,286  | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      | 28,855 |      |   | 36,855 | 
|Less - current maturities      |  |            |  |                   |  |             |  |              |  |      | 6,537  |      |   | 7,712  | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 
|                               |  |            |  |                   |  |             |  |              |  | $    | 22,318 |      | $ | 29,143 | 
|                               |  |            |  |                   |  |             |  |              |  |      |        |      |   |        | 

| |    |                              
| | -- | -----------------------------
| | g. | Long-term
  convertible loan:

|                                                                                        |  |             |  |               |  |          |  |              |  |      |   |      |   |        | 
|--------------------------------------------------------------------------------------- |  | ----------- |  | ------------- |  | -------- |  | ------------ |  | ---- | - | ---- | - | ------ | 
|                                                                                        |  |             |  | Interest rate |  |          |  | December 31, | 
|                                                                                        |  |             |  |               |  |          |  |              | 
|                                                                                        |  |             |  | 2006          |  | 2005     |  |              |  | 2006 |   | 2005 |  
|                                                                                        |  |             |  |               |  |          |  | Contractual  |  |      |   |      |  
|                                                                                        |  | Linkage     |  | %             |  | %        |  | Maturity     |  |      |   |      |   |        | 
|                                                                                        |  |             |  |               |  |          |  |              |  |      |   |      |   |        | 
|                                                                                        |  |             |  |               |  |          |  |              |  |      |   |      |   |        | 
|Loan from Bank Hapoalim / York (a) (b) (c)
  (h)                                        |  | U.S. dollar |  | -             |  | LIBOR+2% |  | 2008-2012    |  | $    | - |      | $ | 70,400 | 
|Less - fair value of change in conversion
  feature of a related party convertible debt |  |             |  |               |  |          |  |              |  |      | - |      |   | 3,798  | 
|                                                                                       
|Less - current maturities                                                               |  |             |  |               |  |          |  |              |  |      | - |      |   | -      | 
|                                                                                        |  |             |  |               |  |          |  |              |  |      |   |      |   |        | 
|                                                                                        |  |             |  |               |  |          |  |              |  |      |   |      |   |        | 
|                                                                                        |  |             |  |               |  |          |  |              |  | $    | - |      | $ | 66,602 | 
|                                                                                        |  |             |  |               |  |          |  |              |  |      |   |      |   |        | 

| |  |     |                                                                                                                                                                                                                                                                  
| |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a) | In March
  2003, the Company concluded a restructuring process reaching an agreement
  with the banks and other creditors, which revised the loan terms. In April
  2004 and in December 2005, the Company further revised the terms of York loan
  (see Note 8).

F  44

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ----------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:   | SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)
|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                 | (b)                                                                            | In addition
  to existing security interests in their favor, the Company granted the banks,
  as referred to in Note 8, a first priority security interest consisting of a
  floating charge on all of the Companys assets and a pledge on Spacenet Inc.
  shares owned by the Company. The Company granted a second priority security
  interest in the same collateral to the holders of the new notes.
|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                 | (c)                                                                            | As of
  December 31, 2006, the Company is in compliance with its covenants.                                                                                                                                                                                                                                                                                                                               
|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                 | (d)                                                                            | The Company
  granted the lender a first priority security interest of approximately $ 20,000
  in its facilities in Israel.                                                                                                                                                                                                                                                                              
|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                 | (e)                                                                            | Spacenet
  Inc. granted the lender a security interest of approximately $ 1,800 in
  certain of its computers, machinery and hub equipment.                                                                                                                                                                                                                                                               
|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                 | (f)                                                                            | A Dutch
  subsidiary of the Company entered into a mortgage and loan agreement with a
  German bank. The amount of the mortgage as of December 31, 2006, is
  collateralized by the subsidiarys facilities in Germany.                                                                                                                                                                                   
|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                 | (g)                                                                            | In order to
  secure credit lines provided by the Banks, the Company granted the Banks a
  second priority security charge on its facilities. As of December 31, 2006,
  the Company used approximately $ 12,400 of those credit lines.                                                                                                                                                                   
|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                 | (h)                                                                            | In July
  2005, Bank Hapoalim assigned its loan to the Company to York (see further
  discussion in Note 8b). In September 2006, York converted the loan into the
  Companys ordinary shares, see Note 7a.                                                                                                                                                                                               
|            |                                                 |                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                           
|            | h.                                              | Long-term
  debt maturities for loans after December 31, 2006, are as follows:

|                           |  |   |        |  | 
|-------------------------- |  | - | ------ |  | 
|Year
  ending December 31, |  |   |        |  | 
|                           |  |   |        |  | 
|                           |  |   |        |  | 
|2007                       |  | $ | 6,537  |  | 
|2008                       |  |   | 4,318  |  | 
|2009                       |  |   | 4,327  |  | 
|2010                       |  |   | 4,348  |  | 
|2011                       |  |   | 4,365  |  | 
|2012 and thereafter        |  |   | 4,960  |  | 
|                           |  |   |        |  | 
|                           |  |   |        |  | 
|                           |  | $ | 28,855 |  | 
|                           |  |   |        |  | 

Interest expenses on the
long-term loans amounted to $ 5,400, $ 6,600 and $ 3,800 for the years ended
December 31, 2006, 2005 and 2004, respectively.

F  45

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
SUBSIDIARIES        
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                 |                               
|----------- | ----------------------------------------------- | ------------------------------
|NOTE 11:   | SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)
|            |                                                 |                               
|            | i.                                              | Other
  long-term liabilities:

|                                      |  |              |        |      |   |        | 
|------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                      |  | December 31, |       
|                                      |  |              |       
|                                      |  | 2006         |        | 2005 |  
|                                      |  |              |        |      |  
|                                      |  |              |        |      |   |        | 
|Deferred
  revenue                    |  | $            | 14,246 |      | $ | 13,488 | 
|Liability
  for space segment         |  |              | 2,795  |      |   | 3,651  | 
|Restructuring
  charges (see Note 9a) |  |              | 1,889  |      |   | 2,147  | 
|Deferred
  taxes                      |  |              | 64     |      |   | 845    | 
|Other                                 |  |              | 2,291  |      |   | 533    | 
|                                      |  |              |        |      |   |        | 
|                                      |  |              |        |      |   |        | 
|                                      |  | $            | 21,285 |      | $ | 20,664 | 
|                                      |  |              |        |      |   |        | 

|            |                                        |                                          
|----------- | -------------------------------------- | -----------------------------------------
|NOTE 12:   | SELECTED STATEMENTS OF OPERATIONS DATA
|            |                                        |                                          
|            | a.                                     | Research and
  development expenses, net:

|                           |  |                         |        |      |   |        |  |   |        | 
|-------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                           |  | Year ended December 31, |       
|                           |  |                         |       
|                           |  | 2006                    |        | 2005 |   | 2004   | 
|                           |  |                         |        |      |   |        | 
|                           |  |                         |        |      |   |        |  |   |        | 
|Total cost                 |  | $                       | 15,687 |      | $ | 16,944 |  | $ | 19,134 | 
|Less:                      |  |                         |        |      |   |        |  |   |        | 
|Royalty bearing grants     |  |                         | -      |      |   | 1,633  |  |   | 2,917  | 
|Non-royalty bearing grants |  |                         | 2,045  |      |   | 1,317  |  |   | 2,338  | 
|                           |  |                         |        |      |   |        |  |   |        | 
|                           |  |                         |        |      |   |        |  |   |        | 
|                           |  | $                       | 13,642 |      | $ | 13,994 |  | $ | 13,879 | 
|                           |  |                         |        |      |   |        |  |   |        | 

| |    |                                   
| | -- | ----------------------------------
| | b. | Allowance
  for doubtful accounts:

|                               |  |                         |        |      |   |        |   |   |        |  
|------------------------------ |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                               |  | Year ended December 31, |       
|                               |  |                         |       
|                               |  | 2006                    |        | 2005 |   | 2004   |  
|                               |  |                         |        |      |   |        |  
|                               |  |                         |        |      |   |        |   |   |        |  
|Balance at
  beginning of year |  | $                       | 12,311 |      | $ | 14,506 |   | $ | 18,102 |  
|Increase
  during the year     |  |                         | 850    |      |   | 422    |   |   | 717    |  
|Write-off of
  bad debts       |  |                         | (452   | )    |   | (2,617 | ) |   | (4,313 | )
|                               |  |                         |        |      |   |        |   |   |        |  
|                               |  |                         |        |      |   |        |   |   |        |  
|Balance at
  the end of year   |  | $                       | 12,709 |      | $ | 12,311 |   | $ | 14,506 |  
|                               |  |                         |        |      |   |        |   |   |        |  

F  46

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
SUBSIDIARIES        
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                |                           
|----------- | ---------------------------------------------- | --------------------------
|NOTE 12:   | SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)
|            |                                                |                           
|            | c.                                             | Financial
  expenses, net:

|                                                                               |  |                         |       |      |   |        |   |   |       |  
|------------------------------------------------------------------------------ |  | ----------------------- | ----- | ---- | - | ------ | - | - | ----- | -
|                                                                               |  | Year ended December 31, |      
|                                                                               |  |                         |      
|                                                                               |  | 2006                    |       | 2005 |   | 2004   |  
|                                                                               |  |                         |       |      |   |        |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|Income:                                                                        |  |                         |       |      |   |        |   |   |       |  
|Interest on cash equivalents, bank deposits
  and restricted cash              |  | $                       | 5,648 |      | $ | 3,058  |   | $ | 2,378 |  
|Interest with respect to capital lease                                         |  |                         | 1,895 |      |   | 2,890  |   |   | 3,168 |  
|Other (mainly foreign exchange gains and
  losses)                             |  |                         | 951   |      |   | 778    |   |   | 298   |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|                                                                               |  |                         | 8,494 |      |   | 6,726  |   |   | 5,844 |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|Expenses:                                                                      |  |                         |       |      |   |        |   |   |       |  
|Interest with respect to short-term bank
  credit and trade payables and other |  |                         | 1,433 |      |   | 1,303  |   |   | 1,403 |  
|Interest with respect to long-term loans                                       |  |                         | 5,398 |      |   | 6,551  |   |   | 3,757 |  
|Interest with respect to capital lease                                         |  |                         | -     |      |   | 56     |   |   | 9     |  
|Accretion of discount                                                          |  |                         | 504   |      |   | -      |   |   | -     |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|Other                                                                          |  |                         | 1,901 |      |   | 1,493  |   |   | 941   |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|                                                                               |  |                         | 9,236 |      |   | 9,403  |   |   | 6,110 |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|                                                                               |  |                         |       |      |   |        |   |   |       |  
|                                                                               |  | $                       | (742  | )    | $ | (2,677 | ) | $ | (266  | )
|                                                                               |  |                         |       |      |   |        |   |   |       |  

F  47

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
SUBSIDIARIES        
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                                                                                             |                                                                                                                                                                                       
|----------- | --------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION                                                                             
|            |                                                                                                                             |                                                                                                                                                                                       
|            | The Group applies
  SFAS No. 131, Disclosures About Segments of an Enterprise and Related
  Information (SFAS No. 131).
|            |                                                                                                                             |                                                                                                                                                                                       
|            | a.                                                                                                                          | Revenues by
  geographic areas:                                                                                                                                                       
|            |                                                                                                                             |                                                                                                                                                                                       
|            |                                                                                                                             | Following is
  a summary of revenues by geographic areas. Revenues are attributed to
  geographic areas, based on the location of the end customers, and in
  accordance with FAS 131:

|                                                              |  |                         |         |      |   |         |  |   |         | 
|------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                              |  | Year ended December 31, |        
|                                                              |  |                         |        
|                                                              |  | 2006                    |         | 2005 |   | 2004    | 
|                                                              |  |                         |         |      |   |         | 
|                                                              |  |                         |         |      |   |         |  |   |         | 
|United
  States                                               |  | $                       | 94,016  |      | $ | 86,488  |  | $ | 94,363  | 
|South
  America and Central America                           |  |                         | 79,557  |      |   | 61,974  |  |   | 88,359  | 
|Asia                                                          |  |                         | 38,160  |      |   | 36,915  |  |   | 32,650  | 
|Africa                                                        |  |                         | 18,631  |      |   | 13,196  |  |   | 14,096  | 
|Europe *)                                                     |  |                         | 18,346  |      |   | 10,822  |  |   | 11,710  | 
|Other                                                         |  |                         | -       |      |   | -       |  |   | 320     | 
|                                                              |  |                         |         |      |   |         |  |   |         | 
|                                                              |  |                         |         |      |   |         |  |   |         | 
|                                                              |  | $                       | 248,710 |      | $ | 209,395 |  | $ | 241,498 | 
|                                                              |  |                         |         |      |   |         |  |   |         | 
|                                                              |  |                         |         |      |   |         |  |   |         | 
|*)      Including
  revenues from related parties as follows: |  |                         |         |      |   |         |  |   |         | 
|Satlynx                                                       |  | $                       | -       |      | $ | 1,621   |  | $ | 2,864   | 
|                                                              |  |                         |         |      |   |         |  |   |         | 

| |    |                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | During 2006,
  2005 and 2004, the Company did not have any single customer or country
  generating revenues exceeding 10% of the Companys total revenues.
| |    |                                                                                                                                                           
| | c. | The Groups
  long-lived assets are located as follows:                                                                                                   

|                |  |              |         |      |   |         | 
|--------------- |  | ------------ | ------- | ---- | - | ------- | 
|                |  | December 31, |        
|                |  |              |        
|                |  | 2006         |         | 2005 |  
|                |  |              |         |      |  
|                |  |              |         |      |   |         | 
|Israel          |  | $            | 76,912  |      | $ | 80,100  | 
|Latin
  America |  |              | 26,843  |      |   | 26,586  | 
|United
  States |  |              | 18,524  |      |   | 21,891  | 
|Europe          |  |              | 7,542   |      |   | 7,607   | 
|Other           |  |              | 432     |      |   | 315     | 
|                |  |              |         |      |   |         | 
|                |  |              |         |      |   |         | 
|                |  | $            | 130,253 |      | $ | 136,499 | 
|                |  |              |         |      |   |         | 

F  48

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                        |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ------------------------------------------------------ | ------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)
|            |                                                        |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | d.                                                     | Information on
  operating segments:
|            |                                                        |                                     
|            |                                                        | Operating
  Segments:               
|            |                                                        |                                     
|            |                                                        | 1)                                   | General:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                        |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                        |                                      | In December
  2004, the Companys board approved a re-organization of its business under
  two separate reportable business segments effective January 1, 2005. During
  the year ended December 31, 2004, the Company operated under a single
  reportable business segment. During the third quarter of 2005, the Company
  further refined its segment reporting by dividing the Spacenet segment into
  two segments,  and the Companys 2005
  financial statements reflect operation under three business units: (i) Gilat
  Network Systems, a provider of VSAT-based
  networks and associated professional services, including turnkey and
  management services, to telecom operators worldwide.; (ii) Spacenet
  Inc., which provides satellite network
  services to enterprises, small office/home office, or SOHOs, and residential
  customers in the United States; and (iii) Spacenet Rural
  Communications, which provides telephony,
  Internet and data services primarily for rural communities in emerging
  markets in Latin America under projects that are subsidized by government
  entities. The following provides proforma information about the
  Companys business during 2004 and 2005, as if its business had operated
  under the new business segments.
|            |                                                        |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                        |                                      | The Companys
  reportable segments are differentiated by whether the nature of the
  transaction is dominated by an equipment sale (a Gilat Network Systems
  transaction) or by the operation of an enterprise or consumer network (a
  Spacenet Inc. transaction) or by the operation of a rural network in Latin
  America (a Spacenet Rural Communications transaction). Segments are managed
  separately and can be described as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                        |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                        |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                        |                                      | Gilat
  Network Systems (GNS): GNS focuses on sales of solutions to operators by
  provision of its proprietary and/or DVB-RCS standard VSAT technology and
  hybrid solutions. The business of GNS reflects the generation of revenue from
  sales of the Companys satellite-based networking equipment, professional
  services and applications. The charges to customers for satellite networking
  products, applications or professional services vary with the number of
  sites, the location of sites, installation services required and the types of
  technologies and protocols employed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                        |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                        |                                      | Spacenet
  Inc.: Spacenet Inc.s business consists of business activity as an operator
  of communications networks for the provision of telephony, data and Internet
  services to its customers, primarily in the Americas. The charges to
  customers for networking services vary with the type of operations provided,
  the length of the contract, the amount of satellite capacity and the types of
  technologies and protocols employed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F  49

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                        |    |                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                        
|----------- | ------------------------------------------------------ | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)
|            |                                                        |    |                                                                                                                                                                                                                                                                                                                                           
|            |                                                        |    | Spacenet
  Rural Communications: The business of Spacenet Rural Communications is comprised
  of several government-sponsored rural projects for telephony and/or internet
  and data connectivity. To date, this business segment has satellite-based
  rural telephony and internet access solutions in remote areas in Latin
  America.
|            |                                                        |    |                                                                                                                                                                                                                                                                                                                                           
|            |                                                        | 2) | Information
  on the reportable segments:                                                                                                                                                                                                                                                                                                 
|            |                                                        |    |                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                        
|            |                                                        |    | a)                                                                                                                                                                                                                                                                                                                                         | The
  measurement of the reportable operating segments is based on the same
  accounting principles applied in these financial statements.                                                                                                                                             
|            |                                                        |    |                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                        
|            |                                                        |    | b)                                                                                                                                                                                                                                                                                                                                         | When
  reported by segment, the results of Spacenet Inc. and Spacenet Rural
  Communication are presented based upon transfer prices. The consolidation
  line reflects the intercompany profits that have been realized in order to
  adjust the transfer price to the Companys cost.
|            |                                                        |    |                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                        
|            |                                                        |    | c)                                                                                                                                                                                                                                                                                                                                         | Financial
  data relating to reportable operating segments:                                                                                                                                                                                                                            

|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|------------------------------------ |  | ---------------------------- | ------ | -------------- | - | ------ |  | ------------- | ------- | ----- | - | ------- | - | - | ------- | -
|                                     |  | Year ended December 31, 2006 |       
|                                     |  |                              |       
|                                     |  | Spacenet Inc                 |        | Spacenet Rural |   | GNS    |  | Consolidation |         | Total |  
|                                     |  |                              |        |                |   |        |  |               |         |       |  
|Revenues:                            |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|External revenues                    |  | $                            | 93,623 |                | $ | 38,870 |  | $             | 116,217 |       | $ | -       |   | $ | 248,710 |  
|Internal revenues                    |  |                              |        |                |   |        |  |               | 19,791  |       |   | (19,791 | ) |   | -       |  
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|                                     |  | $                            | 93,623 |                | $ | 38,870 |  | $             | 136,008 |       | $ | (19,791 | ) | $ | 248,710 |  
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|Financial income (expenses), net     |  | $                            | 1,213  |                | $ | 742    |  | $             | (2,697  | )     | $ | -       |   | $ | (742    | )
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|Income (loss) before taxes on income |  | $                            | (3,237 | )              | $ | 1,472  |  | $             | 11,424  |       | $ | 3,185   |   | $ | 12,844  |  
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  
|Taxes on income                      |  | $                            | 3      |                | $ | 183    |  | $             | 2,171   |       | $ | -       |   | $ | 2,357   |  
|                                     |  |                              |        |                |   |        |  |               |         |       |   |         |   |   |         |  

|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|------------------------------------ |  | ---------------------------- | ------ | -------------- | - | ------ | - | ------------- | ------ | ----- | - | ------- | - | - | ------- | -
|                                     |  | Year ended December 31, 2005 |       
|                                     |  |                              |       
|                                     |  | Spacenet Inc                 |        | Spacenet Rural |   | GNS    |   | Consolidation |        | Total |  
|                                     |  |                              |        |                |   |        |   |               |        |       |  
|Revenues:                            |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|External revenues                    |  | $                            | 86,196 |                | $ | 40,557 |   | $             | 82,642 |       | $ | -       |   | $ | 209,395 |  
|Internal revenues                    |  |                              | -      |                |   | -      |   |               | 15,611 |       |   | (15,611 | ) |   | -       |  
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|                                     |  | $                            | 86,196 |                | $ | 40,557 |   | $             | 98,253 |       | $ | (15,611 | ) | $ | 209,395 |  
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|Financial income (expenses), net     |  | $                            | 1,481  |                | $ | (338   | ) | $             | (3,820 | )     | $ | -       |   | $ | (2,677  | )
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|Income (loss) before taxes on income |  | $                            | (8,726 | )              | $ | (482   | ) | $             | 1,680  |       | $ | 6,538   |   | $ | (990    | )
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  
|Taxes on income                      |  | $                            | 4      |                | $ | 1,856  |   | $             | 1,266  |       | $ | -       |   | $ | 3,126   |  
|                                     |  |                              |        |                |   |        |   |               |        |       |   |         |   |   |         |  

F  50

---

---



|                                                          
|----------------------------------------------------------
|GILAT SATELLITE NETWORKS LTD. AND ITS
  SUBSIDIARIES      
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|            |                                                        |  | 
|----------- | ------------------------------------------------------ |  | 
|NOTE 13:   | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)

|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|-------------------------------------------- |  | ---------------------------- | ------- | ------------- | - | ------ | - | ------------- | ------- | ----- | - | ------- | - | - | ------- | -
|                                             |  | Year ended December 31, 2004 |        
|                                             |  |                              |        
|                                             |  | Spacenet Inc                 |         | SpacenetRural |   | GNS    |   | Consolidation |         | Total |  
|                                             |  |                              |         |               |   |        |   |               |         |       |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|Revenues:                                    |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|External revenues                            |  | $                            | 88,815  |               | $ | 52,243 |   | $             | 100,440 |       | $ | -       |   | $ | 241,498 |  
|Internal revenues                            |  |                              | -       |               |   | -      |   |               | 17,908  |       |   | (17,908 | ) |   | -       |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|                                             |  | $                            | 88,815  |               | $ | 52,243 |   | $             | 118,348 |       | $ | (17,908 | ) | $ | 241,498 |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|Impairment of tangible and intangible assets |  | $                            | -       |               | $ | 122    |   | $             | 2,039   |       | $ | -       |   | $ | 2,161   |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|Financial income (expenses), net             |  | $                            | (98     | )             | $ | 1,282  |   | $             | (1,450  | )     | $ | -       |   | $ | (266    | )
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|Income (loss) before taxes on income         |  | $                            | (13,407 | )             | $ | (9,280 | ) | $             | 3,891   |       | $ | 9,673   |   | $ | (9,123  | )
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  
|Taxes on income                              |  | $                            | -       |               | $ | 3,148  |   | $             | 1,281   |       | $ | -       |   | $ | 4,429   |  
|                                             |  |                              |         |               |   |        |   |               |         |       |   |         |   |   |         |  



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F  51

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# INDEPENDENT
AUDITORS REPORT

To the Board of Directors

# STARBAND COMMUNICATIONS
INC.

We have audited the accompanying
balance sheets of StarBand Communications Inc. as of December 31, 2005 and 2004, and the
related statements of operations, shareholders equity (deficit) and cash flows for
the years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our 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 audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of StarBand Communications Inc. as of December 31, 2005 and 2004, and the results
of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

MAYER HOFFMAN MCCANN P.C.
Bethesda, Maryland
January 19, 2006



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