---

---

As
filed with the Securities and Exchange Commission on December  1 , 2005

# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F /AAMENDMENT NO. 1

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

# For the fiscal year
ended December 31, 2004

# 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: None

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

Ordinary Shares, par
value NIS 0.20 per share (Title of class)

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:

# 22,312,487 Ordinary
Shares, NIS 0.20 par value per share.

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
which financial statement item the Registrant elected to follow:

Item 17  oItem 18 x



---

---



# EXPLANATORY NOTE

Gilat Satellite Networks Ltd. (the
Company) is filing this Amendment No. 1 to its Annual Report on Form 20F for
the year ended December 31, 2004 (the 2004 20F), which was originally filed on March
17, 2005, to restate its financial statements as of December 31, 2004 and for the year
ended December 31, 2004. This Form 20F/A also includes the restatement of selected
financial data included in Item 3.

This Amendment No. 1 is being filed to address comments from the staff (the
Staff) of the Securities and Exchange Commission (the SEC) in
connection with the Staffs normal periodic review of the Companys filings. As
a result of the review, the Company is restating the accompanying audited financial
statements for the year ending December 31, 2004, to reflect the non-cash change in the
accounting treatment of accrued interest liability relating to the Bank Hapoalim Loan.

The restatement increases the
Companys paid in capital by $15.5 million, decreases its liabilities by $13.4
million and increases financial expenses by $2.1 million. The restatement has no effect on
the Companys historical or future revenues, cash flow, total assets or cash.
Moreover, these adjustments do not change the Companys liquidity position or
business operations in either past periods or going forward. Please refer to Note 1e to
the accompanying consolidated financial statements for additional information.

This Amendment No. 1 does not
result in a change in the Companys previously reported revenues, cash flow from
operations, total assets or total cash shown in its consolidated financial statements. For
the convenience of the reader, this Form 20F/A sets forth the complete text of the
originally filed 2004 20F rather than just the amended portions thereof. Accordingly and
other than as disclosed in Note 16 to the financial statements, this Form 20F/A does not
reflect events occurring after the filing of the 2004 20F nor does this filing modify or
update those disclosures affected by subsequent events or discoveries. Information not
affected by these restatements and reclassifications are unchanged and reflects the
disclosures made at the time of the original filing of the 2004 20F on March 17, 2005.

This Form 20F/A should be read in
conjunction with the Companys filings made with the SEC subsequent to the filing of
the 2004 20F. The following items have been amended as a result of the restatement
described above:

| |  | Part
I  Item 3  Key Information
| | - | ---------------------------------

| |  | Part
I - Item 5 - Operating and Financial Review and Prospects
| | - | --------------------------------------------------------------

| |  | Part
I  Item 8  Financial Information
| | - | ---------------------------------------

| |  | Part
III  Item 18 Financial Statements
| | - | ----------------------------------------

| |  | Part
III  Item 19  Exhibits
| | - | -----------------------------

# INTRODUCTION

We
are a leading provider of products and services for satellite-based communications
networks. Beginning January 1, 2005, we operate under two business units: (i) Gilat
Network Systems, often referred to as GNS, which is a provider of network systems and
associated professional services to service providers and operators and (ii) Spacenet,
which provides managed services for enterprises and businesses through our U.S.
Subsidiary, Spacenet Inc., for consumers through our U.S. subsidiary, StarBand
Communications Inc. and for rural communities through Spacenet Rural Communications. In
its most recent available report published in September 2003,Comsys, a specialized
consulting company that analyzes the satellite communications industry, reported that
Gilat is the second-largest manufacturer of very small aperture terminals, referred to in
the network communications industry as VSATs. We were incorporated in Israel in 1987 and
are subject to the laws of the State of Israel. Gilats 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 TwoWay,
OneWay, FaraWay, DialAw@y IPTM,
SkySurfer, SkyWay, Skydata®,
SkyEdge", Clearlink", SkyBlaster ",
Skystar Advantage® and StarBand appearing in this annual report on
Form 20-F are trademarks of Gilat and its subsidiaries. GSAT® is a registered
trademark of GTECH Corporation (GTECH). See Item 4: Information on the
Company  Products and Services. 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.

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 16, 2005 was NIS 4.31 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

- i -

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# TABLE OF CONTENTS

|         |                                                                              |     
|-------- | ---------------------------------------------------------------------------- | ----
|         |                                                                              | Page
|Part I  
|        
|Item 1   | Identity of Directors, Senior Management and Advisers                        | 3   
|Item 2   | Offer Statistics and Expected Timetable                                      | 3   
|Item 3   | Key Information                                                              | 3   
|         | Selected Consolidated Financial Data                                         | 3   
|         | Risk Factors                                                                 | 5   
|Item 4   | Information on the Company                                                   | 18  
|Item 5   | Operating and Financial Review and Prospects                                 | 44  
|Item 6   | Directors, Senior Management and Employees                                   | 66  
|Item 7   | Major Shareholders and Related Party Transactions                            | 75  
|Item 8   | Financial Information                                                        | 76  
|Item 9   | The Offer and Listing                                                        | 78  
|Item 10  | Additional Information                                                       | 79  
|Item 11  | Quantitative and Qualitative Disclosures about Market Risk                   | 94  
|Item 12  | Description of Securities Other than Equity Securities                       | 96  
|Part II 
|        
|Item 13  | Defaults, Dividends, Arrearages and Delinquencies                            | 96  
|Item 14  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 96  
|Item 15  | Controls and Procedures                                                      | 96  
|Item 16  | [Reserved]                                                                   | 96  
|Item 16A | Audit Committee Financial Expert                                             | 96  
|Item 16B | Code of Ethics                                                               | 96  
|Item 16C | Principal Accountant Fees and Expenses                                       | 97  
|Item 16D | Exemptions from the Listing requirements and Standards for Audit Committee   | 97  
|Item 16E | Purchase of Equity Securities by the Issuer and Affiliates and Purchases     | 97  
|Part III
|        
|Item 17  | Financial Statements                                                         | 98  
|Item 18  | Financial Statements                                                         | 98  
|Item 19  | Exhibits                                                                     | 98  

- ii -

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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, 2002, 2003 and 2004, and the selected consolidated balance sheet data as of
December 31, 2003 and 2004 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, 2000 and 2001 and the selected consolidated balance sheet data as of December
31, 2000, 2001 and 2002 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, 2004.

3

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|                                                                                                               | Year Ended December 31,
|-------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                                                                                      |                        
|Products                                                                                                       |                        
|Services                                                                                                       |                        
|                                                                                                               |                        
|                                                                                                               |                        
|                                                                                                               |                        
|Cost of revenues:                                                                                              |                        
|Products                                                                                                       |                        
|Services                                                                                                       |                        
|Write-off of inventories                                                                                       |                        
|                                                                                                               |                        
|                                                                                                               |                        
|                                                                                                               |                        
|Gross profit                                                                                                   |                        
|                                                                                                               |                        
|Research and development expenses, net                                                                         |                        
|Selling, marketing, general and   administrative expenses                                                      |                        
|Provision and write-off for doubtful   accounts and capital lease receivables                                  |                        
|Impairment of goodwill                                                                                         |                        
|Impairment of tangible and intangible   assets                                                                 |                        
|Restructuring charges                                                                                          |                        
|Gain from derecognition of liability                                                                           |                        
|                                                                                                               |                        
|Operating income (loss)                                                                                        |                        
|Financial expenses, net                                                                                        |                        
|Gain from restructuring of debt                                                                                |                        
|Other income (expense)                                                                                         |                        
|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 profits (losses) of affiliated   companies                                                           |                        
|Acquired in-process research and   development of an affiliated company                                        |                        
|Minority interest in losses of a   subsidiaries                                                                |                        
|                                                                                                               |                        
|Income (loss) from continuing    operations, 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)                                                                                              |                        
|                                                                                                               |                        
|Net earnings (loss) per share from   continued operation:                                                      |                        
|Basic                                                                                                          |                        
|                                                                                                               |                        
|Diluted                                                                                                        |                        
|                                                                                                               |                        
|Basic and diluted net 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                                                                                                        |                        
|                                                                                                               |                        

4

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|                                                                  | As of December 31,
|----------------------------------------------------------------- | ------------------
|
|
|
|
|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 Related To Our
Business

Beginning
January 2005, we are operating our business under two business units. It is not
yet certain that this change in operation will be efficient or successful.

Beginning
January 1, 2005, we began to operate under two business units: Gilat Network Systems and
Spacenet. This division was made as part of the Companys new growth strategy aiming
to increase sales for solution driven markets as well as the expansion of its operation
business. While the intention is to enable and encourage each business unit to enhance its
business strategy, it is possible that the division will cause competition within our
company and lead to confusion in the market. In addition, as part of the changes to
operations structure, we closed our offices in Sunrise, Florida and reduced staff in other
offices. We may therefore experience difficulties meeting a high demand for services in
the future or encounter problems in dealing with the increased demands of customers.

We
have incurred major losses in recent years and may never achieve profitability.

We
incurred a loss of approximately $348.2 million in 2002, a loss of approximately $100.6
million in 2003 (excluding the gain from restructuring of debt) and a loss of
approximately $11.5 million in 2004. As of December 31, 2004, we had an accumulated deficit
of approximately $648.4 million. We cannot assure you that we can operate profitably in
the future. If we do not achieve profitability, the viability of our company will be in
question and our share price will likely decline.

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

A
number of the commercial markets for our products in the wireless communications area,
including our broadband products, have only in recent years been developed. 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. 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 stock.

5

---

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We
have announced the introduction of the SkyEdge family of products and their acceptability
in themarket cannot be determined as of yet.

In
February 2004, we announced the launch of the SkyEdge family of products. The SkyEdge
product family includes a series of VSAT products, all able to operate via a single hub,
supporting communications services that customers such as enterprises, carriers, service
providers and governmental customers require, from interactive data to broadband IP,
public telephony and beyond. The unified platform supports a variety of applications and
topologies including mesh, star and multi-star.

We
cannot guarantee that this family of products will be accepted in the industry or that its
performance will be as expected. The SkyEdge family of products have been beta tested by
several customers and is commercially available. If the SkyEdge is not accepted by the
market, then our business, financial condition and operating results could be adversely
affected. In addition, we intend on releasing a DVB-RCS compliant version of the SkyEdge
this year. Satlabs, the European organization that is to issue the certification for this
standard of compliance is still determining which criterion will be used to base the
standard certification. There can be no assurance that once completed, our products will
be certified.

We
face risks from the global slowdown.

The
downturn in the global economy has had significant effects on markets that we serve,
particularly satellite communications equipment manufacturers and network operators. This
has had a negative effect on our revenues. Although there are indications that the
downturn may be ending, we cannot predict whether the markets will fully recover or the
downturn will continue for a long period of time. If the markets in which we operate do
not fully recover, our ability to increase or maintain our revenues and operating results
may be impaired.

Further,
because global economic conditions and economies are extremely uncertain, it is difficult
to estimate the growth in various parts of the economy, including the markets in which we
participate. Because parts of our budgeting and forecasting are reliant on estimates of
growth in the markets we serve, the current economic uncertainty renders estimates of
future revenues and expenditures even more difficult than usual to formulate. The future
direction of the overall domestic and global economies could have a significant impact on
our overall financial performance and impair the value of our shares.

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

There
are 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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;
| | - | -----------------------------------------------------------------------------------

| |  | 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

---

---



Economic
conditions affecting the telecommunications industry, which affect market conditions in
the telecommunications and networking industry, in the United States and globally, affect
our business. Reduced capital spending and/or negative economic conditions in the North
America, Europe, Asia, Latin America and/or other areas of the world could result in
reduced demand for or pricing pressure on our products.

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

A
significant portion of our sales revenue is derived from our 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 between 2,000 and 10,000 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
andother parts of the world; any instability in the exchange rates or in the political or
economic situation orany 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, and Brazil, China and Tibet. 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.

In
addition, in November 2002, we were awarded two large projects by the Colombian
Government, including the installation and operation of 500 telecenters to provide
Internet connectivity and telephony services in cities and towns throughout Colombia and a
second 3,000-site public rural satellite telephony network. The total value of the
contracts is approximately $65 million. If we do not meet certain minimum equity
requirements, this customer may assert that we would be 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 costeffective and timely basis, our business could be adversely affected.

The
network communications market, to which our services and products 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, our initial product, the OneWay VSAT, which we introduced
in 1989, was used primarily to facilitate one-way transmission of information. In 1992, we
began marketing our TwoWay VSAT that enabled two-way communication. In 1999, we began
marketing our SkyBlaster product that uses advanced technology to provide two-way high
speed Internet access and video broadcasting via satellite. In February 2004, we announced
the development of the SkyEdge product family. We cannot yet predict or guarantee the
success of the SkyEdge family of products in the market.

To
remain competitive in the network communications market, we must continue to be able to
anticipate changes in technology 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, then our business, financial condition and operating results could be
adversely affected.

7

---

---



A
decrease in the selling prices of our products 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 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 and on the introduction of new products with advanced
features. However, we cannot assure you that we will be able to obtain any yield
improvements or cost reductions or introduce any new products in the future. To the extent
that we do not reduce costs or introduce new products in a timely manner, or our new
products do not achieve market acceptance, it could materially harm our business and
impair the value of our shares. In addition, our backlog has decreased significantly in
2004. If we are not able to generate a steady rate of long-term contracts in our backlog,
our business could be materially adversely affected.

If
we are not able to fill our backlog of orders, our business will be adversely affected.

At
present, we have a backlog of orders, consisting of network service contracts, generally
for three to five years, and of new orders for products and services. As of December 31,
2004 our backlog for equipment sales and for services under service contracts for our VSAT
products was $191 million. If we are unable to satisfy the entire backlog of orders, we
will not be able to fully recognize the revenues expected from this backlog and we could
lose the contracts from which these backlog of orders arise, either of which could have a
material adverse effect on our business. In addition, an inability to supply equipment and
services could lead to our default on contracts and the subsequent exercise of performance
guarantees by customers.

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

Our
existing contracts could be terminated due, among others, to any of the following reasons:

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

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

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

| |  | customers'
lack of confidence in our financial condition; or
| | - | ------------------------------------------------------------

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

The
termination or non-renewal of our contracts could have a material adverse effect on our
business, financial condition and operating results. A vast majority of our business
generated in 2004 was from recurring customers. If we are not able to gain new customers
and retain our present customer base, our revenues will decline significantly. In
addition, if we have a higher than anticipated subscriber churn for customers from
StarBand and from Spacenet Inc., this could materially adversely affect our financial
performance.

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

Several
of the components required to build our VSATs 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 volumes 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.

8

---

---



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 manufacturing of our products as
well as to provide comprehensive logistic services. The agreement is intended to ensure
JIT (just in time) inventory and to reduce prices currently paid by us for components. In
addition, regarding components purchased in bulk by Arrow for other customers, we are
entitled to enjoy existing lower prices. Arrow is to purchase components on our behalf
based upon rolling forecasts provided by us. 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 their part to substantively perform under the agreement
could have an adverse effect on our operations.

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

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 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. At present our SkyEdge family
line includes both proprietary and VSATs and a VSAT that is expected to be DVB-RCS
compliant. Our principal competitors in the supply of VSAT networks are Hughes Network
Systems, Inc., or HNS, ViaSat Inc., iDirect Technologies, EMS Technologies, Inc. and Nera
ASA.

There
are other manufacturers of products that compete with one or more of our products such as
Alcatel Space, NDSatcom, Newtech and Polarsat. Another potential for product
standardization in the VSAT industry is known as DOCSIS (Data Over Cable Service Interface
Specification) for satellite communications. This concept is embedded in a product
produced and sold by ViaSat directly in the international markets. In the United States,
it has been reported that ViaSat delivers the same technology to the WildBlue consumer
program that is reported to launch in 2004. This product is designed to be a low cost
VSAT. If deployed, this standardization could pose a threat to the acceptance in the
market of our current and future non-DOCSIS for satellite products and could have an
adverse effect on the market price for VSATs industry-wide.

HNS
introduced its own standard called IPoS (IP over Satellite) which relies on the installed
base of their DirecWay System. If accepted by other companies in the industry, this could
have an adverse affect on the acceptance of our products. HNS is also expected to launch
their SpaceWay Ka satellite and program in the United States in two years which, if
successful, could increase our competition in the enterprise market segment.

We
also compete with various mobile satellite communications companies such as Iridium,
Globalstar, Asia Cellular Satellite (known as ACeS) and Thuraya Satellite Communications
Company and companies that offer communication network systems based on other
non-satellite technologies such as terrestrial lines (including cable, DSL, fixed
wireless, ISDN lines, cellular GPRS and fiber optics), frame relay, radio and microwave
transmissions. These technologies can often be cheaper than VSAT technology in some
applications while still providing a sufficient variety of the features required by
customers.

Our
actions to protect our proprietary VSAT technology may be insufficient to prevent others
fromdeveloping 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 United
States. If we are unable to protect our intellectual property, our ability to operate our
business and generate revenues as expected may be harmed.

9

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We
depend on a single facility in Israel and are susceptible to any event that would
adverselyaffect 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, 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 United States, Asia, Africa, Europe and Latin America. 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 providers 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.
This could result in a substantial reduction in our revenue;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | political
instability in countries in which we do or desire to do business. For example, economic
instability in Indonesia has led to a decrease in the value of the Indonesian Rupiah. If
such decrease continues, this could adversely affect the ability of the Indonesian market
to finance VSAT projects. 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
United States 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 that 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.

10

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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 United States, and by regulatory bodies in other countries. In
the United States, 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 can often take a substantial amount of time and require substantial
resources. For instance, Spacenet Services License Sub, Inc., our indirect wholly owned
subsidiary, obtained authorization from the FCC to provide two-way data communications
services on a specific frequency band six months after Spacenet Services License Sub filed
the required regulatory application. Moreover, the license for Spacenet Services License
Sub required approximately four months of technical and legal preparation to complete the
application.

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
economic basis.

Our
lengthy sales cycles could harm our results of operations if forecasted sales are delayed
or donot 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.

Possible
need for additional funds.

We
are currently very thinly capitalized. As such, we may be required to raise additional
funds to finance our business. Our cash and cash equivalents at December 31, 2004 were
approximately $75.8 million. If we are unable to raise additional funds, we may fail and
our inability to obtain adequate capital would limit our ability to continue our
operations. There can be no assurance that we will be able to raise necessary funds or
that we will be able to do so on terms acceptable to us. Any such additional funding may
result in significant dilution to existing shareholders.

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;
| | - | ----------------------------------------------------------

| |  | our
timing of introducing new products and product enhancements 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;
| | - | ---------------------------------------------

11

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| |  | 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.

We
may at times be subject to claims by third parties alleging that we are infringing 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 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 of 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, nor might we 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
onour 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 claims. 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 many 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, nor do we 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 significant costs resulting from these
exposures are incurred.

We
are involved in litigation alleging violations of the federal securities laws that may
have anadverse effect on our business.

12

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On
May 13, 2003, a complaint was filed with the United States District Court for the Eastern
District of New York against the Company and certain of its officers and directors
asserting claims under Section 10(b) of the Securities Exchange Act of 1934. The complaint
was the result of the court-ordered consolidation of nine separate similar actions filed
in March 2002 in the United States District Courts. In addition, a request was made to
file a class action lawsuit in the Tel Aviv, Israel, District Court, but this action was
stayed pending the outcome of the class action proceedings in the United States. The
Complaint asserts the claims of purchasers of our securities from February 9, 2000 and
through May 29, 2002, and alleges violations of the federal securities laws and claims
that we issued material misrepresentations to the market. We have filed a motion to
dismiss the complaint which is pending. We believe that the allegations against us and
certain of our current and former officers and directors are without merit and intend to
contest them vigorously. However, these legal proceedings are in the preliminary stages
and we cannot predict their outcome. The litigation process is inherently uncertain. If we
are not successful in defending these legal proceedings, we could incur substantial
monetary judgments or penalties in excess of available insurance coverage or result in
damage to our reputation, and whether or not we are successful, the proceedings could
result in substantial costs and may occupy a significant amount of time and attention of
our senior management.

Our
senior management and board of directors have made changes to our business plan and
business strategy, which may not prove successful for us.

Our
senior management and board of directors conducted a review of our company and our
business. This review included various factors that may affect our economic viability and
profitability, such as our business model, our corporate structure, our cost structure,
the inter-company relationships and organization of our subsidiaries, and other business
considerations relevant to our business plan and business strategy. The results of this
review have caused management to make certain business strategy decisions regarding our
products and services and the way in which we compete in the market. There can be no
assurance given that our management team will be able to successfully implement our
business plan.

In
the past twelve months we have lost key management, directors and technical personnel. The
loss of these employees may have an ongoing adverse effect on the business of the Company.

During
2004, we lost certain key management, including the CEO and President of our Company. The
changes in management could materially adversely affect our business, financial condition
and operating results.

We
face competition for personnel, particularly for employees with technical expertise. Our
business, financial condition and operating results could be materially adversely affected
if we cannot hire and retain suitable personnel.

The implementation
of SFAS No. 123R, which required us to record compensation expense in connection with
equity share based compensation, would reduce our profitability significantly.

On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No.
123 (revised 2004), Share-Based Payment (SFAS No. 123R), which is a revision
of SFAS No. 123. Generally, the approach in SFAS 123(R) is similar to the approach
described in Statement 123. However, SFAS No. 123 permitted, but not required, share-based
payments to employees to be recognized based on their fair values while SFAS No. 123(R)
requires, as of the third quarter of 2005, all share-based payments to employees to be
recognized based on their fair values. SFAS No. 123R also revises, clarifies and expands
guidance in several areas, including measuring fair value, classifying an award as equity
or as a liability and attributing compensation cost to reporting periods. The adoption of
SFAS No. 123R may have a significant effect on our results of operations. In addition,
such adoption could also limit our ability to continue to use stock options as an
incentive and retention tool, which could, in turn, hurt our ability to recruit employees
and retain existing employees.

13

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# Risks Related To The
Shares And Our Capital Structure

Our
share price has been highly volatile, has experienced a significant decline, and may
continueto be volatile and decline.

The
trading price of our shares has fluctuated widely in the past and may to 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.

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
principal shareholder is also a major creditor of the Company.

Our
principal shareholder, Bank Hapoalim B.M., has provided us with a substantial loan. The
bank agreed to amend the terms of such loan in April 2004. Bank Hapoalim B.M. has a
representative on our board of directors and has a right (as do any of our shareholders
that meet the shareholding threshold) to appoint one director to our board of directors at
every annual general meeting of our shareholders, as long as its holdings of our shares
does not fall below the threshold set forth in our amended articles of association. The
interests of Bank Hapoalim as a major creditor of our company may conflict at times with
the interests of our other shareholders.

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

Our
ordinary shares are traded primarily on the Nasdaq National Market and on the Tel Aviv
Stock Exchange. Trading in our ordinary shares on these markets is made in different
currencies (US dollars on the Nasdaq National Market, and New Israeli Shekels on the Tel
Aviv Stock Exchange), and at different times (resulting from different time zones,
different trading days and different public holidays in the United States 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
may be subject to Israeli tax payments that we had not anticipated or taken into account.

In
2003 and 2004, we received initial tax assessments for the tax years 1998-2001 for
approximately $45 million plus $7 million in penalties based on various claims of the
Israeli Tax Authorities. In January 2005, we received a final tax assessment for the tax
year 1998 for approximately $0.5 million including penalties reduced from $10.5 million in
the initial assessment. We intend to vigorously defend ourselves in this action, but we
cannot be certain as to the outcome of these claims. In addition, the claims made by the
tax authorities may also be made for the years 2002-2004. Any such claims, if
substantiated and proven, could have a significant adverse effect on our financial
condition. In addition, the Israeli Tax Authorities and the tax authorities in the
jurisdictions in which we operate might raise additional claims, which might result in
payment of additional taxes.

We
have historically relied, and in the future intend to rely, upon tax benefits from the
state of Israel on 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, some of our Israeli
facilities 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. Our
historical operating results reflect substantial tax benefits, including tax exemptions
and decreased tax rates up to December 31, 2000. In, 2002, 2003 and 2004, we recorded
substantial losses for tax purposes and a decrease in revenues and therefore could not
realize any tax benefits. The Israeli government has shortened the period for which tax
exemptions are applicable to Approved Enterprises from four to two years. This change only
applies to our last four Approved Enterprises and to any future Approved Enterprises, if
any. Our financial condition and results of operations could suffer if the Israeli
government terminated or reduced the current tax benefits available to us.

14

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In
addition, in order to receive these tax benefits, we must comply with two material
conditions. We must invest specified amount in property and equipment in Israel, and
finance a portion of these investments with the proceeds of equity capital we raise. We
believe we have complied with these conditions, but we have not received confirmation of
our compliance from the government with respect to some of the approved enterprises. If we
have failed or 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, if and when we are profitable, which could harm our financial condition and
results of operations. We are currently negotiating the approval of our Tenth Approved
Enterprise with the Israeli government. If we fail to receive such approval, we will be
required to pay substantial additional taxes, which may negatively affect our results of
operations and financial condition.

We
benefit from Israeli Government grants. The termination or reduction of these grants could
have a material adverse effect on our ability to develop new products and applications.

Research
and development grants from the Office of the Chief Scientist of the Israeli Ministry of
Industry and Commerce, or the Chief Scientist during 2002, 2003 and 2004 amounted to
approximately $3.6 million, $3.5 million and $2.2 million, respectively. These grants
enable us to develop new technologies to use in new products and applications. However,
they also impose certain restrictions on us, as discussed below. Israeli authorities have
indicated that the grant program may be reduced in the future. The termination or
reduction of these grants to us could have a material adverse effect on our ability to
develop new products and applications, which could harm our business.

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. Such limitations may restrict our business growth and profitability.

Our
research and development efforts associated with the development of our OneWay VSAT
product and our DialAw@y IP product and our SkyBlaster product have been partially
financed through grants from the Chief Scientist. We are subject to certain restrictions
under the terms of the Chief Scientist grants. Specifically, the products 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 and/or fines. These restrictions do not apply to the sale or export
from Israel of our products developed with this technology. These restrictions could limit
or prevent our growth and profitability.

Compliance
with changing regulation of corporate governance and public disclosure may result
inadditional expenses.

Changing
laws, regulations and standards relating to corporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission
regulations and Nasdaq Stock Market rules, are creating uncertainty for companies such as
ours. We are committed to maintaining high standards of corporate governance and public
disclosure. As a result, we intend to invest reasonably necessary resources to comply with
evolving standards, and this investment may result in increased general and administrative
expenses and a diversion of management time and attention from revenue-generating
activities to compliance activities, which could harm our operating results and business
prospects.

# 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 result in 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.

15

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Since
October 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.
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 or results of operations.

Generally,
male adult citizens and permanent residents of Israel under the age of 51 are obligated to
perform up to 36 days of military reserve duty annually. Additionally, these residents may
be called to active duty at any time under emergency circumstances. The full impact on our
workforce or business if some of our officers and employees are called upon to perform
military reserve service is difficult to predict.

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 continue to deteriorate. In
addition, due to significant economic measures proposed by the Israeli Government, there
have been several general strikes and work stoppages in 2003 and 2004, affecting all
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 United States against our officers
and directors.

Most
of our executive officers are non-residents of the United States. A significant portion of
our assets and the personal assets of most of our directors and executive officers are
located outside the United States. Therefore, it may be difficult to effect service of
process upon any of these persons within the United States. In addition, a judgment
obtained in the United States 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 United States.

Generally,
it may also be difficult to bring an original action in an Israeli court to enforce
liabilities 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 United States 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

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

16

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Current
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
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 United States 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 United
States 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.

Our
operating results would be adversely affected if inflation in Israel is not offset on a
timelybasis by a devaluation of the new Israeli shekel (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
somerespects 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 certain matters. Israeli law provides that these
duties are applicable in shareholder votes 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
couldprevent 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
maybe 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 (e.g. the confidentiality of certain commercial information or a companys
intellectual property). In the event that any of our employees chooses to go and work for
one of our competitors, we may be unable to prevent our competitors from benefiting from
the expertise of our former employees obtained from us, if we cannot demonstrate to the
court that harm would be caused to us.

17

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Assistance
from the United States.

Israel
receives significant amounts of economic assistance from the United States, averaging
approximately $3 billion annually over the last several years. We cannot assure you that
U.S. economic assistance will continue at or near amounts received in the past. If U.S.
economic assistance is eliminated or reduced significantly, the Israeli economy could
suffer material adverse consequences which could have a material adverse impact on our
financial condition and results of operations.

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

# History and Development
of the Company

We
are a leading provider of products and services for satellite-based communications
networks. Beginning January 1, 2005, we operate under two business units: (i) Gilat
Network Systems, which is a provider of network systems and associated professional
services to service providers and operators and (ii) Spacenet, which provides managed
services for enterprises and businesses through our U.S. Subsidiary, Spacenet Inc., for
consumers through our U.S. subsidiary, StarBand Communications Inc. and for rural
communities through Spacenet Rural Communications. In its most recent available report
published in September 2003,Comsys, a specialized consulting company that analyzes
the satellite communications industry, reported that Gilat is the second-largest
manufacturer of very small aperture terminals, referred to in the network communications
industry as VSATs. We were incorporated in Israel in 1987 and are subject to the laws of
the State of Israel. Gilats 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.

Gilat
shipped its initial product, a first generation OneWay VSAT, in 1989. Since that time, we
have devoted significant resources to developing and enhancing our VSAT applications and
establishing strategic alliances primarily with major telecommunications companies and
equipment suppliers. We have also broadened our marketing strategy by providing a full
range of VSAT services and by emphasizing sales to customers directly and through new
distribution channels.

In
1991, we began marketing our second generation OneWay VSAT. In 1992, we began marketing
our TwoWay VSAT with Spacenet Inc. as part of Spacenets Skystar Advantage VSAT
service offering and we began marketing our TwoWay VSATs to GTECH as part of GTECHs
GSAT lottery networks. Over the years, we experienced significant growth in orders, sales
and earnings including from our OneWay and Skystar Advantage products. By an agreement in
1992, COMSAT RSI, Inc. became our joint venture partner to develop, manufacture and market
two-way rural telephone VSAT products. We began marketing the FaraWay VSAT in 1994. We
began marketing the DialAw@y IP VSAT, another rural telephony product outside of the scope
of that joint venture, at the end of 1996. Additionally, we began marketing the SkySurfer
VSAT in 1997 and the SkyBlaster VSAT in 1999.

In
1999, we began marketing our SkyBlaster VSAT product. The SkyBlaster product is a two-way
IP-based product with which broadband Internet services via satellite are provided. One of
the first SkyBlaster products developed was the 360 model, designed for consumers and home
offices and small business users. In 2001, we completed development of the SkyBlaster
360E, a two-way satellite-based communication geared toward the enterprise, small
business, SME and SoHo markets, that enables broadband networking between a central hub
and up to thousands of locations. The SkyBlaster 360E was launched in 2002 and then
renamed the SkyStar 360E. Approximately 119,000 units of the SkyStar 360E have shipped to
date.

In
February 2004, we introduced our SkyEdge family of products which offer a comprehensive
satellite communications platform to deliver data, voice and video services over a single,
powerful system. The SkyEdge family of products was beta tested in the third quarter of
2004 and became available for commercial distribution in the last quarter of 2004.

18

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The SkyEdge product family consists
of the SkyEdge System(the hub), and five VSAT products including:

| |  | SkyEdge Pro  Multi-service
VSAT, supporting interactive data, mesh telephony, broadband IP and video, with
plug-in card architecture expanding the VSAT capabilities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | SkyEdge IP  IP
Router VSAT, supporting interactive, broadband IP, VoIP and multicasting
applications.
| | - | -------------------------------------------------------------------------------------------------------

| |  | SkyEdgeCall Telephony
VSAT, supporting thin-route telephony applications.
| | - | ---------------------------------------------------------------------------

| |  | SkyEdge Gateway  Trunking
Solutions VSAT,providing mesh trunking solutions supporting digital telephony and IP
data on demand trunking applications.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | SkyEdge DVB-RCS  Enhanced
Standard VSAT, fully supporting the DVB-RCS standard. Being much more than only a
return link standard, this dual mode VSAT provides an end-to-end standard solution for a
satellite network operator with an arsenal of additional access schemes, embedded
software and enhanced IP acceleration features for full flexibility and support in a
complex IP environment. This VSAT has dual-mode capability to operate with the SkyEdge
proprietary hub or the SkyEdge DVB-RCS hub.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition to our VSAT product line, in 2004 we released an integrated solution to support
global systems for mobile communications, also known in the industry as GSM. This
solution, called the SkyAbis, enables transmission communication between GSM cellular base
stations and the base-station controller.

In
October 2002, to permit completion of a detailed restructuring arrangement and the
submission to holders of our 4.25% Convertible Subordinated Notes due 2005, or the old
notes, and certain other creditors, we filed with the Israeli Court a petition under
Section 350 of the Israeli Companies Law  1999 (known as the Companies Law) for a
stay of proceedings on actions by holders of the old notes and our bank lenders. In March
2003, after negotiating with both the holders of the old notes and our major creditors, we
received the approval of the Israeli courts, and completed a plan of arrangement, or the
arrangement with our bank lenders, holders of the old notes and certain other creditors.
Pursuant to the arrangement, our old notes were cancelled and the holders of the old notes
were issued a combination of 4.00% Convertible Notes due 2012, referred to herein as the
new notes, and ordinary shares. Additional new notes and ordinary shares were also issued
in exchange for a portion of our bank debt and debt to another financing creditor. The
arrangement reduced our debt by approximately $309 million, secured new agreements with
our banking creditors, and significantly reduced overall financing costs. As part of the
arrangement, we entered into a new agreement with SES Americom, our major supplier of
satellite transponder capacity.

In
October 2003, we distributed an offering circular to the holders of our new notes and
offered to exchange the new notes for our ordinary shares at a conversion rate of $8 per
share. In November 2003, we accepted approximately $73.7 million of the new notes for
exchange and issued an additional 9,208,270 ordinary shares.

As
of December 31, 2004, 22,312,487 of our ordinary shares were outstanding.

Financing
Transactions.In February 2000, we completed a private offering of $350 million of
convertible subordinated notes due 2005. The notes were convertible into ordinary shares
at a conversion price of $3,723.6 per share. In March 2003, pursuant to the arrangement,
we cancelled these notes and issued to the holders of these notes an aggregate of (i)
10,104,195 ordinary shares; and (ii) $83.3 million in principal amount of 4.00%
convertible notes due 2012 or, the new notes. In November 2003, we offered holders of the
new notes the opportunity to exchange the Notes for ordinary shares at a rate of $8 per
share. More than $73 million of the new notes were exchanged for 9,208,270 of our ordinary
shares, including new notes held by Bank Hapoalim as described below. See Item 5:
Operating and Financial Review and Prospects  Commitments and
Contingencies.

In
December 2000, we entered into a facility agreement with Bank Hapoalim, under which we
borrowed $108 million to finance our general corporate activities including our working
capital. The loan bore interest at LIBOR plus 0.8% per annum and the principal was
repayable in six semi-annual payments commencing June 2002. In June 2002, we paid part of
the initial payment due of $6 million in principal. In March 2003, as part of the
Arrangement, we amended our agreement with Bank Hapoalim. The loan was again amended in
April 2004. Please see Item 5: Operating and Financial Review and Prospects 
Commitments and Contingencies.

19

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In
September 2001, Bank Leumi lent us $30 million to be repaid in a single installment on
April 5, 2003. The loan is secured by a lien on our buildings in Petah Tikvah, Israel. In
March 2003, as part of the arrangement, the terms of the loan made by Bank Leumi were
revised. For more details on the arrangement, see Item 5: Operating and Financial
Review and Prospects  Commitments and Contingencies.

Capital
Expenditures and Divestitures.In 2002, 2003 and 2004, Gilats property and
equipment purchases amounted to approximately $9.7 million, $14.7 million and $6.2 million
respectively. These amounts do not include classification of inventory to property and
equipment made during 2002, 2003 and 2004 in the amount of approximately $3.8 million,
$6.8 million and $21.7 million respectively. For more details, see Item 4 
Property and Equipment. In 2004, we completed the sale of our Argentina
subsidiary, Servicio Satelital S.A. to a third party.

# VSAT Industry Background

A
VSAT network consists of:

| |  | several
dozen to several thousand VSAT remote sites with small antennas;
| | - | ------------------------------------------------------------------------

| |  | a
large central earth station called a hub, which includes a large antenna and base band
equipment which enables the connection of all the VSATs in the network; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
capability to communicate with a specified satellite.
| | - | ---------------------------------------------------------

A
VSAT includes an indoor unit and an outdoor unit (see figure below). The indoor unit
usually fits on a desktop (much like a modem) and contains the technology that enables
communication between the users equipment and the satellite. The outdoor unit
includes a small antenna, usually two to six feet in diameter, that can be mounted on a
users roof, ground or wall and electronic equipment that transmits and receives
signals to and from a satellite transponder. A transponder is the technical term for the
space on a satellite designated to communicate with a specific users equipment.



The
control station or hub, which enables the connection of all VSATs into a VSAT network,
consists of a large dish antenna (4.5 to 11 meters) and radio frequency electronics
equipment to allow signals to be transmitted between the hub and the satellite
transponder. A hub also includes electronic equipment to provide for satellite
communications, protocol support and network management functions. Protocol is a technical
term, which refers to the standards and methods by which computers communicate with one
another.

20

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Satellite
transponder capacity is available on existing satellites positioned in geostationary orbit
(at 35,800 km above the equator). Once in orbit, a satellite beam can cover a geographic
area the size of the continental United States or Western Europe. This coverage area is
known as the satellites footprint. The satellite receives information from a VSAT,
amplifies it and transmits it back to earth on a different frequency. A single satellite
transponder has a capacity of approximately 100 million bits/second, or Mbps.This
means that if the transponder is accessed for only 90 seconds per day, more than one
billion bytes of data, the equivalent of 865,000 double-spaced pages, would be
transmitted.

The
current generation of high power satellites is known as Ku-band satellites, because they
use the Ku-band frequencies. This type of frequency band together with the sophisticated
VSAT earth stations is particularly well suited to provide high-speed business
communications services as well as broadband web-based services. The use of the Ku-band
frequencies (as opposed to the C-band used by older generations of satellites) offers
reduced interference with ground communications. This enables satellites to use the higher
broadcasting power necessary to support VSAT earth stations and makes it cost-effective to
transmit to or among numerous locations. With increasing satellite power and the latest
generation of VSAT software, VSAT earth stations are becoming smaller and less expensive,
reducing overall network costs. Our technology is compatible with both Ku-band and C-band
satellites. In addition, special extended C-band and extended Ku-band satellites are also
supported by our technology, where needed.

# Our Market

The
networks we establish are primarily used for:

| |  | internet-basednetworking
applications such as networks within corporations (known as corporate intranets),
corporate training and other corporate applications which enable the transmission of
audio and video by high-speed Internet connections (known as broadband), as well as
consumer broadband Internet uses;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | on-line
data delivery and transaction-oriented applications including point-of-sale (for example,
credit and debit card authorization), inventory control and real time stock exchange
trading; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | bundled
telephone and internet access service in areas that are underserved by the existing
telecommunications services or in remote locations without service, some of which are
maintained by us.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Satellite-based
communications networks such as those Gilat has developed offer several advantages over
ground-based communication facilities. Among these advantages are the following:

| |  | ubiquitous
reach, providing equal access to users in urban and remote areas under a single tier
              network;
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | fixed
transmission costs, insensitive to distance or the number of receiving stations;
| | - | --------------------------------------------------------------------------------------

| |  | a
persistent "always on" connection to the Internet without the need to dial up to an
internet               service provider;
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | cost
savings over competing technologies such as ground telephone lines and digital subscriber
lines (commonly known as DSLs) in remote areas and suburbs;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | independence
from telecommunication companies and other network providers;
| | - | --------------------------------------------------------------------------

| |  | less
terrestrial infrastructure thus making satellite-based technology less susceptible to
local disasters such as fires and earthquakes that adversely affect ground-based
communication;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | consistent
and rapid response time in comparison to dial-up lines;
| | - | ------------------------------------------------------------------

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| |  | Internet
acceleration technologies, enhancing user experience and improving satellite
communication               effectiveness;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | rapid
installment of networks and flexibility in their configuration, integration and location;
and
| | - | ---------------------------------------------------------------------------------------------------

| |  | a
versatile platform, which allows for the provision of multiple applications solutions and
services.
| | - | -----------------------------------------------------------------------------------------------------

# Gilat Networks Systems
(GNS)

We
provide VSAT communication solutions to service providers in each of the following three
markets, as detailed herein:

# VSAT-Based Products for
Large Corporations and Government Entities

VSAT
and other satellite technology is particularly well suited to data networks which need to
(i) reach many locations over vast distances simultaneously; (ii) solve a last
mile or congestion problem, allowing high bandwidth access in areas currently
limited to slow connections like copper wire; (iii) transmit to remote locations and to
emerging markets where the terrestrial telecommunications infrastructure is not well
developed; (iv) rapidly provide services across a large geographic area served by multiple
terrestrial providers; and (v) provide private, controlled and secured networks for a wide
range of centrally-controlled applications. Due to the above advantages, corporate and
government users are increasingly realizing the benefits of VSAT networks. Additional uses
of the VSAT-based data networks for businesses include lottery card transactions (whereby
chosen lottery numbers of consumers are transmitted via VSATs located in various stores
and stations to a control hub), retailer and manufacturer inventory control and
utilities monitoring and control systems for power lines and pipe lines. Other uses
include hybrid solutions that combine our VSAT technology with other communication
technologies, either wireless or land, producing added solutions to a customer. Some
applications include back-up services, broadcasting and multicasting, and transportable
and mobile solutions.

# VSAT-Based Bundled
Telephony and Internet-access Products

In
a large number of remote, rural and urban areas, primarily in developing countries, there
is limited or no telephone or Internet service due to inadequate ground telecommunications
infrastructure. In these areas, VSAT networks are able to utilize existing satellites to
rapidly provide high quality cost-effective telecommunications solutions. In contrast to
ground-based networks, VSAT networks are simple to reconfigure or expand, relatively
immune to difficulties of topography and can be located almost anywhere. Additionally,
VSATs can be installed and connected to a network in a matter of hours without the need to
rely on local infrastructure and seldom require maintenance.

As
a result of the above advantages, the market for VSAT-based bundled services of fixed
telephony and Internet access products is growing. This market consists of public
telephone operators that need to fulfill service obligations worldwide, large companies
that require private networks to provide inter-office communications between branch
offices and corporate headquarters, and service providers targeting rural and residential
areas in developing countries that do not have a ground-based telecommunications
infrastructure. A new solution that we introduced into this market is a cost effective
transmission product for global system mobile (GSM) cellular operators that deploy
cellular base-station infrastructures to remote areas.

VSAT-Based Broadband and Internet
Products for Small Businesses, SMEs, SoHos and Consumers

The
term broadband services refers to networks that provide high-capacity, high-speed
transmission of data. Satellite broadband networks allow for multimedia transmissions and
can provide high-speed always on accelerated Internet connectivity. A
multimedia transmission (also known as multimedia streaming) is a distribution
process that allows simultaneous broadcasting and playback of video and audio content. The
terrestrial Internet infrastructure was not designed to support the traffic load created
by broadcasting full motion video or high-fidelity audio. Currently, there are three
terrestrial means of providing broadband services to consumers: cable, DSL and fixed
wireless.

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# Our Products and Services

We
currently offer VSATs to the three markets described above, each of which is generally
incorporated into a VSAT network consisting of a remote terminal linked to a central hub
or gateways or via a satellite. In the year 2004, we offered the following satellite
networks, VSATs and services, as described below.

SkyEdge
Product Family

In
February 2004, we introduced our new SkyEdge product family. The family consists of the
SkyEdge system which is the hub, and five VSAT products including SkyEdge Pro, SkyEdge IP,
SkyEdge Call, SkyEdge Gateway and SkyEdge DVB-RCS. These enhanced VSAT platforms support
the same markets as our existing products and also cover new areas, such as the DVB-RCS
standard and applications and solutions based on the SkyEdge products, such as the
SkyAbis. Unlike our previous products, the SkyEdge products all operate on a single hub.

The
SkyEdges modular and flexible hardware enables customers to expand the capabilities
of their system as the need arises, using embedded software and hardware architecture with
plug-in cards architecture that enable a large range of applications and solutions. The
unified platform supports a variety of topologies, including mesh, star and multi-star,
which empower operators and service providers with a true competitive advantage. From
carrier-grade native voice to VoIP and video conferencing, the systems flexible
architecture enables superior performance and heightened user satisfaction. SkyEdges
centralized NMS features hub partitioning for shared hubs, allowing for efficient
allocation of resources. Unique NMS utilities facilitate administrators tasks while
guiding them through common processes and better preparing them for system and VSAT
modifications. Since all software is embedded into the VSATs, there is no need for
external boxes. All software can be fully managed, easily controlled and updated remotely
from the NMS.

SkyEdge
Highlights

| |  | Unites
data and telephony applications over a single VSAT platform
| | - | ------------------------------------------------------------------

| |  | Universal
service platform
| | - | --------------------------

| |  | Standard
DVB-RCS and Gilat's multi-service technologies on one system
| | - | ---------------------------------------------------------------------

| |  | Provides
customer-oriented service diversity
| | - | --------------------------------------------

| |  | Flexible,
modular, scalable
| | - | ---------------------------

| |  | Cost-effective,
lower maintenance, operation and support costs
| | - | --------------------------------------------------------------

| |  | Saves
resources/space segment optimization
| | - | ------------------------------------------

| |  | Secure,
redundant and centrally-controlled
| | - | ------------------------------------------

| |  | Advanced,
simple-to-operate NMS
| | - | -------------------------------

Key
Features

Data
Support.SkyEdge features a wide-ranging solution with extensive IP capabilities for
full flexibility and support in a complex IP environment. It also supports all data and IP
multicast applications, interactive broadband IP, and legacy protocols.

Full
Telephony and managed VoIP Capabilities.SkyEdge contains all of Gilats
satellite telephony innovations: toll quality voice, fax and in-band data support; mesh
call routing, payphone support; advanced signaling support allowing for supplementary
features; numbering schemes that conform with PSTN conventions; highly efficient space
segment utilization; and fully-managed, low cost public telephony.

Embedded
VPN.Gilats VPN Inside processor is an integral part of the VSAT,
enabling accelerated VPN and is easily managed from the NMS. Everything is onboard 
no external box is necessary.

Embedded
IP & HTTP Acceleration.The network receives a dramatic improvement in IP
application performance and Web browsing. Moreover, all software conveniently resides
inside the VSAT, not on the clients PC.

23

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Enhanced
DVB-RCS Support.Standard DVB-RCS and multi-service VSATs can operate on the same
network providing unparalleled advantages including flexible and tailored services for
supporting diverse markets and applications. In addition to the DVB-RCS standard access
scheme, operators receive an arsenal of additional access schemes, embedded software and
enhanced IP acceleration features. SkyEdge utilizes highly efficient outbound supporting
additional modulation and coding technologies. A scaleable outbound range provides a major
advantage for small-scale networks wanting a minimal initial investment and seamlessly
growing to accommodate large networks.

Architecture



Members
of SkyEdge Family

The
family consists of the SkyEdge System and five VSAT products currently under
development including:

| |  | SkyEdge Pro  Multi-service
VSAT, supporting interactive data, mesh telephony, broadband IP and video, with
plug-in card architecture, expanding the VSAT capabilities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | SkyEdge IP  IP
Router VSAT, supporting interactive, broadband IP, VoIP and multicasting
applications.
| | - | -------------------------------------------------------------------------------------------------------

| |  | SkyEdgeCall Telephony
VSAT, supporting thin-route telephony applications.
| | - | ---------------------------------------------------------------------------

| |  | SkyEdge Gateway  Trunking
Solutions VSAT,providing mesh trunking solutions supporting digital telephony and IP
data on demand trunking applications.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | SkyEdge DVB-RCS  Enhanced
Standard VSAT, fully supporting the DVB-RCS standard. Being much more than only a
return link standard, this dual mode VSAT provides a unique real end-to-end standard
solution for a satellite network operator with an arsenal of additional access schemes,
embedded software and enhanced IP acceleration features for full flexibility and support
in a complex IP environment. This VSAT has a dual-mode capability, to operate with the
SkyEdge proprietary hub and the SkyEdge DVB-RCS hub.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

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# Our Legacy Products

# Legacy Products by
VSAT Market Type

|Type                                             | Products/Application                                    
|------------------------------------------------ | --------------------------------------------------------
|Data Network     Applications for Enterprises    | Skystar Advantage -Interactive Data   Multiple Protocols
|Bundled telephony
and Internet     
Applications | FaraWay    
- Corporate
Telephony                       
|Broadband SME, 
SoHo & Consumer
Applications     |                                                         

---

# Data Delivery VSATs for
Enterprises

Skystar
Advantageis a private VSAT network designed for data, multimedia and voice
applications, providing highly reliable communication between a central hub and almost any
number  tens or thousands  of geographically dispersed sites. Skystar
Advantage integrates the features of several different applications into a single
platform. The same network can be used for interactive data and voice, as well as for
multicasting multimedia over an Internet service provider. Its modular 3-slot plug-in card
enables a service operator to customize for each remote site according to their specific
and changing needs.

Gilats
Skystar Advantage is already implemented in numerous markets, such as: Internet access,
banking, multimedia, Supervisory Control and Data Acquisition, or SCADA  a technical
term for computer systems that collect and summarize data from up to thousands of
computers into reports for operators and management, retail and gas stations. The
applications currently served by the Skystar Advantage include credit and debit card
authorization for retail sales, point-of-sale information and ATM networks, on-line
recording and validation of lottery tickets, prescription verification, review of
customers profiles, inventory control and delivery scheduling at the manufacturing level,
supervisory control and data acquisition networks for oil and gas pipelines, on-line
remote stock exchange trading for brokers, distance learning and Internet access.
Additional voice channel add-ons are available, as are video and audio broadcasting
applications.

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Skystar Advantage
Network Architecture

Architecture.
As illustrated above, our Skystar Advantage VSAT product consists of remote
          terminals, hub equipment and related software. Our remote terminal consists of
a           small outdoor antenna (typically 0.55 to 1.2 meters in diameter for the
Ku-band           frequency and 1.8 to 2.4 meters in diameter for the C-band frequency),
an           outdoor electronics unit and an indoor electronics unit. The outdoor unit
          receives signals from a satellite transponder using a Low Noise Block frequency
          down-converter that converts between the higher frequency a satellite uses and
          the lower frequency used by the antenna and the indoor unit. The outdoor unit
          then transmits signals to the satellite transponder using our proprietary
          frequency up-converter that converts the low frequency into the high frequency
          used by the satellite and power amplifier. The indoor unit incorporates a
          satellite modem utilizing digital signal processing technology and a powerful
          central processing unit. The central processing unit controls communications
          through the satellite (including the satellite access scheme) and provides the
          platform for interface to the end-users remote terminal equipment. The
          small antenna typically is supplied by a third-party vendor or purchased
          directly by our customer. We design and manufacture the indoor unit, design and
          integrate the outdoor unit and supply that part of the software that, among
          other things, controls the satellite access scheme and the end-user interfaces.

The
Skystar Advantages modular configuration includes intrinsic flexibility with three
indoor unit slots for plug-in cards. This architecture enables field upgradability by the
addition of plug-and-play cards, which are able to support a variety of interfaces and
applications such as LAN (local area networks), Universal Serial Bus port (USB port), a
standard port used in PCs to connect a computer with external applications such as modems,
VSATs and digital cameras, serial ports that are used as standard interface to many
devices, such as ATMs and lottery machines, and video and voice cards.

The
hub for the network incorporating our Skystar Advantage VSAT products consists of a radio
frequency terminal and basebandequipment. The radio frequency terminal
incorporates a large dish antenna (typically 4.5 to 11 meters) and radio frequency
electronics equipment (up and down frequency converters, low noise amplifiers and high
power amplifiers). The baseband equipment is comprised of the hub satellite processor, hub
protocol processor and network management system, or NMS. The hub satellite
processor hardware provides the communication connectivity to the remote terminals and the
hub protocol processor provides the interface between the hub satellite processor and the
customer host computer running end-user applications. The NMS monitors and controls all
the remote terminals and the hub equipment. We design and manufacture the hub satellite
processor, hub protocol processor and NMS software and hardware. Third-party vendors
typically provide the radio frequency terminal.

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Our
Skystar Advantage VSAT product utilizes a patented technology that enables us to use
low-cost outdoor unit hardware and allows the VSAT network to handle momentary peak
traffic loads without any significant degradation of response time.

Features.
          The Skystar Advantage VSAT now offers a feature enabling Internet connectivity
          and additional voice channel capability, enabling voice communication between
          the hub site and a remote location. A VSAT network incorporating our Skystar
          Advantage VSAT product can offer features including: low-cost terminal
          equipment; rapid response time; high network availability; small antenna size
          which allows for easy installation and maintenance; very low transmission error
          rate; high hardware reliability; a variety of customer interfaces such as local
          area networks, or LAN (e.g., Token-Ring and Ethernet); support for commonly used
          data communications protocols, including and, if required, simultaneously X.25,
          SDLC, TCP/IP IP routing, MPEG1, MPEG2 and video; easy integration of additional
          value-added services such as data, audio and video broadcasting, and modular
          design that enables easy and staged network expansion.

Skystar
360E VSAT. The Skystar 360E VSAT offers two-way satellite based communication-enabling
broadband and digital video broadcast applications. The Skystar 360E is designed for
networking between a central hub and tens of thousands of locations across wide
geographical areas. The Skystar 360E is to be used by companies that control their own
dedicated hub or that work with shared hub operators. Applications for companies using the
Skystar 360E include the following:

| |  | Enterprises
 Two-way interactive Internet Protocol communications, reliable software
distribution, Internet and Intranet access, which means communicating between and among
VSATs, video conferencing, corporate training and voice over IP enabling an integrated
telephony and data solution over the same platform;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retail
Businesses  credit, debit and check authorizations, point-of-sale transactions,
inventory management and check authorizations, point-of-sale transactions, inventory
management and hotel and airlines or other reservations systems;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Banking
and Financial Services  stock market and financial transactions, ATMs,
financial data broadcasts and a electronic or floorless stock exchange; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Government
Uses  education networks for schools, lottery transactions, long-distance training
and SCADA line monitoring.
| | - | -------------------------------------------------------------------------------------------------------------------------

27

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Skystar 360E Network Architecture

Architecture.The Skystar 360E star network consists of a central hub, many VSAT terminals
          based in remote locations, and a satellite channel. The hub consists of base
          band equipment and a radio frequency terminal. Each remote terminal is composed
          of a small outdoor antenna, an outdoor unit and an indoor unit. The indoor unit
          is a stand-alone box that connects to the users PC via an Ethernet LAN.

At
the hub, the base band equipment controls the satellite transmission and interfaces with
the customers data equipment. An advanced, user friendly NMS provides centralized
monitoring and control, using statistics, alarms, network configuration and report
generation. Corporate content is sent from the companys headquarters to the hub
where it is uploaded and distributed to remote locations via satellite. Information can be
sent to a single location, a group of locations or all locations. Delivery confirmation
and other data, including file uploads, are sent back to headquarters via the satellite
return channel.

Key
Features

| |  | Star
Topology  The Skystar 360E is designed to support connectivity from a central hub
to many remote locations.
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | DVB
Outbound  The Skystar 360E outbound carrier complies with DVB standards.
| | - | -----------------------------------------------------------------------------

| |  | Superior
Inbound Coding  Intelligent coding algorithms and modulation techniques enable
efficient usage of satellite bandwidth.
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | Stand
Alone Remote Unit  Client software is already embedded in the box. There is no need
for external software for terminal operation.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

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| |  | Extensive
Internet Protocol Capabilities  The Skystar 360E can function in a variety of
Internet Protocol environments and supports a wide range of Protocols and applications.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Centralized
Network Management  Network management is carried out from the hub. Remote
terminals can be monitored from a central location.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | Rapid
Deployment  Terminals can be set up easily across multiple locations.
| | - | ----------------------------------------------------------------------------

| |  | Proven
Technology  Gilats interactive VSAT terminals have already been installed and
are operating successfully in thousands of locations worldwide.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

# VSATs as Telephony
Products

FaraWay
VSAT.Gilat and COMSAT RSI were parties to a joint venture for the development of the
FaraWay VSAT, a satellite telephony VSAT, which provides voice and data services via
satellite to remote locations and other areas that lack adequate telecommunications
infrastructure. FaraWay VSATs provide:

| |  | a
reliable telecommunications network (with fax, telephone and data capabilities) for
corporate, governmental and business users in developing countries that have minimal or
no telecommunications infrastructure;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | multi-channel
toll-quality telephone or digital trunking service to geographically isolated rural
residential areas in developing countries; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | cost-effective
telephone and data service that can be installed quickly for remote installations (e.g.,
oil and gas exploration sites, small rural government agencies, public call offices and
new factories).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Architecture.
          The FaraWay telephony product employs a unique VSAT architecture and satellite
          access scheme. As illustrated above, the product architecture permits
          connections to either private telephone equipment, pay telephones, private or
          public switches connecting the product to a single telephone line or a public
          switch connecting the product to many lines and data terminals, as well as to
          any combination of this equipment. High-speed data links can be established on a
          permanent basis or on demand, in a full mesh configuration.

29

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The
remote terminal of the FaraWay includes a dish antenna (typically 1.8 to 3.7 meters in
diameter), an outdoor unit and an indoor unit. The indoor unit connects directly to
subscribers telephone equipment central office or data networks. The FaraWay hub,
which may be connected to a public switch telephony network, or PSTN, or data networks,
such as Internet access or connection to other servers), includes a large dish antenna
(typically 3.7 to 13 meters in diameter), radio frequency electronics, a network resource
and call-processing controller, and a Network Management System, or NMS, which includes
call accounting files. The network resource controller assigns satellite frequencies to
the equipment at both ends of the communication link; the NMS monitors and controls the
overall network and also provides data for external network billing; and the traffic
terminal provides the hubs interface to the public switch, voice or data network.

Features.The FaraWay VSAT offers a cost-effective, flexible solution for connecting
          multiple telephone and data lines from a public switch or ISP connection to a
          local switch or directly to subscribers premises via satellite and to
          support voice, fax and high data rate applications. The product features
          include: Ku-band and C-band and extended Ku-band and C-band frequency operation;
          flexible interfaces and telephony signaling support; support of up to 330,000
          calls per hour; ITU-approved 16 and 8 kilobit per second voice encoding and bit
          pipe data links up to 5Mbps (via High Rate Module).

DialAw@y
IP VSAT.Our DialAw@y IP VSAT product is intended to provide inexpensive, toll quality
telephone service including voice and fax communication bundled simultaneously with high
speed Internet access. This product is targeted for small businesses and villages in
remote or urban areas lacking an adequate telephone infrastructure. The product has many
applications:

| |  | Public
Telecommunications - offering telecommunication services to remote locations such as:
 public               call offices, pay phones, pre-paid services and "always-on"
internet access;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Private
Telephones  offering telephone, fax and Internet access for small offices and home
offices, referred to in the industry as small office/home office users, remote
businesses, farms and remote tourist sites;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Standalone
Phones  for emergency or rescue operations, rural roads and remote highways and as
back up for ground-based telephony networks.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

|C
or Ku
|-------
|       

30

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The
DialAw@y has been designed to offer subscriber or pay telephone and public call
offices with up to six lines. Our rural telephony product can operate in a mesh
configuration, in which the remote terminals communicate with one another in single
satellite hop(meaning that the connection between the terminals passes only once
through the satellite), or multi-star configuration, which involves several
interconnection points to the public network. At the same time the DialAw@y IP offers
always on high speed two-way Internet access. We believe that the cost
benefits of the product meet the telephony needs of the targeted non-urban telephony
users, as well as such users current and future needs for Internet access.

Architecture.As illustrated above, a DialAw@y IP network consists of a central hub, PSTN
          and ISP gateways, satellite channels and remote terminals. A remote terminal
          consists of a small outdoor antenna (typically 0.98 to 1.2 meters), an outdoor
          unit and our indoor unit with one to six telephone lines. The hub consists of a
          radio frequency terminal and baseband equipment. The radio frequency terminal
          incorporates a large dish antenna (typically 3.7 to 11 meters) and radio
          frequency electronics equipment (up and down frequency converters, low noise
          amplifiers and high power amplifiers). The baseband includes a Hub Satellite
          Processor handling the satellite communications, a Hub Voice Processor be
          connected to the PSTN using a digital E1 line, a Hub Internet Processor
          connected to an internet service provider, and an NMS. The NMS monitors and
          controls all the remote terminals and the hub equipment. The hub design permits
          easy incorporation of new features. The hub station is the point of presence for
          Internet traffic, which means that it is the gateway to the users
          connection to the Internet. Telephony traffic can be also routed to regional
          gateways, which can utilize satellite or terrestrial infrastructure.

Features.Our DialAw@y IP VSAT product offers full support of telephone line services,
          including flexible adjustment to various payphones, an integrated telephony
          prepaid platform, high speed Internet access, full mesh architecture, call data
          processing, low cost, simple installation and operation, high hardware
          reliability, remote control and monitoring; and low power consumption.

# VSATs for Consumers

SkyBlaster
360 VSAT. The SkyBlaster 360 provides two-way connectivity, with both directions of
connectivity via satellite. The SkyBlaster 360 is designed for consumers and home offices
and small business offices that want high bandwidth services and do not have a terrestrial
high-speed infrastructure available to them. Our VSAT technology is ideal in outside
metropolitan centers because geographic distances do not hinder our ability to provide the
high-speed infrastructure that is unavailable otherwise. The SkyBlaster 360 consists of a
DVBreceiver and a satellite transmitter as a return channel. The VSAT is in the
form of a stand-alone external modem. The external modem is substantially easier to
install than the personal computer card used in previous models.

The
consumer-friendly external modem (approximately 12 inches x 12 inches x 4 inches wide)
sits near a users personal computer and provides two-way connectivity for Internet
access as well as for content delivery and other multicast and interactive applications.

The
SkyBlaster 360 features adaptable capacity of up to 52.5 megabits per second, or Mbps,
downstream and 307.2 kilobits per second, or Kpbs for the return channel. It can be used
with either an Ethernet connection or a USB port, and is compatible with Windows
98SE, Windows Me, Windows 2000 and Windows XP.

The
SkyBlaster 360 enables reliable, high-speed, bandwidth-intensive content delivery
applications including the following:

| |  | Consumer
Internet access;
| | - | -------------------------

| |  | High-speed
Intranet and Extranet.  Extranet enables sources outside an enterprise such as suppliers,
              access to only select portions of a network and Internet connections;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | High-speed
Internet access;
| | - | ---------------------------

| |  | Business
TV such as conferences, classes and seminars; and
| | - | ----------------------------------------------------------

| |  | Interactive
learning that enables companies to conduct a single class to employees located throughout
a single continent.
| | - | -------------------------------------------------------------------------------------------------------------------------

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Architecture.
          A SkyBlaster 360 star network consists of a central hub, many VSAT terminals,
          and a two-way satellite channel. The hub consists of base-band equipment and a
          radio frequency terminal. Each remote terminal is composed of a small outdoor
          antenna, an outdoor unit and an indoor unit. The indoor unit is a stand-alone
          box that connects to the users PC.

At
the hub, the base-band equipment controls the satellite transmission and interfaces with
the Internet and various servers. An advanced, user friendly Network Management System
provides centralized monitoring and control of the entire system including statistics,
alarms, status reports, network configuration and trouble-shooting of all the hub
components and remote VSATs. Content from the Internet or from the various servers at the
hub is transmitted from the hub to the remote stations. Information can be sent
simultaneously to a single location, which is referred to as unicasting, a group of
locations, which is referred to as multicasting, or all locations, which is referred to as
broadcasting. Delivery confirmation and other data, including file uploads, are sent back
to headquarters via the satellite return channel.

Key
Features

| |  | Star
Topology  Specially designed to support connectivity from a central hub to
thousands of remote locations.
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | DVB-S
Outbound  The outbound carrier is DVB-S (MPE) compliant and is scalable from
2.5Mbps to 52.5Mbps. It can also be multiplexed into an existing Direct to Home (DTH)
carrier.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Stand
Alone VSAT  The VSAT houses the transmitter and receiver. A USB or 10 base-T
Ethernet interface connects the VSAT to the PC.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | Centralized
Network Management  Network management is carried out from the hub. Remote
terminals can be monitored from a central location.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Extensive
IP capabilities  The VSAT can function in a variety of IP environments and
supports a wide range of IP protocols and applications.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | Rapid
Deployment  Any site within the satellite footprint can be immediately
connected to the network. The unique design allows a single team to install up to three
remote sites per day.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Proven
Technology  Gilats VSAT terminals have already been installed and are
operating successfully in thousands of locations worldwide.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | Host
Software  Performance enhancing client applications implemented on the PC
accelerate traffic at both the TCP and HTTP layers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

# Spacenet

Spacenet
acts as an operator of communications networks for the provision of telephony, data and
Internet services to customers, who are at present 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. The business is divided as follows:

| |  | The
enterprise provides satellite-based, enterprise-grade broadband wide-area networking
solutions for a broad range of commercial organizations and small business customers,
primarily in North America.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
consumer market, which provides broadband Internet access via satellite to residential,
SoHo in North America.
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | The
rural market, which provides satellite-based rural telephony and internet access
solutions to remote areas in Latin America.
| | - | --------------------------------------------------------------------------------------------------------------------------------

In
our two primary geographic markets, North America and Latin America, we provide full
network services through our network management centers, or NMC, in addition to product
sales. We offer a full spectrum of services, from installation and maintenance services to
comprehensive satellite communication service offerings in which we package the VSAT
system with installation, network operations, maintenance and access to satellite
transponder capacity. Our services include the following, as further detailed below:

| |  | network
analysis,
| | - | -----------------

| |  | network
implementation,
| | - | -----------------------

| |  | shared
hub services,
| | - | --------------------

| |  | network
operations,
| | - | -------------------

| |  | value-added
services,
| | - | ---------------------

| |  | managed
network services,
| | - | -------------------------

| |  | maintenance,
| | - | ------------

| |  | customer
technical services,
| | - | ----------------------------

| |  | provision
of telephony services,  and
| | - | -------------------------------------

| |  | access
to satellite capacity.
| | - | -----------------------------

Network
Analysis.Network analysis involves designing the system in response to
specific customer needs, determining critical system parameters, such as data protocols
and network response times, assisting in generating component and subsystem specifications
for the networks hardware, hub requirements (private or shared) and satellite
capacity.

Network
Implementation.The network implementation process covers hub
installation and network rollout, which entails installing and connecting all of the
remote VSAT locations to the network. Network rollouts are planned and managed by our
program management teams. A program manager serves as the customers single point of
contact and is responsible for delivering the network on time, on budget and to
specification.

Many
of the activities for installing a VSAT network take place at the customers
facilities, such as site survey, site preparation and installation of ground, roof, or
wall-supported mounts with lightning protection, connection of the outdoor unit and the
indoor unit to the antenna and intra-facility link or cable, powering up the system,
pointing the antenna, initializing the VSAT and confirming proper operation with the hub,
connecting the VSAT with the customers local equipment, and providing an orientation
to the local customer personnel. A typical installation can be completed in four to six
hours.

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Hub
installation services vary depending on whether the customers network involves a
private hub or use of one of our shared hub facilities in McLean, Virginia, Chicago,
Illinois, Atlanta, Georgia, Colombia or Peru.

We
currently use in-house personnel for hub installation and third parties to perform most
VSAT installations. The program manager, working with our in-house implementation staff,
insures that our third-party installation teams arrive at the customers site on
schedule and are equipped with the necessary equipment to complete the installation. The
third-party installers are trained and certified on our hardware platforms.

Shared
Hub Services.The hub is the most costly and complex component of a VSAT
system. Some customers prefer to outsource the management and operation of the hub, either
by leveraging our competency in managing networks or by gaining additional cost
efficiencies through sharing the hub hardware and operations costs with multiple
customers. We presently staff our primary shared hubs in the United States with a highly
specialized technical staff on a 24-hour basis. Our shared hub service typically includes
use of hardware, maintenance, ground-based backhaul circuits, satellite uplinking and
operations for which the customer pays a monthly fee.

Network
Operations.Our network operations services coordinate and manage the
operations of customers networks and monitor the quality of services delivered on a
24-hour basis from one of our two NMCs. Our largest NMC is located in McLean, Virginia,
and is staffed by technicians who are trained in network fault isolation, problem
resolution and customer service. We also have NMCs in Bogotá, Colombia and Lima,
Peru. When customers experience an outage on their network, they call the NMC, where a
trained professional, using proprietary monitoring and control technology, works to
restore service. In instances in which service cannot be restored through the
troubleshooting process, the NMC technician dispatches one of our third-party field
service technicians to repair or replace the on-site hardware and restore operations to
the site.

Value-Added
Services. We provide a wide range of developed and third-party value-added network
services for our customers to increase their network connections. Value-added services are
applications, managed or coordinated by us, providing added functionality to customers
over their Gilat network connection. Our value-added services currently include licensed
in-store music delivered to customer sites over their Gilat network connection,
unicast/multicast delivery of distance learning/videoconferencing content, and credit/debt
transaction processing support via the VSAT link, with more services expected to be added
in 2005. Rural operation services include prepaid voice, prepaid IP and voice mail
services.

Managed
Network Services. We also offer managed network services, which allow customers to
outsource their IT functionality to us on a consultant services basis. These services
leverage our experience providing enterprise network solutions customized to each
customers specific applications, topology and usage profiles, bringing us into a
more consultative professional services role and enabling us to add more value to the
customer relationship.

Maintenance.Once an NMC technician determines that a field service dispatch is required
          to fix a problem, our maintenance and logistics organizations provide service to
          the customer. We offer a variety of maintenance plans to support our customer
          networks. All of the plans include toll-free trouble reporting service from one
          of our NMCs, field service, replacement of equipment, warehousing of spare
          parts, shipping and repairs. The objective is to provide an on-site response
          within an average of four hours for most sites. In the United States, we have
          contracted with a third-party repair service provider, to operate nationwide
          service centers that are staffed with Gilat-trained and certified field service
          technicians. Other trained and certified third-party vendors are contracted in
          our international service markets.

Our
maintenance services are supported by our internal logistics and repair organization,
which is responsible for stocking parts in warehouses in the United States and Latin
America.

Customer
Technical Services.Our technical services group includes engineering test and support
services during the project implementation phase and on-going telephone and on-site
support for complex networking issues. The customer technical services group provides
application troubleshooting, network optimization, customer training and documentation
services.

34

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Protocols
and Methodologies.The development of new software protocols has resulted in improved
use of available network capacity and decreased delays in transmission of information. Our
networks support multiple protocols simultaneously, including SDLC, Bisync, X.25,
X.3/X.28/X.29 PAD, Token Ring LLC, Ethernet LLC, X.25 Broadcast, TCP/IP and voice
services. The performance of these protocols across satellite bandwidth is optimized by
techniques such as TCP/IP spoofing, which improves data throughput efficiency.
In addition, our VSAT networks have built-in protocol conversion capabilities, including
X.25 to Async PAD, SDLC to Token Ring, Bisync to Token Ring, X.25 to Bisync, X.25 to SDLC
and TCP/IP over Ethernet to TCP/IP over Token Ring, which allow our VSAT networks to
operate with multiple protocols without the purchase of additional equipment.

Spacenet
Inc.

Our
U.S. subsidiary. Spacenet Inc., provides satellite-based, enterprise-grade broadband
wide-area networking solutions for a broad range of commercial organizations throughout
North America. These networks are provided to a wide range of business and corporate
enterprises that require hundreds or sometimes thousands of VSATs with high-speed Internet
access and other communication applications via VSATs. Most service contracts through
Spacenet Inc. are for three to five year periods and enterprises pay on a per site, per
month basis in addition to upfront installation and hardware and software fees. Major
customers of Spacenet Inc. include the United States Postal Service, GTECH, Dollar
General, Countrywide, Valero, Rent-Way and Kroger. In 2002, Spacenet Inc. expanded its
market to include an off the shelf service known as Connexstar, a satellite
network solution product for small to mid-sized enterprises. This business offers standard
pre-packaged services, hardware and software for businesses that want business
connectivity for as few as one location and up to hundreds of locations. Today, Connexstar
off the shelf VSAT services represent the majority of new business generated by Spacenet
Inc.. In 2004, Spacenet Inc. broadened its service portfolio to provide hybrid
VSAT/terrestrial networks to customers where VSAT technology cannot provide a complete
solution. In 2002, 2003 and 2004, Spacenet Inc.s revenues accounted for
approximately one-half, one-third and one-quarter of our total revenues respectively.

Spacenet
Rural Communications

We
provide satellite-based rural telephony and internet access solutions to remote areas in
both Colombia and Peru. Outside dense urban areas, telephone and Internet access
communications infrastructure is costly and difficult to set up. Gilats service
offering provides governments with an affordable way to bridge the gap between urban and
rural areas, providing high-speed Internet connectivity, phone and fax service using our
satellite-based technology.

To
meet these needs, we have developed the following product portfolio:

| |  | Hub
operation, which includes handling a network operation and engineering services.
| | - | ------------------------------------------------------------------------------------

| |  | Maintenance
of remote sites, technical support, preventive and corrective maintenance, planning and
management of network operativeness, creation or improvement of the distribution network
for payment means.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | BOT
(Build, Operate, Transfer) in which we assume full responsibility for the design,
construction and operation of a telecommunications project, and then transfer the
knowledge of the operation and after a time pass it on to the client.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Rendering
of pre-payment and post-payment voice public services, preferably by public telephones or
public telephone booths.
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | Provision
of connection to Internet with high velocity services for small and medium companies.
| | - | -----------------------------------------------------------------------------------------------

| |  | National
and international long distance call services.
| | - | -------------------------------------------------------

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These
applications enable us to provide the following services:

| |  | Isolated
Public Telephones with one line and the gradual increase of the number of lines, as
needed, feeding options through alternative power sources, pre- and post-payment service.
The telephones can be used for general public use as community phones, for emergency or
rescue measures and on long highways.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Public
Call Offices which typically offer several voice lines in the same premises, enabling
telephone, fax and Internet services.
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | Telecenters
which offer both voice and Internet services with multiple telephone lines, personal
computers providing communities with Internet, telephones, facsimiles, carrier and
scanner and printing of documents.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Through
four contracts awarded to us by Perus National Program for Rural Telecommuncations
Projects, Fonde de Inversion en Telecomunicaciones del Peru (FITEL), we have deployed
fixed satellite telephony and Internet access in Peru  a public call office network,
serving approximately 6,000 communities, and providing rural satellite telephony and
Internet service to twenty percent of Perus population. The solution includes: (i)
bundled service of high-speed Internet access and toll-quality telephony service on a
single, low-cost platform; and (ii) VSAT satellite communications equipment that can be
deployed without reliance on terrestrial infrastructure, even in the most remote
locations. The FITEL telephony network operated by us provides citizens with quality,
affordable phone, fax and Internet services.

In
Colombia, we have provided telecommunications services since 2000. At present, we operate
approximately 11,535 remote locations. The services provided include public telephone
services in call offices and isolated telephone booths and telecenters of both voice and
Internet services. The services are provided under three government subsidized projects
awarded to us in the past five years.

# Marketing and
Distribution

We
use both direct and indirect sales channels to market our products, solutions and
services. Our GNS equipment sales division has marketing activities organized
geographically, with groups, subsidiaries or affiliates covering all regions of the map.
Our sales teams are comprised of account managers and sales engineers, who are the primary
account interfaces and work to 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 are lengthy and it is not unusual for a sale to require 18 months
from initial lead through signing of the contract. The sales process includes several
network design iterations, network demonstrations, and in some cases special software
development, integrations with third party equipment for complete solution offerings,
which is completed before contract signing. For VSAT networks sold as a complete service
offering, the sale cycle is typically shorter and can be as low as 90 days from the
initial lead through the signing of the contract. Some of the larger government bids in
Latin America include service provision for up to ten years.

36

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The
following table sets forth our revenues by geographic area for the periods indicated below
as a percent of our total sales and includes countries in which revenues exceeded 10% in
any of the reporting years:

|                                                | Years Ended December 31,
|----------------------------------------------- | ------------------------
|
|
|
|
|United States                                   |                         
|South and Central Latin America (except Brazil) |                         
|Asia                                            |                         
|Brazil                                          |                         
|Africa                                          |                         
|Europe                                          |                         
|Other                                           |                         
|                                                |                         
|Total                                           |                         
|                                                |                         

(1)    Includes
revenues from related parties of 3.2%, 4.0%, and 1.2% for the years           ended
December 31, 2002, 2003 and 2004, respectively.

# Strategic Alliances,
Joint Ventures and Acquisitions

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

Spacenet
Inc.On December 31, 1998, we completed the acquisition of Spacenet Inc., a company
engaged in providing VSAT-based network services, from SES Americom (formerly known as GE
Americom) and certain affiliates. Prior to the acquisition, Spacenet Inc. was our single
largest customer. Spacenet Inc. purchased our VSAT products in order to incorporate them
into its VSAT-based network service offerings.

As
part of the Spacenet Inc. acquisition, we entered into several significant agreements with
SES Americom. See Item 7: Major Shareholders and Related Party Transactions 
Related Party Agreements. The acquisition of Spacenet Inc. has enabled Gilat to
expand from primarily manufacturing and selling VSAT equipment to becoming a provider of
complete end-to-end telecommunications and data networking solutions based on VSAT
satellite earth stations.

StarBand.In March 2000, we established a joint venture named StarBand Communications
          Inc.(formerly known as Gilat-to-Home, Inc.) with MSN, EchoStar and ING, to
          provide broadband Internet access via satellite to residential, SoHo and small
          business customers in North America. MSN and EchoStar originally invested $50
          million each and ING has invested $25 million in cash in StarBand in exchange
          for both senior convertible preferred and common shares, of the outstanding
          capital of StarBand. Following an additional investment by EchoStar, Gilat,
          through Spacenet Inc., owned approximately 35.0% of StarBands outstanding
          shares.

On
May 31, 2002, StarBand filed a voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Since that time, we provided to StarBand approximately $14
million of debtor in possession financing, the majority of which has been in
the form of transponder capacity, and additional financing of approximately $11.2 million.
In November 2003, StarBand emerged from bankruptcy and we currently hold 49% of StarBand.
Upon StarBands emergence from Chapter 11, and in consideration for the 49% shares
issued to Gilat at that time, we forgave approximately $84 million of debt provided by us
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 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 a up to $7.5
million in revolving financing and trade credit, subject to various restrictions and
reductions, through the end of 2009. As of December 31, 2004, StarBand is consolidated
into our financial statements. Please see Item 8 Significant Changes.

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Deterministic
Networks Inc.In July 2000, we acquired all of the shares of Deterministic Networks,
Inc. (Deterministic), a privately held company based in California.
Deterministic is a supplier of policy-based networking products and toolkits to several
major technology companies, providing quality of service, network management and Internet
security capabilities that enhance the products and services of its customers. In exchange
for Deterministics stock, the shareholders of Deterministic received 10,921 of our
ordinary shares then valued at approximately $7.8 million. A total of $7.2 million of this
price was attributed to goodwill which was amortized at an annual rate of 20% through
December 2001, with the balance impaired in 2002 and recorded as a cumulative effect of
change in accounting principle in the first quarter of 2002. Currently, Deterministic has
approximately ten employees and continues to develop software-networking products.

rStar.In January 2001, following a tender offer, we became the owners of 51% of
          the outstanding shares of rStar (a then publicly traded company on NASDAQ) at a
          cost of approximately $51 million. In May 2001, rStar issued and delivered to
          Gilat 19,396,552 shares of rStar Common Stock, in full satisfaction of
          rStars outstanding capital lease obligations to Spacenet Inc. in the
          amount of approximately $45 million, which resulted in Gilat increasing its
          share holdings in rStar to approximately 66%. In August 2002, we completed a
          transaction in which we acquired additional shares of rStar, increasing our
          ownership interest to approximately 85%. As part of this transaction, we sold to
          rStar the exclusive rights in certain Latin American countries (i) to implement,
          operate and market broadband Internet access services and voice services to
          residential consumers and SoHo subscribers, (ii) to provide a bundled product
          with direct-to-home television service using a single satellite dish, and (iii)
          to provide such new technologies and products related to the foregoing as Gilat
          may in the future develop or make available to StarBand, which shall be offered
          to rStar upon commercially reasonable terms. Under the acquisition agreement,
          rStar purchased the outstanding capital stock of StarBand Latin America in
          exchange for 43,103,448 shares of rStar common stock. StarBand Latin America was
          created to provide, through local subsidiaries, two-way always on, high-speed
          Internet access and telephony to residential and SoHo customers in Latin
          America.

In
December 2003, we entered into an agreement with certain rStar stockholders to acquire an
additional 9.3% of rStar shares for $0.60 per share in cash. In April 2004, immediately
following such transaction, , we effected a short-form merger and acquired the shares held
by all other rStar stockholders.

Satlynx
S.A. In April 2002, together with SES Global SA (formerly known as SES Finance SA), we
announced the formation of a new company that provides two-way satellite broadband
communications services to enterprises, consumers and SoHo users throughout Europe. We and
SES Global contributed cash and in kind contributions, which included existing facilities,
transponder capacity, hubs, terminals, other technology and technical as well as marketing
assistance. Gilat transferred six of its European subsidiaries (in Italy, Germany, the
Czech Republic, England, Holland and France). As a result, substantially all of the
service-providing business of Gilat in Europe was transferred to this joint venture. The
transaction between Gilat and SES Global was completed on May 24, 2002. In June 2003, and
in March 2004, Alcatel Space and Skybridge (Alcatel subsidiaries) invested in Satlynx cash
and in-kind contributions. The future of Satlynx is contingent upon its ability to raise
additional financing.

# Backlog

The
2004 year-end backlog for equipment sales and revenues from multi-year service contracts
for our VSAT products was approximately $191 million, from approximately $243 million at
the year-end 2003. Approximately $24 million of the backlog is for equipment sales, and
$167 million for network operations. 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 could
lead to a termination of the related contract. In addition, our backlog has decreased
significantly in the past year. If our backlog continues to decrease and we do not
increase our short-cycle sales, our business could be adversely affected.

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# 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 48 patents issued (22
U.S. and 26 foreign patents), 22 U.S. patent applications pending and nine 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 that will be released to the market soon, as well as patents
concerning a range of other inventions. As part of our patent program, Gilat intends 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. However, we cannot assure that our
proprietary technology will remain a trade secret, or that others will not develop a
similar technology or use such technology in products competitive with those offered by
us.

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 Gilats business, financial
condition and operating results.

We
cannot assure that additional infringement, invalidity, right to use or ownership claims
by third parties, or claims for indemnification resulting from infringement claims will
not be asserted in the future. 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.

# Customers

Gilats
products are purchased by a wide spectrum of customers, including government operators,
service providers large retail, small and medium enterprises, small consumer-oriented
businesses, including retail and consumer distribution, convenience stores, restaurants
and hospitality establishments, gas stations, hotels, brokerage, banking and financial
services providers, communications companies, lotteries, automotive and governmental
institutions. We sell our products, both equipment and in some instances services,
directly to these customers or indirectly through resellers. In general, networks for
these customers range from approximately 100 to 10,000 sites, although some customers have
satellite data networks considerably smaller and others, considerably larger than this
range. For example, GTECH, a lottery provider in the United States, has deployed more than
25,000 Skystar Advantage VSATs around the world. In Peru, Gilat has deployed 6,000
Dialaw@y IP VSATs providing telephony and Internet services. In Brazil, StarOne,
the largest satellite ISP from enterprise to consumer customer, is using Skystar
Advantage, SkyBlaster 360 and Skystar 360E in more than 10,000 sites. In South Africa,
Gilat has been contracted to deploy up to 26,000 Skystar 360E Broadband VSATs over the
next five years. In China, the two western provinces, Xinjiang and Tibet, have more than
3,000 Dialaw@y IPs for rural telephony. In Australia, Optus has selected Gilat to
supply an additional 2,500 Skystar 360E for broadband applications. In Kenya, the
Dialaw@y IP platform will be used to modernize the Kenyan postal offices throughout
the country.

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# Competition

The
network communications industry is highly competitive and the level of competition is
increasing. As a provider of data network products and services in the United States and
internationally, we compete with a large number of telecommunications service providers.
Many of these competitors have significant competitive advantages, including long-standing
customer relationships, close ties with regulatory and local authorities and control over
connections to local telephone networks. This increasingly competitive environment has put
pressure on prices and margins and has led to pressures for industry-wide standardization
which would enable multi-vendor networks. To compete effectively, we emphasize the price
competitiveness of our products as compared to products offered by ground-based and other
satellite service providers, the advantages of satellite data networks in general, our
network quality, our customization capability, our offering of networks as a turnkey
service rather than as an equipment sale and our provision of a single point of contact
for products and services.

We
have encountered strong competition from major established carriers such as AT&T, ,
Sprint, British Telecom, France Telecom, Deutsche Telekom and global consortia of PTTs and
other major carriers, which provide international telephone, private line and private
network services using their national telephone networks and those of other carriers. Such
carriers also offer technological solutions for customer networks, including ISDN lines
and frame relay networks. Fiber optic cable is increasingly available for wide bandwidth
networks in the United States and Western Europe and competitive issues often involve
tradeoffs among price, various features and customer needs for specialized services or
technologies. We are facing increasing competition from ground-based telecommunications
service providers that use frame relay, fiber optic networks and digital network switching
to provide competitive network offerings. The increase of cellular coverage and
development of General Pocket Radio Service, or GPRS technology is also beginning to prove
a competitive technology for low-medium bit rate applications.

Our
VSAT networks generally have an advantage over terrestrial networks where the network must
reach many locations over large distances, where the customer has a last mile
or congestion problem that cannot be solved easily with terrestrial facilities and where
there is a need for transmission to remote locations or emerging markets, as discussed
more fully above. By comparison, ground-based facilities (e.g., fiber optic cables) often
have an advantage for carrying large amounts of bulk traffic between a small number of
fixed locations. However, a customers particular circumstances, the pricing offered
by suppliers and the effectiveness of the marketing efforts of the competing suppliers
also play a key role in this competitive environment.

The
major telecom carriers also serve as resellers of our products and services, and are an
increasingly important distribution channel in Asia and Latin America.

Our
principal competitor in the supply of VSAT satellite networks is Hughes Network Systems
(HNS) which offers a full line of VSAT products and services and which obtains most of its
satellite capacity on the satellite system operated by its affiliates Hughes Galaxy and
PanAmSat. In competing with HNS, we emphasize particular technological features of our
products and services, our ability to customize networks and perform desired development
work, the quality of our customer service and our willingness to be flexible in
structuring arrangements for the customer. In addition, we face increased competition for
all of our product lines from ViaSat, Inc. and iDirect Technologies.

The
satellite market is leaning toward a standard technology. Several technologies have
emerged as possible candidates. The only open standard at this point in time is DVB-RCS.
There are several manufacturers providing and supporting this standard which has been
established primarily in Europe. Other companies offer technologies that can be
standardized such as DOCSIS by ViaSat and IPoS by HNS.

We
may experience increased competition in the future from existing or new competitors in the
hardware, services and the consumer broadband spheres that may adversely affect our
ability to continue to market our products and services successfully. We believe that we
have been able to compete successfully with larger telecommunications companies in part by
entering into strategic joint development and marketing relationships with major companies
such as SES Global, by developing new products such as the SkyEdge and by emphasizing
low-cost product and service features and functions that meet the needs of customers in
the markets in which we compete. See Item 4: Information on the Company
 Patents and Intellectual Property.

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We
believe that our major competitors have the resources available to develop products with
features and functions competitive with those offered by us. In addition, the entry of new
companies into the market or the expansion by existing competitors of their product lines
could have an adverse effect on us. However, we believe that our primary competitive
advantage is our ability to provide products with relatively low overall cost and high
functionality. We also compete on the basis of the performance characteristics of our
products and our ability to customize certain network functions. We cannot assure that our
competitors will not develop such features or functions, that we will be able to maintain
a cost advantage for these products or that new companies will not enter these markets.

We
also compete with other companies that offer communications networks and services based on
other technologies (e.g., ground-based lines and frame relay, radio transmissions,
point-to-point microwave) that can be competitive in terms of price and performance with
our products. For example, there is a competing technology for a unidirectional VSAT
system that uses a lower-cost remote terminal but requires more satellite space segments
capacity than our unidirectional VSAT products. See Item 3: Key Information 
Risk Factors; Competition in the network communications industry.

# Government Regulation

# Regulatory Overview

The
international telecommunications environment is highly regulated. As a provider of
communications services in the United States, we are subject to the regulatory authority
of the United States, 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 United States 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.

# United States Regulation

All
entities that use radio frequencies to provide communications services in the United
States 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 use of
telephony services we provide.

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# Political and Economic
Conditions in Israel

We
are incorporated under the laws of, and our offices and manufacturing facilities are
located in, the State of Israel. Accordingly, we are directly affected by political,
economic and military conditions in Israel. Our operations would be materially adversely
affected if major hostilities involving Israel should occur or if trade between Israel and
its present trading partners should be curtailed.

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors and a state of hostility, varying from time to
time in intensity and degree, has led to security and economic problems for Israel.
However, a peace agreement between Israel and Egypt was signed in 1979 and, a peace
agreement between Israel and Jordan was signed in 1994. Since 1993, several agreements
between Israel and Palestinian representatives have been signed but since October 2000,
there has been substantial deterioration in the relationship between Israel and the
Palestinian Authority, which has resulted in increased violence. The future effect of this
deterioration and violence on the Israeli economy and our operations is unclear. As of the
date hereof, Israel has not entered into any peace agreement with Syria, Lebanon or other
Arab countries except those mentioned above, and no prediction can be made as to whether
any other agreements will be entered into between Israel and its neighboring countries.
The ongoing violence between Israel and the Palestinians and tension between Israel and
neighboring Syria and Lebanon may have a material adverse effect on our business,
financial conditions or results of operations. Generally, male adult citizens and
permanent residents of Israel under the age of 51 are, unless exempt, obligated to perform
up to 36 days of military reserve duty annually. Additionally, all such residents are
subject to being called to active duty at any time under emergency circumstances. Some of
our officers and employees are currently obligated to perform annual reserve duty. While
we have operated effectively under these requirements since we began operations, no
assessment can be made as to the full impact of such requirements on our workforce or
business if conditions should change, and no prediction can be made as to the effect on us
of any expansion or reduction of such obligations.

In
addition, in the event and to the extent the recent armed conflict entered into by the
United States and other countries in Iraq will impact Israel, our operations may adversely
affected.

Israels
economy has been subject to numerous destabilizing factors, including a period of rampant
inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world
commodity prices, military conflicts and civil unrest. The Israeli government has, for
these and other reasons, intervened in various sectors of the economy employing, among
other means, fiscal and monetary policies, import duties, foreign currency restrictions
and control of wages, prices and foreign currency exchange rates. The Israeli government
has periodically changed its policies in all these areas.

In
addition, certain countries, companies and organizations continue to participate in a
boycott of Israeli firms. We do not believe that the boycott has had a material adverse
effect on us, but there can be no assurance that restrictive law, policies or practices
directed toward Israel or Israeli businesses will not have an adverse impact on the
expansion of our business.

# Trade Agreements

Israel
is a member of the United Nations, the International Monetary Fund, the International Bank
for Reconstruction and Development and the International Finance Corporation. Israel is a
member of the World Trade Organization and is a signatory 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.

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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 June 2000, Israel was admitted as an Associate Member of the European Union. 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 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.

# Organizational Structure

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 15, 2005:

|Company                                   | Place of
Incorporation | Ownership
Interest
|----------------------------------------- | ---------------------- | ------------------
|
|
|
|
|Spacenet Inc.                             |                        |                   
|rStar Corporation                         |                        |                   
|Gilat to Home Latin America (Holland) N.V |                        |                   
|Gilat Satellite Networks (Holland) B.V    |                        |                   
|StarBand Communications Inc.              |                        |                   
|Satlynx S.A                               |                        |                   

# Property and Equipment

Our
products are primarily designed, assembled, manufactured and tested at our facility in
Petah Tikva, Israel. The net book value of the facilities in Petah Tikvah is $70.6
million. A recent valuation of the land and facilities valued the property at
approximately $46 million. In accordance with SFAS 144, the Company tested the
recoverability of its facilities as part of a group of assets and determined that no
impairment charge should be recorded as of December 31, 2004. Had the Company put the
facilities up for sale, it would have been required to record the difference between the
carrying amount and the fair value as an impairment, loss in the statement of operations,
all in accordance with SFAS 144.

Our
current manufacturing facilities have sufficient capacity to handle current demand. We
continuously adjust our capacity based on our production requirements. 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. We have implemented a
multifaceted strategy focused on meeting customer demand for our products and reducing
production costs. Our operations group, together with our research and development group,
is working with our vendors and subcontractors to increase development and production
efficiency in order to obtain higher component quantities at reduced prices.

We
have network operations centers at McLean, Virginia and shared hub facilities in Chicago,
Illinois, Brazil, 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. The network operations
centers allow us to perform diagnostic procedures on customer networks and to reconfigure
networks to alter data speeds, change frequencies and provide additional bandwidth.

Our
offices in McLean, Virginia originally comprised approximately 137,000 square feet,
portions of which we sublease, such that the current net monthly rental cost is
approximately $223,000. These offices house our personnel and also contain one of our U.S.
network operations centers. In June 2000 we purchased the land and building facilities
used by Spacenet Inc. for a purchase price of approximately $24.3 million. In March 2001
we sold these premises for approximately $31.5 million (net of related costs of
approximately $1.5 million) and entered into a 15-year lease for this space, at an initial
annual rent of approximately $3.7 million. In addition, we lease additional office space
in McLean for Spacenet Inc. personnel comprising approximately 60,000 square feet at
monthly rental of approximately $182,000. We also maintain space in Chicago, Illinois and
Houston, Texas for sales and operations.

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In
2000 and 2002, we purchased and developed facilities on approximately 140,400 square feet
of land in Backnang, Germany, for approximately $13 million. In June 2001, we entered into
a mortgage and loan agreement with a German bank, secured by our Backnang facilities. The
mortgage is for approximately Euro 5.7 million, of which (i) approximately one-fifth bears
interest at 5.86% and is repayable over 5 years commencing July 2001 and (ii)
approximately four-fifths bears interest at 6.3% and is repayable quarterly over 20 years
commencing July 2006. As of May 24, 2002, these facilities are leased to Satlynx, one of
the six Gilat subsidiaries sold to Satlynx. In addition, Satlynx has been granted an
option to purchase the Backnang facility.

We
also maintain facilities in Santa Cruz, California; Austin, Texas; Atlanta, Georgia; and
in South America in Brazil, Colombia, Mexico, and Peru, along with representative offices
in Beijing, Melbourne, Prague, Pretoria, New Delhi, Almaty, Jakarta, Kiev and Moscow and
small facilities in other locations throughout the world.

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

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

# Introduction

During
the years ended December 31, 2002, 2003 and 2004, we operated under a single reportable
business segment. As of January 2005, we changed our business reporting to reflect
operation under two business units: Gilat Network Systems (GNS) and Spacenet. The
Companys 2004 financial statements reflect this change.

Our
reportable segments are differentiated by whether the nature of the transaction is
dominated by an equipment sale (a GNS transaction) or by the operation of a network (a
Spacenet transaction). Segments are managed separately and can be described as follows:

Gilat
Networks Systems. This business segment 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 our 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.Spacenets business consists of activity as an operator of
          communications networks for the provision of telephony, data and Internet
          services to our 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. The business is divided as follows:

| |  | The
enterprise market, through Spacenet Inc., which provides mainly satellite-based,
enterprise-grade broadband wide-area networking solutions for a broad range of commercial
organizations and small business customers primarily in North America.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
consumer market, primarily through StarBand, which provides broadband Internet access via
satellite to residential and SoHos in North America.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
rural market, known as Spacenet Rural Communications, which provides satellite-based
rural telephony and internet access solutions to remote areas in Latin America.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This
discussion and analysis of our financial condition and results of operations is based upon
our audited consolidated financial information included in this Form 20-F, and which has
been prepared in accordance with accounting principles generally accepted in the United
States.

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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 the average exchange rate for the period.
The resulting translation adjustments are reported as a component of shareholders
equity in accumulated other comprehensive loss.

# Critical Accounting
Policies and Estimates

We
believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our audited consolidated financial information
included in this Form 20-F.

Use
of 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, long-lived assets,
restructuring charges, revenues and contingencies. We base our estimates on historical
experience and on various other assumptions 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 under different assumptions or conditions.

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 VSATs and hubs and services include access to and communication
          via satellites, known as space segment, installation of network equipment,
          telephony services, internet services, consulting, on-line network monitoring,
          network maintenance and repair services. We sell our products primarily through
          a 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 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. We do not grant rights of return. Service revenues
are recognized ratably over the contractual period or as services are performed.

We
record a significant amount of revenue from arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. A multiple-element
arrangement 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.

Revenues
from products under sales-type-lease contracts are recognized upon installation or upon
shipment, in cases where the customer obtains its own or others 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.

Revenue
from products and services under operating leases of equipment are recognized ratably over
the lease period.

45

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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. 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 or 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 are less
favorable than our projections, additional 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. In 2002, 2003, and 2004 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 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. See Restructuring Charges, Write-Offs and Other
Significant Chargesbelow.

Inventory
Valuation.We are required to state our inventories at the lower of cost or market
price. 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. We have recorded significant changes in required reserves in recent
periods. See Restructuring Charges, Write-Offs and Other Significant Charges
below.

Impairment
of Goodwill, Intangible Assets, Long-Lived Assets, and Investment in Affiliates.Our
business acquisitions resulted in goodwill and other intangible assets. We periodically
evaluate our goodwill, 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.

Effective
January 1, 2002, indefinite life intangible assets and goodwill are not amortized but
rather subject to annual impairment testing.

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 asset, 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 wining bids and other judgmental assumptions, which are also
affected by factors detailed in our risk factors section in this annual report. If these
estimates or the related assumptions change in the future, we may be required to record
impairment charges for our long-lived assets.

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.

For
all of the above, see Restructuring Charges, Write-Offs and Other Significant
Chargesbelow.

46

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Future
events could cause us to conclude that impairment indicators exist and that additional
intangible 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, primarily facilities-related operating
leases, resulting from our actions. We have estimated facility exit costs for certain
under-utilized facilities and have 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 charges 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 required to assess the likelihood of any adverse judgments or outcomes
of these proceedings 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. 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.

In
January 2003, upon emergence from Chapter 11, we determined that we did not control
StarBand since we did not hold the majority of its voting interest and could not gain
control in any other way over such company. As such, as of December 31, 2003 StarBand was
accounted for under the equity method of accounting in accordance with APB 18 and the
excess of losses over the investment in StarBand amounted to approximately $ 0.2 million.
StarBands board of directors was and is comprised of three members, all of which are
from our senior management.

FIN
46, which we adopted in January 2004, requires consideration and estimates of a
significant number of possible future outcomes of the Variable Interest Entity as well as
the probability that each of the outcomes will occur. The results of each possible outcome
are allocated to the parties holding interests in the Variable Interest Entity. Based on
the allocation of possible outcomes, a calculation is performed to determine which party,
if any, has a majority of potential negative outcome (expected losses) or a majority of
the potential positive outcomes (expected residual returns). That party, if any, is the
Variable Interest Entitys primary beneficiary and is required to consolidate the
Variable Interest Entity. Calculating the expected losses and expected residual returns is
highly subjective and requires the use of significant estimates.

As
of January 1, 2004, as per FIN 46, we analyzed whether StarBand could finance its
activities without additional subordinated financial support from other parties and
concluded that the equity investment at risk was not greater than the expected losses of
the entity. Accordingly we believe that StarBand is a Variable Interest Entity
(VIE).We performed an analysis in which we allocated the expected losses and
expected residual returns to ourselves and to the other investors in StarBand using
expected cash flows derived by projecting possible cash flows and assigning each
projection with a probability weight. Through our analysis, we concluded that we absorb
the majority of StarBands expected losses and we receive the majority of the
residual return. Accordingly we believe that we are the primary beneficiary of StarBand,
and therefore we determined that StarBand should be consolidated into our consolidated
financial statements.

As
of December 31, 2003 Satlynx was accounted for under the equity method of accounting in
accordance with APB 18 and the excess of losses over the investment in Satlynx amounted to
approximately $2.3 million.

We
analyzed whether Satlynx can finance its activities without additional financial support
from other parties and concluded that the equity investment at risk was not greater than
the expected losses of the entity. Accordingly, we believe that Satlynx is a Variable
Interest Entity, as defined in FIN 46. As such, we performed an analysis in which we
allocated the expected losses and expected residual returns to our company and to the
other investors in Satlynx using expected cash flows derived by projecting possible cash
flows and assigning each projection with a probability weight. Through this analysis, we
concluded that we do not absorb the majority of Satlynxs expected losses and we do
not receive the majority of the residual return. Accordingly we believe that we are not
the primary beneficiary of Satlynx, and therefore Satlynx should not be consolidated into
our consolidated financial statements.

47

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# Restructuring Charges,
Write-Offs and Other Significant Changes

Our
company has been through significant changes in the past three years. The following
disclosure provides in-depth background for each financial year which will enable a better
analysis of our financial condition and results of operations.

2002. In the year ended
December 31, 2002, the recession in the communications industry which began in 2001 and
the resulting slowdown in orders continued. Furthermore, once again certain circumstances
such as the global decrease in the financial stability of telecommunication companies and
depressed market conditions indicated that the carrying amount of certain assets would
not be recoverable. In October 2002, we commenced the arrangement to restructure our debt
with holders of our convertible bonds, bank lenders and other creditors, which was
successfully completed in March 2003. Prior to and while the arrangement was under
negotiation, customers expressed doubts regarding our ability to restructure our debt and
our ability to sell products and retain customers declined. As a result of the above, in
2002 we recorded the following charges:

| |  | We
wrote-off (i) excess inventories in order to adjust the inventory level to the new
revenue expectations, in the amount of approximately $7.0 million; (ii) discontinued
products in our inventory in the amount of approximately $8.8 million; and we marked down
inventory that is expected to be sold at a price lower than the carrying value in an
amount of approximately $4.3 million.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
increased our bad debt provision and wrote-off an amount of approximately $34.7 million.
| | - | -------------------------------------------------------------------------------------------

| |  | We
recorded an impairment of all of the goodwill relating to our subsidiaries in an amount
of $69.7 million. The impairment was prompted by the continued deterioration in market
conditions and the decrease in the projected income of our subsidiaries. The impairment
of goodwill recognized at adoption of SFAS No. 142 in the amount of $56.7 million is
presented under cumulative effect of a change in an accounting principle and
the impairment of goodwill recognized after adoption in the amount of $13.0 million is
presented in our operating expenses.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Based
on our managements periodic review of the carrying value of our long-lived assets,
in 2002 we recorded the following impairments:

| |  | Intangible
assets in the amount of $7.0 million and other intangible assets relating to technology
that we no longer use in an amount of $1.3 million. The impairment consists of technology
purchased by us in 2000 which is no longer in use and intangible assets from the purchase
of Spacenet Inc..
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
identified the following factors pertaining to property, plant and equipment: (a)
decreased levels of cash which curtailed future financing prospects needed in order to
finance our business; and (b) a growing weakness in our target markets. We recorded
impairment of our property, plant and equipment in an amount of $42.4 million for
adjustments of the carrying value of assets which are not used to generate our revenues
to their fair value, and for adjustments of the carrying value of productive assets to
their fair value according to the guidance of SFAS No. 144.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
light of our review of the auditors report of a Brazilian entity in connection with
the financial statements as of September 30 and December 31, 2002 which noted that such
company may not be able to retain its existence as a going concern if they are unable to
raise additional funding or otherwise generate sufficient revenues and other factors, and
the fact that such company did not repay our investment at maturity in December 2002, we
concluded that these conditions were not temporary and needed to be considered in our
financial statements. As a result, we recorded an impairment of our investment in this
company in an amount of approximately $39.4 million; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
recorded an impairment of our investment in Communicacion y Telefonia Rural S.A or, CTR,
a company in Chile in which we had invested, in an amount of approximately $11.2 million.
The impairment was due to a decrease in revenues of CTR, a devaluation of the Chilean
currency and other adverse economic conditions, the inability of CTR to generate cash
flow and a decrease in our shareholding in such entity. We also recorded an impairment of
other investments in the amount of $0.8 million.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48

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2003. In
2003, our financial weakness in the early part of the year continued to           impact
our orders globally and in particular in the United States. At the end of           the
first quarter of 2003, we concluded the arrangement to restructure our debt
          with creditors, bank lenders and note holders. At that time, our management
went           through significant change, with the resignation of our CEO and President
          (founders of our company) and the resignation of the CEO of Spacenet Inc. On
          April 15, 2003, our shareholders elected an almost entirely new board of
          directors and Chief Executive Officer and President. Also during 2003, our COO,
          CFO, and other members of senior management resigned. In June 2003, new
          management imposed an additional set of lay-offs and budget cuts and embarked
on           an effort to streamline our operations in order to increase efficiency and
          reduce costs. This effort included a variety of measures including
          organizational and structural changes and office consolidation as well as
          involuntary termination of 88 employees worldwide. The reductions have resulted
          in a decrease in annual expenses of approximately $16 million. In November
2003,           we concluded an exchange offer pursuant to which the majority of the
holders of           our new notes converted their notes into equity. As a result of all
of the above           factors, we recorded the following charges:

| |  | We
wrote-off (i) excess inventories in the amount of approximately $1.5 million in order to
adjust the inventory level to new revenue expectations; (ii) discontinued products in the
amount of approximately $4.0 million; and we marked down inventory of approximately $0.9
million that is expected to be sold at a price lower than its carrying value.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | An
additional impairment of goodwill in the amount of approximately $5.0 million relating to
the closing of the rStar acquisition on August 2, 2002.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Restructuring
charges of approximately $3.9 million. The restructuring costs consisted of employee
termination benefits associated with involuntary termination and costs associated with
termination of lease commitments with respect to premises occupied by Gilat.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Based
on our periodic review of the carrying value of our long-lived assets we recorded the
following impairments:

| |  | We
identified the following factors pertaining to long-lived assets: (a) a continued low
level of cash has adversely affected future financing prospects which are needed to
finance our business; and (b) a growing weakness in our target markets. We recorded an
impairment of our property, plant and equipment in an amount of approximately $18.1
million and intangible assets of approximately $5.6 million for adjustments of the
carrying value of assets not used to generate revenues to their fair value, and for
adjustments of the carrying value of productive assets to their fair value according to
the specifications of FASB 144.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
light of managements decision to dispose of our subsidiary in Argentina we recorded
an impairment of approximately $3.2 million, which is recorded as an impairment of
tangible and intangible assets.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, we reversed $3.3 million of the impairment of our investment in a Brazilian
company due to an option exercise related to our investment in such company.

Details
Regarding the Restructuring of Our Debt in 2003. In March 2003, an Israeli court
approved an arrangement with our creditors that provided for the restructuring of our
debts, which included the following changes to our current commitments and the creation of
new commitments:

49

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| |  | Convertible
Notes. We exchanged our 4.25% Convertible Subordinated Notes due 2005, or the old notes
which had a principal amount of $350 million for (i) 10,104,195 ordinary shares; and (ii)
$83.254 million in principal amount of new notes.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Bank
Hapoalim. Of the $102 million we owed Bank Hapoalim (i) $25.5 million was converted into
924,430 Shares; (ii) $5.1 million was converted into new notes of the same principal
amount; and (iii) the remaining debt of $71.4 million remains as a loan with revised
terms. The revised terms of the loan include equal semiannual installments of principal
of $4.5 million beginning on July 2, 2005, with a fixed installment of $8.9 million on
July 2, 2012. The loan bore interest at the six-month LIBOR rate plus 2.5% and was
payable semiannually together with the installments of principal. Please see details of
the further revision to this loan described in 2004 below.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Bank
Leumi Le-Israel B.M. We revised the terms of our loan from Bank Leumi Le-Israel B.M. in
the principal amount of $30 million. The revised terms of the restructured loan include
principal payments in the amount of $1 million annually during each of 2003 and 2004 and
principal payments of $4 million annually during each of the years 2005 through
2011. The loan bears interest at the six-month LIBOR rate plus 2.5%.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Israel
Discount Bank Ltd.  In March 2003, Israel Discount Bank Ltd. agreed to provide its
performance                guarantees for our benefit in the amount of up to $13.3
million for at least one year.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | SES
Americom.  SES Americom agreed to terminate its transponder agreements with Spacenet
Inc., which                related to StarBand.  In addition, SES Americom agreed to
defer payments by Spacenet Inc. in                connection with other agreements.  As
part of the arrangement, we issued to SES Americom                713,052 of our shares.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
part of the arrangement approved by the Israeli court, we granted to the banks referred to
above, in addition to existing security interests in their favor, a first priority
security interest consisting of a floating charge on all of our assets and we pledged for
their benefit all of the shares that we own in Spacenet Inc.. We granted a second priority
security interest in the same collateral to the holders of the new notes.

In
March 2003, we finalized the financial restructuring arrangement described above. As a
result, we reduced our principal debt by approximately $309 million, which included $12.0
million of accrued interest. The arrangement significantly increased our
shareholders equity, reduced our debt and reduced our financing costs. We recorded
an increase in our shareholder capital in the amount of $55.2 million (net of expenses in
the amount of $2.8 million) and a gain of approximately $185.6 million (net of related
expenses in the amount of approximately $11.9 million) and $5.7 million in tax expenses.
The related expenses included settlement payments to outgoing management in the amount of
$2.4 million and debenture issuing expenses in the amount of $4.1 million.

In
October 2003, we improved our financial condition by consummating an exchange offer to our
holders of new notes and exchanging the majority of the notes for ordinary shares at a
rate of 125 of our ordinary shares for each $1,000 principal amount of our new notes. In
November 2003, we closed the exchange offer with the participation of a majority of our
note holders, reducing our debt by approximately $76.0 million, which included $2.3
million of accrued interest. We recorded an increase in our shareholders equity in
the amount of $45 million and an additional gain relating to this completed debt
restructuring of approximately $58.6 million.

We
accounted for the first debt restructuring included in the arrangement on the basis of a
combination of types of restructuring and on the basis of modification of terms as part of a
troubled debt restructuring, and for the debt to equity conversion on the basis of equity
interest in full settlement in accordance with SFAS 15. As a result of the arrangements,
we recorded the shares issued at their fair value in our shareholders equity at the
date of the closing. In addition, we recorded the estimated future interest payments to be
made in connection with the repayments of the new notes and the loans in our consolidated
balance sheet, and recorded a capital gain from restructuring of debt in our consolidated
statements of operations.

50

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2004.In
the first quarter of 2004, we evaluated the applicability of FIN 46 on our
          investment in StarBand and concluded that we absorb the majority of
          StarBands expected losses and receive the majority of the residual
return.           Accordingly we determined that we are the primary beneficiary of
StarBand, and           therefore StarBand should be consolidated into our consolidated
financial           statements.

Also
in the first quarter, we recorded a write-off of $2.0 million of excess inventory as a
result of an adjustment to our forecast of revenues for certain products in connection
with the introduction of a new product line.

In
April 2004, we revised the terms of our loan from Bank Hapoalim, to whom we owe a
principal debt amount of $71.4 million. The new loan terms reduced the principal
installments due on July 1, 2005 and January 1, 2006 from $4.5 million to $1 million and
$1.5 million respectively, with the remainder due for payment in 2012. Other principal
payments for $4.5 million due semi-annually thereafter remain unchanged and the last
installment of $15.3 million is due on July 2, 2012. In addition, under the revised loan
terms, the interest on the loan was reduced from a six-month LIBOR rate plus 2.5% to be
paid semi-annually with principal installments to the following new terms: (i) for each
interest period commencing from April 1, 2004 until March 31, 2008 interest due shall be
six month LIBOR plus 2% per annum, and (ii) for each interest period commencing from April
1, 2008 until the final maturity date interest due shall be six month LIBOR plus 1.5% per
annum. For more details, see Liquidity and Capital Resources  Financing
Activities.

In
April of 2004, we also completed the short-form merger of rStar and we recorded a gain of
$ 0.2 million from a derecognition of liabilities (see Item 4  Strategic
Alliances, Joint Ventures and Acquisitions.)

In
June 2004, our then CEO and President resigned and was replaced by Mr. Shlomo Rodav who
currently serves as CEO and Chairman of the Board of Directors.

In
the third quarter of 2004, as a result of decreased future undiscounted cash flow from a
certain customer and in accordance with FAS 144, we decreased the carrying value of an
asset and recorded an impairment of property and equipment in an amount of approximately
$2.2 million.

In
September 2004, we closed an agreement for the sale of Spacenet International Services,
Inc. and its only subsidiary, Servicio Satelital S.A., an Argentinean company. The
consideration received was $0.6 million paid upon the closing and an additional amount of
$0.5 million to be paid in installments through September 2006. . We recorded a loss from
this transaction in the amount of $0.2 million.

The
following provides information about our business during 2002, 2003 and 2004, as if our
business was operating under the new business segments. The financial information was
extracted, from a practical prospective, from the consolidated results reported for those
years.

51

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# Year Ended December 31,
2004 Compared to Year Ended December 31, 2003

Revenues:

|                   | 2004 | 2003 |  | 2004    | 2003
|------------------ | ---- | ---- |  | ------- | ----
|
|
|
|
|SpacenetEnterprise |      |      |  |         |     
|Equipment          |      |      |  | 13,375  |     
|Services           |      |      |  | 47,081  |     
|                   |      |      |  |         |     
|                   |      |      |  | 60,456  |     
|                   |      |      |  |         |     
|Consumer           |      |     
|Equipment          |      |      |  | 2,446   |     
|Services           |      |      |  | 25,913  |     
|                   |      |      |  |         |     
|                   |      |      |  | 28,359  |     
|                   |      |      |  |         |     
|Rural              |      |     
|Equipment          |      |      |  | 1,711   |     
|Services           |      |      |  | 50,532  |     
|                   |      |      |  |         |     
|                   |      |      |  | 52,243  |     
|                   |      |      |  |         |     
|Total Spacenet     |      |      |  | 141,058 |     
|                   |      |      |  |         |     
|GNS                |      |     
|Equipment          |      |      |  | 82,590  |     
|Services           |      |      |  | 17,850  |     
|                   |      |      |  |         |     
|Total GNS          |      |      |  | 100,440 |     
|                   |      |      |  |         |     
|Total              |      |     
|Equipment          |      |      |  | 100,122 |     
|Services           |      |      |  | 141,376 |     
|                   |      |      |  |         |     
|Total revenues     |      |      |  | 241,498 |     
|                   |      |      |  |         |     

Revenues
in 2004 were derived 41.5% from equipment and 58.5% from services. In contrast, in 2003,
our revenues were derived 63.5% from equipment and 36.5% from services. The increase in
service revenues in 2004 is attributed to the following factors: (i) an increase in our
service revenues from our enterprise operation; (ii) the consolidation of StarBand, which
increased our service revenues by approximately $26 million; (iii) a significant increase
in our rural operation as a result of the progress in the implementation of the Compartel
projects in Colombia, the operation of the GESAC network in Brazil and increased traffic
on the networks in both Colombia and Peru; and (iv) an increase in the sale of services in
our GNS operation. The decrease in equipment sales is attributed to: (a) a decline in
sales to large-scale customers when compared to the prior year in our enterprise
operation; (b) the completion of installation of equipment in the Fitel projects in Peru
in 2003; and (c) overall industry-wide price reductions and a decline in the number of
large-scale sales to customers in our GNS operation. The decrease in equipment sales was
offset by the consolidation of StarBand which increased our equipment revenues by
approximately $2.4 million.

52

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Gross
profit (loss):

|                   | 2004 | 2003 | 2004 | 2003  
|------------------ | ---- | ---- | ---- | ------
|
|
|
|
|SpacenetEnterprise |      |      |      |       
|Equipment          |      |      |      | 140   
|Services           |      |      |      | 4,360 
|                   |      |      |      |       
|                   |      |      |      | 4,500 
|                   |      |      |      |       
|Consumer           |      |     
|Equipment          |      |      |      | 298   
|Services           |      |      |      | 3,632 
|                   |      |      |      |       
|                   |      |      |      | 3,930 
|                   |      |      |      |       
|Rural              |      |     
|Equipment          |      |      |      | 477   
|Services           |      |      |      | 1,568 
|                   |      |      |      |       
|                   |      |      |      | 2,045 
|                   |      |      |      |       
|Total Spacenet     |      |      |      | 10,475
|                   |      |      |      |       
|GNS                |      |     
|Equipment          |      |      |      | 36,077
|Services           |      |      |      | 12,938
|                   |      |      |      |       
|Total GNS          |      |      |      | 49,015
|                   |      |      |      |       
|Consolidation      |      |      |      | 17,613
|                   |      |      |      |       
|                   |      |      |      |       
|Total Gross Profit |      |      |      | 77,103
|                   |      |      |      |       

Our
gross profit margin increase in 2004 can be attributed to the following factors: (i) an
increase in gross profits from our rural operations, primarily due to the implementation
of Compartel and the GESAC network in Brazil and better efficiency in the maintenance of
our networks operations; (ii) in our GNS segment, higher profit margins than in past years
and a decrease in the amount of inventory write-offs from approximately $6.4 million in
2003 to approximately $2.0 million in 2004; and (iii) cost reductions attributed to the
implementation of our restructuring plan in June 2003 which led to a decrease in personal
and other related expenses in all of our segments. When reported by segment, Spacenets
results 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 Gilats cost.

Our
service cost of revenues decreased due to higher levels of business efficiency within the
Company. Specifically, while our cost of service revenues increased on an absolute US
Dollar basis, the cost decreased as a percentage of service revenues in 2004, due to the
following factors: (i) certain significant expenses were reduced as part of
restructurings in 2003, such as  transponder capacity costs which were reduced due to the
renegotiation of the agreement with our major provider; (ii) depreciation expenses were
reduced due to an impairment of long-lived assets in 2003 in accordance with FASB 144;
(iii) wages and overhead costs decreased due to a reduction in headcount; and (iv) as
described above, we had higher profit margins and more revenue streams in 2004

53

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# Research and Development
Expenses:

|                     | 2004 | 2003 |  | 2004   | 2003
|-------------------- | ---- | ---- |  | ------ | ----
|
|
|
|
|Spacenet Enterprise: |      |      |  |        |     
|Expenses incurred    |      |      |  | 977    |     
|Less - grants        |      |      |  | -      |     
|                     |      |      |  |        |     
|Total Spacenet       |      |      |  | 977    |     
|                     |      |      |  |        |     
|GNS                  |      |     
|Expenses incurred    |      |      |  | 18,157 |     
|Less - grants        |      |      |  | 5,255  |     
|                     |      |      |  |        |     
|Total GNS            |      |      |  | 12,902 |     
|                     |      |      |  |        |     
|                     |      |      |  |        |     
|Total                |      |      |  | 13,879 |     
|                     |      |      |  |        |     
|                     |      |     

Net
research and development costs decreased in 2004 primarily due to the transfer of research
and development operations from Spacenet Inc. to Israel, which resulted in significant
decrease in costs in Spacenet Inc. and no relative significant increase in research and
development costs in Israel. Grants for research and development received by us remained
approximately the same and reflect an increase of approximately $1.5 million grants
receive from SES Global, offset by a decrease of approximately $1.3 million of Chief
Scientist grants.

# Selling, Marketing,
General and Administrative Expenses

|               | 2004 | 2003 |  | 2004   | 2003
|-------------- | ---- | ---- |  | ------ | ----
|
|
|
|
|Spacenet:      |      |      |  |        |     
|Enterprise     |      |      |  | 13,773 |     
|Consumer       |      |      |  | 6,809  |     
|Rural          |      |      |  | 12,119 |     
|               |      |      |  |        |     
|               |      |      |  |        |     
|Total Spacenet |      |      |  | 32,701 |     
|               |      |      |  |        |     
|GNS            |      |      |  | 36,473 |     
|               |      |      |  |        |     
|               |      |      |  |        |     
|Total          |      |      |  | 69,174 |     
|               |      |      |  |        |     

Selling,
marketing, general and administrative expenses decreased in 2004 by $2.6 million. The
decrease can be attributed mainly to overall staff reductions which led to a decrease in
the salaries and related expenses in the amount of approximately $3.5 million, reduced
depreciation and amortization expenses of approximately $1.4 million, reduced professional
fees and legal claims of approximately $2.5 million and the going-private of rStar which
reduced fees associated with being a public company including directors and officers
insurance and on-going public filing fees by approximately $1.0 million. The decrease was
offset by the consolidation of StarBand, in the amount of approximately $5.8 million.

Impairment
of Goodwill, Tangible and Intangible Assets. In 2004, as a result of decreased
future undiscounted cash flow from a certain customer, we decreased the carrying value of
an asset and recorded an impairment of property and equipment in an amount of
approximately $2.2 million. In 2003, our sales decreased as a result of both the continued
economic slowdown and due to our focus on the restructuring of our debt and as a result,
we recorded an impairment of tangible and intangible assets of approximately $31.9
million.

54

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Financial
Expenses, Net.In 2004, we had financial expenses of approximately $0.3 million
compared to approximately $3.3 million in 2003. The sharp decrease
in our financial expenses is explained primarily by (i) the successful completion of the
restructuring of our debt in March and November 2003, which led to a sharp decrease in
interest expenses associated with our debt;  and (ii) in 2004, we had an increase in our interest income due to the increase in our cash
balances.

Taxes
on Income. Taxes on income decreased by approximately $5.3 million to approximately
$4.4 million in 2004 compared to approximately $9.7 million in 2003 primarily due to the
taxes accrued in 2003 in relation to the restructuring of our debts, which were not
accrued in 2004.

Equity
in Profits (Losses) of Affiliated Companies. Equity in profits of affiliated companies
was approximately $1.2 million in 2004, compared to approximately $0.5 million in 2003.The 2003 amount includes both Satlynx and StarBand while in 2004, due to the
consolidation of StarBand, only Satlynx is included.

Minority
Interest in Losses of a Subsidiary. Minority interest in losses of a subsidiary was
approximately $0.2 million in 2004, compared to approximately $0.9 million in 2003. The
2004 figure reflects the minority share of rStar until April 2004, at which time we
effected the short-form merger and as such, became the 100% owners of rStar.

55

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# Year Ended December 31,
2003 Compared to Year Ended December 31, 2002

Revenues:

|                   | 2003 | 2002 |  | 2003    | 2002
|------------------ | ---- | ---- |  | ------- | ----
|
|
|
|
|SpacenetEnterprise |      |      |  |         |     
|Equipment          |      |      |  | 17,879  |     
|Services           |      |      |  | 40,286  |     
|                   |      |      |  |         |     
|                   |      |      |  | 58,165  |     
|                   |      |      |  |         |     
|Consumer           |      |     
|Equipment          |      |      |  | -       |     
|Services           |      |      |  | -       |     
|                   |      |      |  |         |     
|                   |      |      |  | -       |     
|                   |      |      |  |         |     
|Rural              |      |     
|Equipment          |      |      |  | 9,345   |     
|Services           |      |      |  | 17,435  |     
|                   |      |      |  |         |     
|                   |      |      |  | 26,780  |     
|                   |      |      |  |         |     
|Total Spacenet     |      |      |  | 84,945  |     
|                   |      |      |  |         |     
|GNS                |      |     
|Equipment          |      |      |  | 93,552  |     
|Services           |      |      |  | 11,680  |     
|                   |      |      |  |         |     
|Total GNS          |      |      |  | 105,232 |     
|                   |      |      |  |         |     
|Total              |      |     
|Equipment          |      |      |  | 120,776 |     
|Services           |      |      |  | 69,401  |     
|                   |      |      |  |         |     
|Total revenues     |      |      |  | 190,177 |     
|                   |      |      |  |         |     

Revenues
in 2003 were derived of 63.5% equipment sales and 36.5% from services. In 2002, our
revenues were derived of 62.3% equipment and 37.7% services. The decrease in our revenues
can be attributed to the following factors: (i) in our enterprise operations the revenues
decreased significantly in 2003, primarily due to a decrease in our equipment revenues
from two major customers and a decrease in our services revenues due to the termination of
contracts by two other major service customers and increased competition. An additional
factor for this decrease was our sale of six European entities in the second quarter of
2002 to our joint venture, Satlynx S.A.; (ii) in our rural operations, service revenues
increased due to the beginning of the implementation of the GESAC network in Brazil and
increased revenues from traffic on our networks in Peru and Colombia. Our equipment
revenues in our rural operations decreased mainly due to the completion of installation of
equipment in the Fitel projects in Peru in 2003; and (iii) in 2003, GNS increased its
equipment and service revenues due to the sale of equipment to two major customers.

56

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# Gross profit (loss):

|                   | 2003 | 2002 | 2003 | 2002   
|------------------ | ---- | ---- | ---- | -------
|
|
|
|
|SpacenetEnterprise |      |      |      |        
|Equipment          |      |      |      | 428    
|Services           |      |      |      | (3,715 
|                   |      |      |      |        
|                   |      |      |      | (3,287 
|                   |      |      |      |        
|Consumer           |      |     
|Equipment          |      |      |      | -      
|Services           |      |      |      | -      
|                   |      |      |      |        
|                   |      |      |      | -      
|                   |      |      |      |        
|Rural              |      |     
|Equipment          |      |      |      | 4,028  
|Services           |      |      |      | (13,606
|                   |      |      |      |        
|                   |      |      |      | (9,578 
|                   |      |      |      |        
|Total Spacenet     |      |      |      | (12,865
|                   |      |      |      |        
|GNS                |      |     
|Equipment          |      |      |      | 20,713 
|Services           |      |      |      | 8,215  
|                   |      |      |      |        
|Total GNS          |      |      |      | 28,928 
|                   |      |      |      |        
|                   |      |      |      |        
|Consolidation      |      |      |      | 16,567 
|                   |      |      |      |        
|                   |      |      |      |        
|Total Gross Profit |      |      |      | 32,630 
|                   |      |      |      |        

Our
gross profit increase in 2003 can be attributed to the following factors: (i) in our
enterprise operations, the gross loss decreased primarily due to the decrease in the
depreciation expenses of approximately $6.0 million, resulting from the impairment of
long-lived assets that was recorded at the end of 2002 and in June 2003 and $2.5 million
in inventory write-offs only in 2002. The decrease in the gross loss was offset by the
decrease in revenues; (ii) in our rural operations, our gross loss increased, primarily
due to the increase in maintenance expenses of our networks in Latin America. This
increase was offset by $1.3 million related to inventory write-offs in 2002 and an
increase in our revenues; and (iii) in our GNS operation, our gross profit increased
significantly, mainly due to increased revenues and reduced inventory write offs from
$18.3 million in 2002 to $6.4 million in 2003; and (iv) the implementation of our
restructuring plan in June 2003 which led to a decrease in personnel and other related
expenses. When reported by segment, Spacenets results 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 Gilats cost. Given that Spacenet
revenues were lower in 2003 compared to 2002, purchases of equipment by Spacenet from GNS
were also reduced significantly. As such, the unrealized profits also decreased.

57

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# Research and Development
Expenses

|                     | 2003 | 2002 |  | 2003   | 2002
|-------------------- | ---- | ---- |  | ------ | ----
|
|
|
|
|Spacenet Enterprise: |      |      |  |        |     
|Expenses incurred    |      |      |  | 4,203  |     
|Less - grants        |      |      |  | -      |     
|                     |      |      |  |        |     
|Total Spacenet       |      |      |  | 4,203  |     
|                     |      |      |  |        |     
|GNS                  |      |     
|Expenses incurred    |      |      |  | 17,860 |     
|Less - grants        |      |      |  | 5,114  |     
|                     |      |      |  |        |     
|Total GNS            |      |      |  | 12,746 |     
|                     |      |      |  |        |     
|                     |      |      |  |        |     
|Total                |      |      |  | 16,949 |     
|                     |      |      |  |        |     

Net
research and development expenses decreased in 2003 primarily due to (i) the
implementation of restructuring plans within our company which led to a decrease in
research and development personnel and overhead from $18.0 million in 2002 to
approximately $14.4 million in 2003, (ii) a decrease in our depreciation expenses due to
the impairment of long-lived assets that was made at the end of the year 2002 and in June
2003 from approximately $6.3 million in 2002 to approximately $3.5 million in 2003 and
(iii) an increase in research and development grants attributable to payments made by SES
Global, a related party, in connection with the development agreement signed with them.
See Research and Development.

# Selling, Marketing,
General and Administrative Expenses

|               | 2003 | 2002 |  | 2003   | 2002
|-------------- | ---- | ---- |  | ------ | ----
|
|
|
|
|Spacenet:      |      |      |  |        |     
|Enterprise     |      |      |  | 17,613 |     
|Consumer       |      |      |  | -      |     
|Rural          |      |      |  | 16,102 |     
|               |      |      |  |        |     
|Total Spacenet |      |      |  | 33,715 |     
|               |      |      |  |        |     
|               |      |      |  |        |     
|GNS            |      |      |  | 38,005 |     
|               |      |      |  |        |     
|               |      |      |  |        |     
|Total          |      |      |  | 71,720 |     
|               |      |      |  |        |     

Selling,
marketing, general and administrative expenses decreased in 2003 compared to 2002. The
decrease in such expenses was attributed mainly to (i) the decrease in our depreciation
expenses due to the impairment of long-lived assets that was made at the end of the year
2002 in accordance with SFAS No. 144 from approximately $15.7 million in 2002 to $6.1
million in 2003; (ii) implementation of restructuring plans within our company which led
to a decrease in our payroll expenses offset by compensation expenses and a bonus
provision to employees and a consultant; and (iii) the sale of six European entities to
our joint venture, Satlynx S.A., resulting in a reduction of expenses in the amount of
approximately $5.2 million.

Provision
and write-off of doubtful accounts and capital lease receivables. Provision and
write-off of doubtful accounts and capital lease receivables decreased to $1.4 million in
2003 from approximately $34.7 million in 2002. See Restructuring Charges, Write-offs
and Other Significant Changes.

Impairment
of Goodwill, Tangible and Intangible Assets. As discussed above, in 2003, our sales
continued to decrease as a result of both the continued economic slowdown and due to our
focus on the restructuring of our debt. As a result, we recorded an impairment of tangible
and intangible assets of approximately $31.9 million in 2003 and approximately $63.7
million in 2002.

58

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Restructuring
Charges. In 2003, we recorded restructuring charges of approximately $3.9 million. The
restructuring cost consists of employee termination benefits associated with involuntary
terminations of employees and other costs associated with termination of lease commitments
in respect of premises occupied by us and our affiliates.

Financial
Expenses, Net. Our net financial expenses, decreased in 2003 to approximately $3.3
million from approximately $21.3 million in 2002. The decrease was attributed mainly to
the (i) successful completion of the restructuring of our debt in March and November 2003,
which led to a sharp decrease in the interest expenses associated with our debt and (ii)
the fact that the future interest payments relating to the restructured debt was recorded
in accrued interest relating to restructured debt and decreased the gain from
restructuring of debt. As a result, after the restructuring, no such interest expenses are
recorded as an expense.

Gain
from Restructuring of Debt. In March and November 2003, we completed the
restructuring of our debt and converted debt to equity, which resulted in a capital gain
of approximately $244.2 million. See Details Regarding Restructuring of Our Debt in
2003.

Write-off
of Investments in Companies.During 2003, we entered into a Second Amendment to the
G.V.T. Note. The original note granted by us was for $40 million, $39.4 million of which
was impaired in 2002. According to the amendment to the note, G.V.T Holdings was granted
an option, which was exercised by G.V.T. in December 2003, pursuant to which we received
$4.3 million in cash and 2% of the outstanding shares in G.V.T Holdings. As a result, we
recorded income of approximately $3.3 million.

Taxes
on Income. Taxes on income were approximately $9.7 million in 2003 compared to
approximately $0.9 million in 2002. Taxes on income in 2003 include a decrease in our
deferred income taxes in the amount of $4.7 million (including $4.6 million relating to
the restructuring of debts), provision for income taxes relating to previous years of
approximately $1.9million, $1.1 million tax expenses relating to the restructuring of debt
and current taxes of approximately $2.0 million. Taxes on income in 2002 included
provision for income taxes relating to current taxes in the amount of $0.9 million.

Equity
in Profits (Losses) of Affiliated Companies. Equity in profits of affiliated companies
was approximately $0.5 million in 2003, compared to equity in losses of approximately
$29.3 million in 2002. The sharp change is attributed mainly to the equity losses in
StarBand resulting from the estimated cost of a settlement with SES Americom relating to
transponders used by StarBand and losses associated with the debtor in
possession financing and other financing provided to StarBand which existed only in
2002. In 2003, we recorded equity losses in the amount of $1.8 million mainly relating to
our investment in Satlynx offset by a reduction in the fair market value of the shares
issued to SES Americom under the first debt restructuring in March 2003 in the amount of
$2.3 million.

Minority
Interest in Losses of a Subsidiary. Minority interest in losses of a subsidiary was
approximately $0.9 million in 2003, compared to approximately $3.5 million in 2002. The
decrease was due to the decrease in the losses of rStar.

# 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 entry 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.

59

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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 also may be affected by a number of factors, including our
ability to continue to develop, introduce and deliver 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.
These 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 be
lower (or higher with respect to net loss) than those of the preceding quarters, including
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 is fixed (i.e. space segment,
lease payments, personnel) 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 likely 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.

Our
business historically has not been affected by seasonal variations.

# Liquidity and Capital
Resources

Since
inception, our financing requirements have been met through cash generated by 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 financed our operations through available credit facilities as discussed
below. We have used available funds primarily for working capital, capital expenditures
and strategic investments. While we are likely to seek additional sources of funding for
our operations through bank lenders or equity financing, we believe that we have
sufficient funds to operate our business in 2005 and 2006. Thereafter, if we do not have
available sufficient cash to finance our operations, we may be required to obtain
additional debt or equity financing. We cannot be certain that we will be able to obtain,
if required, additional financing on acceptable terms, or at all. If we are to raise
additional funding through an equity investment, any such transaction will dilute the
holdings of our present shareholders.

As
of December 31, 2004, we had cash and cash equivalents of $75.8 million, short-term and
long-term restricted cash of $21.7 million, short-term and long-term restricted cash held
in trustees accounts of $29.6 million and short-term bank credit of $4.2 million. As
of December 31, 2003, we had cash and cash equivalents of $51.8 million, short-term and
long-term restricted cash of $20.2 million, restricted cash held in trustees
accounts of $26.7 million and short-term bank credits of $1.8 million.

Our
cash and cash equivalents increased in 2004 by $24.0 million as a result of the following:

Operating
activities. In 2004, cash provided by operating activities was approximately $30.5
million, and comprised of amounts provided by (i) an increase in advances from customers
held by trustees in the amount of $14.2 million (relating to our contracts in Colombia),
(ii) a decrease in other accounts receivable and prepaid expenses, including long-term
receivables in the amount of $12.4 million (iii) a decrease in our trade receivables in
the amount of $8.0 million; and (iv) net cash provided by other operating activities in
the amount of $23.1 million, net of (a) a decrease in trade payables, accrued expenses,
other accounts payable and other long-term liabilities in the amount of $18.4 million; and
(b) an increase in inventories in the amount of $8.8 million.

Investing
activities. In 2004, cash used in investing activities was approximately $6.5 million,
and comprised of (i) investments in restricted cash held by trustees in the amount of
$23.5 million, net of $22.5 million cash that has been released from the trust account;
(ii) purchase of property and equipment and other assets in the amount of $6.2 million,
(iii) net investment in short-term and long-term restricted cash in the amount of $1.3
million and (iv) purchase of minority shares of rStar in the amount of $1.1 million; net
of (a) cash provided from the consolidation of StarBand in the amount of $2.6 million and
(b) cash provided from the sale of subsidiaries in the amount of $0.6 million.

60

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Financing
activities.In 2004, cash used in financing activities was approximately $0.1 million,
and comprised mainly from principal payments on loans in the amount of $2.0 million, net of
(i) proceeds from short term bank credit in the amount of $2.4 million; and (ii) proceeds
from the exercise of options in the amount of $0.4 million.

The
$29.6 million of restricted cash held in a trustees account relates to funds
collected from our largest project in Colombia. The release of these funds is dependent
both on a schedule of payments and on operational milestones, many of which relate to the
installation of project sites. In 2004, we released from the trustee account approximately
$22.5 million (irrespective of the $29.6 currently held in the trust). Based on the
milestones and scheduling of payment set forth in the project, we expect that to collect
from restricted cash approximately $10.6 million in 2005. However, if 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.

Our
inventory levels have decreased significantly in the past three years due to our efforts
to decrease these levels and adjust to our current levels of revenues. In 2005, we expect
to continue to utilize our existing inventory but given our reduced levels of inventory,
will need to make additional purchases for our products.

We
repaid $1.0 million in principal to Bank Leumi in 2004. The loan is scheduled to be repaid
by principal payments of $4 million annually during each of the years 2005 through 2011.

The
deed of pledge securing our obligations to Bank Leumi and an additional Israeli bank sets
forth events which entitle the banks to declare their respective outstanding amounts due
and payable. Our obligations include a loan from Bank Leumi for $28 million and a credit
facility for guarantees of an aggregate of $12.6 million from the banks, expected to
expand to $22.5 millions upon completion of agreement between the Israeli banks.

In
April 2004, we revised the terms of our loan from Bank Hapoalim, to whom we owe a
principal debt amount of $71.4 million. The new loan terms reduced the principal
installments due on July 1, 2005 and January 1, 2006 from $4.5 million to $1 million and
$1.5 million respectively, with the remainder due for payment in 2012. Other principal
payments for $4.5 million due semi-annually thereafter remain unchanged and the last
installment of $15.3 million is due on July 2, 2012. In addition, under the revised loan
terms, the interest on the loan was reduced from a six-month LIBOR rate plus 2.5% to be
paid semi-annually with principal installments to the following new terms: (i) for each
interest period commencing from April 1, 2004 until March 31, 2008 interest due shall be
six month LIBOR plus 2% per annum, and (ii) for each interest period commencing from April
1, 2008 until the final maturity date interest due shall be six month LIBOR plus 1.5% per
annum.

In
consideration for the banks agreement to amend the interest rates, defer principal
payments and modify certain covenants, the bank is entitled to provide us with written
instructions to issue a warrant or warrants for the purchase of our ordinary shares, or
the Warrant. The Warrant shall be issued to the bank or to third parties as designated by
the bank, each a Holder. The maximum exercise amount that may be paid under the Warrant
shall be equal to the then outstanding balance on the loan due by us to the bank. The
Warrant can be issued at any time at the request of Bank Hapoalim between July 1, 2004 and
June 30, 2007.

The
exercise price of the ordinary shares underlying the Warrant shall be equal to the average
closing sale price of our shares, as published by the NASDAQ Stock Market over the thirty
(30) consecutive trading days immediately preceding the day of the notice of exercise by
the Warrant holder plus 1%, however, in no event shall the per share price be less than
$7.50 or in excess of $21.00 if exercised between July 1, 2004 and June 30, 2005, $30.00
if exercised between July 1, 2005 and June 30, 2006 and $40.00 if exercised between July
1, 2006 and June 30, 2007. In addition, in the event that in the three-year period in
which the bank can request the issuance of the Warrant, we complete a private placement
investment by a third party in Gilat for an amount which exceeds $20 million, Gilat shall
enable the Holder to exercise such warrant based on the same price offered in the private
placement. Once issued to a Holder, the Warrant is exercisable for a thirty-day period
only.

The
proceeds paid to Gilat from the exercise of a warrant shall be applied to reduce all
future installments of the principal due to Bank Hapoalim, on a pro-rata basis.

61

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As
of December 31, 2004, our short and long term obligations were as follows:

|Contractual Obligations                                                                           | Payments due by period (in thousands)
|------------------------------------------------------------------------------------------------- | -------------------------------------
|
|
|
|
|Long-term debt                                                                                    |                                      
|                                                                                                  |                                      
|Convertible subordinated notes                                                                    |                                      
|Accrued interest related to restructured   debt (including $718 as short term   accrued expenses) |                                      
|Capital lease obligations                                                                         |                                      
|                                                                                                  |                                      
|Operating lease                                                                                   |                                      
|                                                                                                  |                                      
|Other long-term debt                                                                              |                                      
|                                                                                                  |                                      
|Total contractual cash obligations                                                                |                                      

# Off Balance Sheet
Arrangements

At
December 31 2004, we have guaranteed 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.

Our
maximum potential amount of future payments that we could be required to make under its
guarantees at December 31, 2004 is approximately $112.3 million. This amount includes the
following guarantees:

| |  | The
aggregate amount of bank guarantees provided in order to secure our performance
obligations is approximately $16.5 million, comprised mainly of performance guarantees
provided on behalf of our subsidiary in Peru in an amount of approximately $11.5 million.
We have restricted cash as collateral for these guarantees in an amount of approximately
$9.5 million.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
aggregate amount of corporate guarantees provided in order to secure performance
obligations is $69.0 million, comprised mainly of guarantees for three projects in
Colombia for an aggregate of $67.0 million.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
addition, we have provided corporate and bank guarantees for certain leases throughout
the world, lines of credit and capital lease agreements for an aggregate amount of
approximately $26.8 million. We have restricted cash as collateral for these guarantees
in an amount of approximately $7.8 million.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have not recorded any liability for the above amounts, as we expect that our performance
will be acceptable. To date, no guarantees have ever been exercised against us.

# 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 2004, there was inflation in Israel of 1.2% while the NIS appreciated in relation to
the U.S. dollar at a rate of 1.6%, from NIS 4.4 per $1 on December 31, 2003 to NIS 4.3 per
$1 on December 31, 2004. In 2003 deflation in Israel was 1.9% while the NIS appreciated in
relation to the U.S. dollar at a rate of 7.6%. In 2002, the rate of inflation in Israel
was 6.5% while the NIS depreciated in relation to the U.S. dollar at a rate of 7.3%. 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.

62

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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, adversely impacted our financial
expenses during the twelve-month periods ended December 31, 2004 and 2003. 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. See Item 11:
Quantitative and Qualitative Disclosures About Market Risk.

We
do not engage in hedging transactions to manage our exposure to interest rate and currency
fluctuations.

# Effective Corporate Tax
Rate

Israeli
companies are generally subject to income tax at the rate of 35% of taxable income.
However, most of our production facilities in Israel have been granted Approved Enterprise
status under Israeli law for Encouragement of Capital Investments, 1959, and consequently
are eligible for certain tax benefits for the first several years in which they generate
taxable income. We currently have nine Approved Enterprises, and have applied for approval
for a tenth enterprise. Income derived from the nine Approved Enterprises is entitled to
tax benefits for periods of seven years (in the case of two of the enterprises) or ten
years (for the remaining seven enterprises), from the first year in which we generate
income from the respective Approved Enterprise, on the basis of the nature of the
incentives selected by us. Investments related to the tenth enterprise are expected to be
considered as a replacement of previously approved equipment. The main tax benefits are a
tax exemption for two or four years and a reduced tax rate of 15% to 25% for the remainder
of the benefits period depending upon the level of foreign ownership of us.

In
2002, we had a loss mainly due to the decrease in revenues and write-offs of our assets.
In 2003, we had a loss for tax purposes mainly due to recognition of StarBand bad debts
and a ruling we obtained from the Israeli tax authorities regarding the gain from
restructuring of debts. We anticipate that we will not have to pay taxes relating to 2005
tax year for most of our entities due to current and/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 arrear for annual
taxes in profitable years.

On
January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the tax
reform, resident companies are subject to Israeli tax 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 2004, the tax
reform did not have any material effect on our liquidity, financial condition and results
of operations.

# 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.

63

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We
devoted significant research and development resources in 2003 and 2004 to the development
of our new line of products  the 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.

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,
of which we still owe approximately $2.2 million, is payable in semi-annual installments
over a four-year period and bears an interest rate equal to the Accountant Generals
Index and limited to the change in the CPI. 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 entitle us to
an aggregate of up to $6 million for the development of certain ODU (outdoor unit)
technology. Thus far, we have received approximately $4.4 million under these agreements.
In addition, we are required to pay SES a royalty of 10% calculated on the purchase price
for each Ka-band transmitter contained within each VSAT sold and 10% of the purchase price
for each Ka-band antenna and feed contained within each VSAT sold by Gilat up to a total
recoupment by SES of its investment and thereafter, the royalties decrease to 5% per unit.
Royalties will be payable for some of the sales of product units which include components
developed under the agreements. As of December 31, 2004 we have not finalized the
development and, as such, no royalties have been paid or accrued.

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 Ended December 31,
|------------------------------------ | ------------------------
|
|
|
|
|Gross research and development costs |                         
|Less:                                |                         
|Royalty-bearing grants               |                         
|Non-royalty-bearing grants           |                         
|                                     |                         
|                                     |                         
|Research and development costs-- net |                         
|                                     |                         

*
Consists of funding from SES Global.

64

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# Trend Information

In
the past year and at present, 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. As 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.

In
2005, our inventory levels will be lower than in past years. We also see an increasing
demand by our customers for long-term financing alternatives. Both of these factors are
likely to place pressure on our needs for additional working capital, whether through
third party financing, creditors or otherwise. In addition, we estimate that the political
environment in Israel could prevent certain countries from doing business with Gilat 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.

# IMPACT OF RECENTLY
ISSUED ACCOUNTING STANDARDS:

In
November 2004, the FASB issued Statement of Financial Accounting Standard No. 151,
Inventory Costs, an amendment of ARB No. 43, Chapter 4. (SAFS
151). SFAS 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter
4, to clarify that abnormal amounts of idle facility expense, freight handling costs and
wasted materials (spoilage) should be recognized as current-period charges. In addition,
SFAS 151 requires that allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. SAFS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not expect that the
adoption of SFAS 151 will have a material effect on its financial position or results of
operations.

In
December 2004, the FASB issued Statement of Financial Accounting Standard No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS
153). The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions
(APB 29), is based on the principle that exchanges of nonmonetary assets
should be measure based on fair value of the assets exchanged. APB 29 included certain
exceptions to that principle. SFAS 153 amends APB 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS 153 is effective for
nonmonetary assets exchanges occurring in fiscal periods beginning after June 15, 2005. We
do not expect that the adoption of SFAS 153 will have a material effect on our financial
position or results of operations.

On
December 16, 2004, the FASB issued FASB Statement No. 123 (Revised), Share Based Payment,
which is revision of FASB Statement No. 123, Accounting for Stock Based Compensation. SFAS
123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends
FASB Statement No. 95, Statement of Cash Flow. Generally, the approach in SFAS 123R is
similar to the approach described in Statement 123. However, SFAS 123R requires all
share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair value. Pro forma disclosure is no
longer an alternative.

SFAS
123R must be adopted no longer than July 1, 2005. Early adoption is permitted in periods
in which financial statement have not yet been issued. We expect to adopt SFAS 123R on
July 1, 2005.

SFAS
123R permits companies to adopt its requirement using one of the two methods:

| | 1. | A
modified prospective method in which compensation cost is
               recognized beginning with the effective date (a) based on the requirements
of                SFAS 123R for all share-based payments granted after the effective date
and (b)                based on the requirements of SFAS 123 for all awards granted to
employees prior                to the effective date of SFAS 123R that remain unvested in
the effective date.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 2. | A
modified retrospective method which includes the requirements of
               the modified prospective method described above, but also permits entities
to                restate based in the amounts previously recognized under SFAS 123 for
purposes                of pro forma disclosures either: (a) all prior periods presented
or (b) prior                interim period of the year of adoption.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
plan to adopt SFAS 123R using the modified prospective method. As permitted by SFAS 123,
we currently account for share based payments to employees using APB 25s intrinsic
value method and, as such, generally recognize no compensation cost for employees stock
options. Accordingly, the adoption of SFAS 123R fair value method will have a significant
impact in our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share based payments granted in the future. However,
had we adopted SFAS 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma net income
and earnings per share.

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

# Directors

|Name                  | Age | Position                          
|--------------------- | --- | ----------------------------------
|
|
|
|
|Shlomo Rodav          | 56  | Chairman of the Board of Directors
|                      |     | and Chief Executive Officer       
|Robert Bednarek       | 59  | Director                          
|Haim Benjamini(1) (2) | 66  | External Director                 
|Pinchas Buchris (2)   | 49  | Director                          
|Gideon Chitayat(2)    | 66  | Director                          
|Linda E. Harnevo(3)   | 50  | External Director                 
|Abraham Neyman(1)     | 55  | Director                          

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

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

| | (3) | Ms.
Harnevo serves as chairman of our Audit Committee, Compensation Committee           and
Stock Option Committee.
| | --- | -------------------------------------------------------------------------------------------------------------------

Shlomo
Rodav has served as chairman of our board of directors since April 2003. He
has also served as our chief executive officer since July 1, 2004. He provides services to
our company as a consultant and as chairman of the board of directors through a consulting
agreement between Gilat and Israel Literage & Supply Company Ltd. Mr. Rodav is the
indirect owner, director, chairman and/or chief executive officer of numerous companies
engaged in the investment, environment, infrastructure, food, hi-tech and other fields.
Mr. Rodav has served as a director since 1996 of Israel Coldstorage & Supply Co. Ltd.,
a public company, and in an array of private companies including Torrel Investments Ltd.
and Torrel-Crown (Israel) Ltd., Metzad Ateret Ltd., Waste Management (W.M.) Israel Ltd.,
Nymphaea A.A. Ltd., Tapoogan Industries Ltd., Jaf-Ora Ltd., Jafora-Tabori Ltd. and others.
Mr. Rodav served in the past as a director of numerous other companies, including, among
others, Extent and Cellonet for which a receiver was appointed in May 2000 and January
2001, respectively. Mr. Rodav holds an M.B.A. from Columbia University and a B.A. from Tel
Aviv University.

Robert
Bednarek was appointed as a director in June 2003 and had served on
Gilats board in the past. Mr. Bednarek is the Executive Vice President Corporate
Development and a member of the Executive Committee of SES-GLOBAL. Previously he was the
Executive Vice-President and Chief Technology Officer of PanAmSat Corporation. Mr.
Bednarek holds a B.Sc. degree in engineering from the University of Florida.

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Haim
Benjamini was appointed as a director in February 2005. He served as the
Corporate Vice President of Human Resources of Teva Pharmaceutical Industries Ltd. since
1988 and until December 31, 2004. Mr. Benjamini currently serves as an advisor to
Tevas CEO, board and management. 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
Force and served in various command staff and training roles from 1957 until 1982.

Pinchas
Buchris joined the Gilat board in November 2003. Since January 2003, Mr.
Buchris has been a Venture Partner in Apax Israel, a venture capital firm, and acts as a
special advisor to several technology start-ups and companies. As Brigadier General
(Res.), for the past 15 years, he has headed an array of technology units within the
Israeli Defense Corps, culminating with his being appointed head of the main intelligence
technology unit. Mr. Buchris completed the Advanced Management Program at Harvard Business
School.   He holds an M.B.A. and a B.Sc. in computer science from the
Technion Technology Institute in Haifa. In 1993, Mr. Buchris was awarded the Israel
Security Award, a most prestigious national award given in Israel.

Gideon
Chitayatwas appointed to our board of directors in April 2003. He served as the
President and Chief Executive Officer of General Management and Business Strategy
Consultant (GMBS) Ltd. from 1985 until 2004. At present he is the chairman of GMBS. Mr.
Chitayat serves and served in the past as a consultant to chief executive officers and to
chairmen of boards of directors of several leading Israeli companies and entities in
diversified fields in Israel. His main area of consultancy is competitive strategy. Among
those companies and entities are Teva Pharmaceutical Industries Ltd., Amdocs Israel, Bank
Mizrahi Ltd., Pele-Phone Cellular Communication Ltd., Ackerstein Ltd., Israel Railways,
El-Op Electro Optics Industries Ltd., Israel Electric Corporation Ltd., Bank Leumi
Le-Israel B.M., Osem Food Corporation Ltd. and Israel Chemicals Ltd.

Mr.
          Chitayat currently serves on the board of directors of Bank Hapoalim B.M., a
          public company. Mr. Chitayat served in the past on the boards of directors of
          many leading public and private companies and entities, including Cellcom Israel
          Ltd., Africa-Israel Investment Company and its subsidiaries, Oil Refineries
          Ltd., Mishkan Mortgages Bank, Israel Aircraft Industries, Ihud Insurance Ltd.,
          Tadiran Consumer and Electric Products Ltd., Migdal Insurance Company, Bezeq
           Israel Telephone Corporation and others.

Mr.
          Chitayat holds a Ph.D. and an M.A. in Business and Applied Economics from the
          Wharton School of the University of Pennsylvania, and a M.B.A. (with honors) and
          B.A. (in Economics) from the Hebrew University in Jerusalem. Mr. Chitayat was
          Senior Adjunct Professor at the Recanati Graduate School of Business
          Administration in the Tel Aviv University and held numerous academic positions
          in the past, including at the Wharton School of the University of Pennsylvania,
          at the Jerusalem School of Business Administration of the Hebrew University in
          Jerusalem and at Harvard Business School. Mr. Chitayat has published numerous
          articles and a book on corporate, boards of directors and business issues.

Mr.
          Chitayat currently serves on the board of directors of Bank Hapoalim B.M.. Bank
          Hapoalim B.M. is a principal shareholder and a creditor of Gilat. Pursuant to
          our Articles of Association, Bank Hapoalim B.M. has the right to appoint a
          director to our board of directors. Mr. Chitayat was nominated at the request of
          Bank Hapoalim B.M.

Linda
E. Harnevowas appointed to our board of directors in April 2003. She is the
founder and General Manager of the technology solutions company RedZebra Ltd. and has
served on its board of directors since 2001. Ms. Harnevo has also recently founded Global
Medical Networks, which is engaged in the field of mobile medical information, and serves
on its board of directors. From 1998 until 2000, Ms. Harnevo worked as a manager and
director of Team Works Technology, an Israeli hi-tech company. Ms. Harnevo has recently
been appointed as a director of Lipman Electronics Engineering Ltd., a public company in
the field of electronics. Ms. Harnevo holds a Ph.D. and an M.Sc. from the Weizmann
Institute and a B.Sc. from Bar-Ilan University.

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Abraham
Neyman was appointed a director of Gilat in May 2004. Professor Neyman has
taught as a Professor of Mathematics at the Hebrew University of Jerusalem since 1982.
Over the past three decades, he has also taught at the University of California, Berkeley,
Standford University, Harvard University, Ohio State University and SUNY at Stony Brook.
In 1999, Professor Neyman founded Bidorbuy.com, an online auction website and served as
its chief executive officer and chairman of the board of directors until 2001. Professor
Neyman was awarded the Aaron Katzir prize. Professor Neyman holds a Ph. D. in Mathematics
from the Hebrew University of Jerusalem.

# Senior Management

The
executive officers and key executives of our Company and our subsidiaries as of March 15,
2005, are as follows:

|Name            | Age | Position                                   
|--------------- | --- | -------------------------------------------
|
|
|
|
|Shlomo Rodav(1) | 56  | Chief Executive Officer and Chairman of the
|                |     | Board of Directors                         
|Avihu Bergman   | 48  | Executive Vice President, Sales            
|Rocio del Campo | 42  | President, Spacenet Rural Communications   
|Yossi Gal       | 44  | Vice President, Research and Development   
|Bill Gerety     | 46  | President, Spacenet Inc.                   
|Arik Keshet     | 45  | Vice President, Chief Technology Officer   
|Tal Meirzon     | 38  | Vice President, Marketing and Business     
|                |     | Development                                
|Tal Payne       | 33  | Vice President, Finance                    
|Yaron Suher     | 39  | Vice President Financial Planning, Treasury
|                |     | and Administration                         

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

Avihu
Bergman joined Gilat in 2003 as Executive Vice President of Sales with more
than 20 years of sales and marketing management experience in the hi-tech field. Prior to
joining our company, he most recently served as Vice President at Ascend Technology
Ventures. Prior to this position, Mr. Bergman held senior executive positions at ECI
Telecom, Teledata, ArelNet and VocalTec. Mr. Bergman holds a M.B.A. and B.Sc. in
Electrical Engineering from Tel Aviv University.

Rocio
del Carmen del Campojoined Gilat to Home Peru S.A in 2000 as its General
Manager. In June 2003, Ms. Del Campo was appointed General Manager of Gilat Colombia as
well. Since January 2005, Ms. del Campo is the president of our rural operations business,
Spacenet Rural Communications.. Before coming to Gilat, Ms. del Campo served as General
Manager of Acer Peru, S.A. Ms. Del Campo holds a B.Sc. degree in Industrial Engineering
from the University of Lima.

Yossi
Gal re-joined Gilat in December of 2003 and now serves as our Vice
President for Research and Development. Prior to this position, Mr. Gal served as Vice
President of Engineering and Operations for StarBand Communications Inc, an affiliate of
Gilat. As of December 2004, he also serves as a director in StarBand. Before moving to the
United States in 1999, Mr. Gal worked at Gilat as the Director of Software Development for
communications. Mr. Gal began his career in telecommunications with the Adacom Group in
Israel where he managed data communications development projects. Mr. Gal holds a B.Sc.
degree in Computer Engineering from the Technion  Israel Institute of Technology.

Bill
Gerety joined Spacenet Inc. as its President in July 2003. Prior to joining
to Spacenet Inc., Mr. Gerety served as acting Chief Executive Officer and Chief Operating
Officer of Astrolink International, a broadband satellite venture headed by Liberty Media,
Lockheed Martin, TRW and Telespazio. His experience also includes holding the COO position
at telecom service provider World Access/Facilicom International and leading international
network sales efforts for GTE and Sprint Communications. In addition to his
telecommunications industry experience, Mr. Gerety has had a distinguished career as a
senior officer in the U.S. Army, and continues to serve as a colonel in the U.S. Army
Reserve. Mr. Gerety holds a B.S. in Engineering from the U.S. Military Academy at West
Point, an M.S. in Strategic Studies from the U.S. Army War College, an M.S. in Contracts
and Acquisition Management and an M.B.A. from the Florida Institute of Technology. As of
September 2004, Mr. Gerety serves as a director of StarBand Communications Inc. and
Satlynx S.A.

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Arik
Keshet joined Gilat in 1989, and currently serves as our Vice President and
Chief Technology Officer. Prior to that, Mr. Keshet served in various positions in
Gilats research and development department. Before joining Gilat, Mr. Keshet served
in various positions at the Electronics Development Labs of Israels Ministry of
Defense. Mr. Keshet holds a B.Sc. and M.Sc. in Electrical Engineering, both from the
Technion  Israel Institute of Technology.

Tal
Meirzon joined Gilat in 1995 and currently serves as our Vice President of
Marketing and Business Development. Prior to this, Mr. Meirzon was the Director of Product
Management (1998-2001) and Project Manager for telephony products within Gilats
research and development department (1995-1997). Before joining Gilat, Mr. Meirzon was a
Captain in the Israeli Air Force specializing in Electronic Warfare. Mr. Meirzon holds an
M.B.A. in Business Administration and a B.Sc. in Electrical Engineering, both from
Tel-Aviv University.

Tal
Paynewas appointed VP Finance in January 2004. Prior to holding this
position, Ms. Payne served as Gilats Financial Director. Prior to joining Gilat in
July 1999, 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.

Yaron
Suherwas appointed VP Financial Planning, Treasury and Administration in
January 2004. Prior to that, he served as Gilats Director, Financial Planning and
Analysis. Prior to joining Gilat in 1999, Mr. Suher worked as a senior economist for Teva
Pharmaceuticals and as an analyst for Poalim Trust Funds. Mr. Suher holds an M.B.A. in
Finance and a B.A. in Economics, both from Bar-Ilan 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, 2004:

|                                                    | Salaries, Fees, Directors' Fees,
Commissions and Bonuses | Pension, Retirement and Similar
Benefits
|--------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------
|
|
|
|
|All directors and officers as a group (21 persons*) | $3,793,738                                               | $552,202                                

*
Includes settlement agreements to our former chief executive officer. Also includes
bonuses and stock option compensation accrued in 2004.

# Management Employment
Agreements

In
2003, we entered into a consulting agreement with Israel Literage & Supply Co. Ltd., a
company under the ownership and control of Shlomo Rodav, the Chairman of our board of
directors. The agreement specifies management services to be provided to us through Mr.
Rodav. Pursuant to the agreement, Mr. Rodavs company receives: (i) $25,000 per
month; (ii) an annual bonus of 2.5% of the net after tax profits for each fiscal year
beginning in 2003; and (iii) participation in our employee stock option and bonus plans.
In addition, Mr. Rodav was granted 150,000 options exercisable at $5.00 per share over a
three-year vesting period. He is also entitled to a bonus upon the sale or merger of our
company, based upon the price of such transaction. In February 2004, our shareholders
approved an additional payment to be made to Israel Literage & Supply Co. Ltd. for
services rendered to us by Mr. Shlomo Rodav in his capacity as our chief executive officer
from July 1, 2004 through December 31, 2004. The compensation approved was an additional
monthly payment of $25,000 plus V.A.T. for the six-month period beginning July 1, 2004 and
a $300,000 bonus for 2004 plus V.A.T.

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# Board Compensation

By
resolutions adopted by our shareholders, the directors of Gilat who are not employees are
entitled to receive annual compensation of $20,000 for each year of service on the board
of directors 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 is received for physical
attendance, provided that the board member is a member of such committee. Each current and
future non-employee director receives options to purchase 6,066 of our ordinary shares,
which options vest over a two-year period, for so long as such optionee remains a director
of Gilat. In addition, 10,000 options are to be granted to each of the non-employee
directors serving on the board during 2005 with the same vesting terms set forth above.

# 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.

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 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. 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.

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# 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 Gilat, are treated as public companies with respect to the external directors
requirement. External directors may not have during the 2 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 additional
three-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.

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.

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 Ms. Linda Harnevo and Mr. Haim Benjamini. Ms. Harnevo was elected
at the Annual General Meeting held on April 15, 2003, 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.

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Pursuant
to the current listing requirements of the Nasdaq National Market, we are required to
establish an audit committee whose members are independent of management. Pursuant to the
Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission, or the SEC, has issued
new rules which would, among other things, require Nasdaq to impose independence
requirements on each member of the audit committee. Nasdaq has proposed rules that would
comply with the SECs requirements and which are expected to be applicable to us as
of July 31, 2005.

The
proposed requirements would implement two basic criteria for determining independence: (i)
audit committee members would be barred from accepting any consulting, advisory or other
compensatory fee from the issuer or an affiliate of the issuer, other than in the
members capacity as a member of the board of directors and any board committee, and
(ii) audit committee members of an issuer that is not an investment company may not be an
affiliated person of the issuer or any subsidiary of the issuer apart from his
or her capacity as a member of the board and any board committee.

The
SEC has proposed to define affiliate for non-investment companies as a
person that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified. The term
control is proposed to be consistent with the other definitions of this term
under the Securities Exchange Act of 1934, as the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract, or otherwise. A
safe harbor has been proposed by the SEC, under which a person who is not an executive
officer, director or 10% shareholder of the issuer would be deemed not to have control of
the issuer.

Under
the final rules adopted by the SEC, an issuer is required to disclose in its annual
report, beginning with the annual report for 2003, whether or not such issuer has at least
one audit committee financial expert. If it does, the issuer must disclose the name of the
expert. If not, the issuer must disclose why it does not have an audit committee financial
expert.

Presently,
our audit committee consists of Mr. Buchris, Ms. Harnevo, Mr. Benjamini and Mr. Chitayat.
We believe that these appointments comply with the requirements of the Companies Law and
with the SEC and Nasdaq rules, and that Mr. Chitayat 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 National Market, we are required to have
at least two independent directors on our board of directors. Under Nasdaq rules, the
majority of the members of the board directors need to be independent as of July 31, 2005.
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.

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

# Employees

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 also utilize temporary employees, as necessary,
to supplement our manufacturing and other capabilities. We believe that our relations with
our employees are satisfactory.

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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.

We
have a number of savings plans in the United States that qualify under Section 401(k) of
the Internal Revenue Code. Our U.S employees may contribute up to 15% or 100% of their
pretax salary, but not more than statutory limits. We contribute 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, we contribute 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 2002, 2003 and 2004 for all the plans were $ 0.9 million, $ 0.5 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 250 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 $120,000.

# Share Ownership

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

# Stock Option Plans

In
January 1993, we adopted the Stock Option Plan (Incentive and Restricted Stock Options),
or the 1993 ISO/RSO Plan and Section 102 Option/Restricted Stock Purchase Plan, or the
1993 Section 102 Plan (collectively, the 1993 Plans). The 1993 Plans provided for the
granting of options and/or rights to purchase (in the case of the 1993 Section 102 Plan)
up to an aggregate of 15,925 ordinary shares to our officers, directors, key employees or
consultants. These plans expired in January 2003.

In
June 1995, we adopted the 1995 Stock Option Plan (Incentive and Restricted Stock Options),
or the 1995 ISO/RSO Plan, which currently provides for the granting of incentive and
restricted stock options for the purchase of up to 197,000 ordinary shares; the 1995
Section 102 Stock Option/Stock Purchase Plan, or the 1995 Section 102 Plan, which provides
for the granting of options to purchase up to 296,000 ordinary shares; and the 1995
Advisory Board Stock Option Plan, or the 1995 Advisory Board Plan, which provides for the
granting of options to purchase up to 7,500 ordinary shares and collectively, the 1995
Plans. The 1995 Plans will expire on June 29, 2005, unless terminated earlier by our board
of directors.

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As
of December 31, 2004, we had granted options to purchase a total of 13,391 ordinary shares
under the 1993 Plans and 172,222 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, 2004, a total of 69,643 options
have been exercised under the 1993 Plans and the 1995 Plans.

In
April 2001, Gilat initiated a voluntary stock option exchange program for its employees,
or the Option Exchange Program. Under the program, employees of Gilat and its
subsidiaries who were granted options under Gilats stock option plans were given the
opportunity to cancel outstanding stock options previously granted to them in exchange for
an equal number of new options to be granted at a future date pursuant to the terms of
Gilats Plans. The exercise price of these new options is $77.2, the fair market
value of Gilats ordinary shares as reported by Nasdaq on the date the options were
granted. In November 2001, we granted the new options under the Option Exchange Program.
Options for a total of 322,183 ordinary shares were tendered for cancellation and were
cancelled as of May 24, 2001.

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 such that the 2003
Plans provide for the granting of options of up to an aggregate of 2,635,000 ordinary
shares to our officers, directors, employees or service providers or any of the employees
of service providers of our subsidiaries. As of March 15, 2005, options to purchase a
total of 2,240,009 ordinary shares under the 2003 Plans were outstanding.

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 Gilat. In addition, the 2003 ISO/RSO Plan
is designed to afford qualified optionees certain tax benefits available under the United
States Internal Revenue Code of 1986, as amended (the Code). 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 a Stock Option Committee appointed by our board of
directors. The Stock Option Committee, comprised of Mr. Neyman, Mr. Benjamini and Ms.
Harnevo, 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. All grants of options pursuant to the 2003 Section 102 Plan are
subject to the approval of the board of directors.

Stock
options issued as incentive stock options pursuant to the 2003 ISO/RSO Plan will only be
granted to the employees of Gilat 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.

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
addition, as part of a consulting agreement entered into between us and Israel Literage
& Supply Co. Ltd., Mr. Shlomo Rodav, our Chairman of the board of directors, was
granted options to purchase 150,000 shares. The options vest over a three-year period
beginning March 2, 2003, and the shares can be purchased at $5.00 per share. The options
expire three years following vesting. We also granted options to Mr. Most, our former CEO
and President, for the purchase of up to 225,000 ordinary shares at a purchase price of
$5.00 per share exercisable over a three-year period. All such options vested upon his
separation from our company in July 2004. The options shall all expire by July 14, 2007.

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

The
following table sets forth certain information with respect to the beneficial ownership of
our ordinary shares as of March 15, 2004 (including options exercisable within 60 days of
March 15, 2004) 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 Gilat, 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 Gilats outstanding share capital.

|                                                      | Number of
Ordinary
Shares
Beneficially
Owned | Percent of
Ordinary
Shares
Outstanding
|----------------------------------------------------- | -------------------------------------------- | --------------------------------------
|
|
|
|
|Bank Hapoalim B.M (1)(2)                              |                                              |                                       
|Eliezer Fishman (1)(3)                                |                                              |                                       
|                                                      |                                              |                                       
|                                                      |                                              |                                       
|All officers and directors as a group
(21 persons)(4) |                                              |                                       

| | (1) | Based on a Schedule 13D filing made with the United States Securities and
               Exchange Commission and representations of such shareholders.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | We have an outstanding loan to Bank Hapoalim B.M. in the approximate principal
               amount of $71.4 million.
| | --- | ----------------------------------------------------------------------------------------------------------------------

| | (3) | Mr. Fishman, directly and through members of the Fishman family, beneficially
               owns Gilat ordinary shares through the following entities (which hold Gilat
               ordinary shares directly or indirectly through other companies): Fishman Family
               Properties Management (1988) Ltd., Fishman Chains Ltd., Fishman Mifalei Kerur
               Ltd., E.T. Fishman Properties (1998) Ltd., Hashkaot Kedaiot Ltd., and Fish Et
               Ltd., all of whom are incorporated in Israel. Mr. Fishman, directly and through
               members of the Fishman family, is the sole shareholder of all of such entities
               except Fishman Chains Ltd. ( 97.5%) and Fishman Mifalei Kerur Ltd. (98%).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes seven officers and directors in 2004 who are no longer serving in such
               capacity, only two of whom still hold options.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------

# Related Party
Transactions

# Amendment to Loan
Agreement with Bank Hapoalim

In
April 2004, we revised the terms of our loan from Bank Hapoalim, to whom we owe a
principal debt amount of $71.4 million. Please see Item 5: Liquidity and Capital
Resources  Financing Activities.

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The
proceeds paid to Gilat from the exercise of a warrant shall be applied to reduce all
future installments of the principal due to the bank, on a pro-rata basis.

# Agreement with SES
Americom

In
March 2003, SES Americom agreed to terminate its transponder agreements with Spacenet Inc.
that relate to StarBand (which is partially held by Spacenet Inc.) and to enter into a new
transponder capacity agreement directly with StarBand. SES Americom also agreed to allow
Spacenet Inc. to defer an outstanding debt of $3.5 million to 2003, and to defer payment
of certain transponder capacity charges due in 2003 and 2004 with payment of those
deferred charges to commence in 2005. The agreement reduced the aggregate amount payable
to SES Americom in 2003 from $26.9 million to $16.5 million (including the $3.5 million
which was deferred from 2002 to 2003 and paid by Spacenet Inc. in full in 2003).

In
addition, we have entered into two development agreements with SES Global S.A. Please see
Item 5: Third Party Funding. Mr. Bednarek who serves on our Board of Directors
is an executive officer of SES Global S.A., an affiliate of SES Americom.

# Consulting Agreement
with Israel Literage & Supply Co. Ltd.

In
2003, we entered into a consulting agreement with Israel Literage & Supply Co. Ltd., a
company under the ownership and control of Shlomo Rodav, the Chairman of our board of
directors. For more information, please see Item 6: Directors, Senior Management and
Employees  Management Employment Agreements.

# StarBand Agreements

In
2003, we entered into a master supply services agreement, a note agreement and a financing
agreement with StarBand. For more information, please see Item 4:  Strategic
Alliances, Joint Ventures and Acquisitions and Item 8  Significant
Changes.

# Satlynx Agreement

We
are party to an investment agreement pursuant to which we are a shareholder in Satlynx
S.A. For additional information, please see Item 4: Strategic Alliances, Joint
Ventures and Acquisitions.

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

# Consolidated Statements

See
Item 18: Financial Statements.

# Export Sales

Gilats
manufacturing facilities are based in Israel. Most of our products are exported out of
Israel. For information on Gilats revenues breakdown by geographic market 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. During September, 2004 the plaintiffs filed a motion to further amend the
claim. Gilat has filed a motion to dismiss the amended complaint, which is pending hearing
by the court. 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, to Mobilcom for an unspecified
amount. Gilat 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, SPC received notice of
a lower administrative ruling against it in this regard, and the subsidiary filed an
appeal of such ruling. The Brazilian authorities are also checking into possible criminal
allegations with respect to this matter. The subsidiary denies such claim and is
vigorously defending against it.

In
December 2003 and October 2004, we received tax assessment for the tax years 1998 and
1999-2001, respectively for approximately $45 million plus $7 million in penalties mainly
based on various claim of the Israeli Tax Authorities.  In January 2005, we received
a final tax assessment for the tax year 1998 for approximately $0.5 million including
penalties, reduced from the $10.5 million in the initial assessment. We intend to
vigorously defend ourselves.

In
2004 we received a notice from the Israeli Stamp Tax authorities requiring that Gilat
disclose all documentation which may be subject to Stamp Tax duties from June 2003 to
date.  The authorities right to demand Stamp Tax duty is pending deliberation by
Israels High Court.   We intend to challenge any demands for payments received
from the Stamp Tax authorities should such demands be received.

In
addition, during 2004, we settled a claim from 2002 in which a third party issued a letter
to us claiming that it had rights to a portion of one of our subsidiaries based upon a
document and certain partial payments made. The matter was settled for approximately $1.15
million.

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.

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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

In
March 2005, we completed the purchase of all of the remaining StarBand shares not held by
us that were held by various Israeli banks. In addition to the initial payment, Spacenet
Inc. was committed to pay the banks an additional consideration equal to 50% of
consideration, should such consideration be received by Spacenet Inc. in the event of,
among other things, the sale of the StarBand shares by Spacenet Inc. to a third party,
merger of StarBand with a third party, transfer or sale of substantially all of
StarBands assets or activities to a third party, or liquidation of StarBand, on
condition that any of these events occur prior to December 31, 2007.

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

Our
ordinary shares are quoted on the Nasdaq National Market under the symbol
GILTF. 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, 2000: |       |                             
|                              |       |                             
|Year Ended December 31, 2001: |       |                             
|                              |       |                             
|Year Ended December 31, 2002  |       |                             
|                              |       |                             
|                              |       |                             
|Year Ended December 31, 2003: |       |                             
|                              |       |                             
|First Quarter                 |       |                             
|                              |       |                             
|Second Quarter                |       |                             
|                              |       |                             
|Third Quarter                 |       |                             
|                              |       |                             
|Fourth Quarter                |       |                             

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|                              | Price | Average Daily Trading Volume
|----------------------------- | ----- | ----------------------------
|
|
|
|
|Year Ended December 31, 2004: |       |                             
|                              |       |                             
|First Quarter                 |       |                             
|                              |       |                             
|Second Quarter                |       |                             
|                              |       |                             
|Third Quarter                 |       |                             
|                              |       |                             
|Fourth Quarter                |       |                             
|                              |       |                             
|                              |       |                             
|Most Recent Six Months:       |       |                             
|                              |       |                             
|August 2004                   |       |                             
|                              |       |                             
|September 2004                |       |                             
|                              |       |                             
|October 2004                  |       |                             
|                              |       |                             
|November 2004                 |       |                             
|                              |       |                             
|December 2004                 |       |                             
|                              |       |                             
|January 2005                  |       |                             
|                              |       |                             
|February                      |       |                             
|                              |       |                             
|March (through March 16)      |       |                             

As
of December 30, 2004, there were 22,312,487 ordinary shares outstanding, and 27 record
holders of ordinary shares, of which 13 represented U.S. record holders owning an
aggregate of approximately 92% of our outstanding ordinary shares.

|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
Gilats purpose is to engage in any business permitted by law and that Gilat can also
grant reasonable donations for any proper charitable cause.

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# 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 Gilat,
may amend their memorandum of association to authorize future amendments to the memorandum
of association by any required voting. On November 9, 2000, Gilats shareholders
approved an amendment to Gilats Memorandum of Association, by adding a provision
that will authorize Gilat 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 Gilat, can be set between four and forty days before the
date of the meeting. Article 20 of our Articles of Association therefore 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.

# 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 Companies
Law Israeli 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.

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In
2003, we had two shareholders meetings. At the meeting held in April 2003, the following
resolutions were among those adopted: the nomination of a new slate of directors, approval
of an amendment to the Articles of Association, an increase of our authorized share
capital and the implementation of a 20:1 reverse stock split. In September 2003, we held
an additional shareholders meeting and the following resolutions were among those adopted:
election of a board member to fill a vacancy, approval of directors and officers
insurance, approval of the 2003 Stock Option Plans, approval of remuneration for
non-employee directors, approval of consulting agreement with a company controlled by our
Chairman of the board and approval of a settlement agreement with past executives of our
company.

# Quorum at General
Meetings

Under
Article 6(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 thirty-three and one-third percent
(331/3%) 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 adjourned meeting was called by
a shareholder(s), 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 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 are 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 Gilat. Under the Companies Law, a person cannot serve as a
director if convicted of certain offenses or been declared bankrupt.

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.

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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 the 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 the Company 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 the Company, upon its written request at any time and from time to time,
with reasonable evidence of its beneficial ownership in the 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 the Company, 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.

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.

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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, Senior Management and Employees  Alternate Directors.

# External Directors

See Item
6: Directors, Senior Management and Employees  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 the 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.

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 Gilat 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.

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# 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
Gilats Chief Executive Officer flexibility in hiring officers (other than
directors), Article 50(b) of our Articles of Association authorizes Gilats Chief
Executive Officer to appoint the officers and employees of Gilat (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 the
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 the 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 the 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 the Company, unless there is another
person holding at that time more than fifty percent of the voting rights of the Company.

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 Gilat 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 Gilat,
in such manner and under such terms as the 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 Gilat 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.

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# 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.

# 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
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | (3) | the
terms of engagement or employment with a controlling shareholder who is also           an
office holder or an employee of the 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) a private placement of securities that will increase the holdings of a
shareholder that holds five percent or more 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.

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.

The
disclosure provisions of the Companies Law require certain disclosure to be made to the
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 the 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, such shareholder must promptly disclose to the Company 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 the Company 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 the Company 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.

86

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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.

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 past or present 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.

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 an insurance may also cover the Company for
indemnifying such office holder.

87

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Israeli
Taxation

The
following is a short 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 consequenses to you. The summary is intended for
general purposes only, 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. GILAT IS NOT MAKING ANY REPRESENTATIONS REGARDING
THE PARTICULAR TAX CONSEQUENCES AS TO ANY HOLDER, NOR IS GILAT OR ITS ADVISORS RENDERING
ANY FORM OF LEGAL OPINION OR PROFESSIONAL TAX ADVICE AS TO SUCH TAX CONSEQUENCES.

# Tax Consequences to
Nonresidents of Israel

Nonresidents
of Israel are subject to income tax on income accrued or derived from sources in Israel or
received 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.
Gilat is required to withhold income tax at the rate of 25% (15% for dividends generated
by an Approved Enterprise) on all distributions of dividends other than bonus shares
(stock dividends), unless a different rate is provided in a treaty between Israel and the
shareholders country of residence. Under the income tax treaty between the United
States and Israel (the Treaty), the maximum tax on dividends paid to a holder
of ordinary shares who is a U.S. resident (as defined in the Treaty) is 25%. 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. 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 exempted for
nonresidents of Israel if the shares are quoted on the Nasdaq National market or listed
for trading on a stock exchange recognized by the Israeli Ministry of Finance. If our
shares are delisted, gains from sales of ordinary shares will be subject to 25% capital
gain tax on the capital gain derived since December 31, 2002, and 35% (34% in 2005, 32% in
2006 and 30% in 2007 thereafter) capital gain tax for companies and up to 49% capital gain
tax for individuals on the capital gain derived until December 31, 2002, 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 and certain withholding obligations
may apply unless a reduced rate or an exemption is provided under any tax treaty
applicable to the specific holder.

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 exeptions 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. For residents of the
United States, under the treaty between Israel and the U.S., the maximum tax on dividends
paid to a U.S. resident (as defined in the treaty) holding Gilat ordinary shares that
Gilat is required to withhold is 25%. For residents of other countries, unless a different
rate is provided in a treaty between Israel and the stockholders country of
residence, Gilat may be required to withhold income tax at the maximum rate of 25% on all
distributions of dividends other than stock dividends.

88

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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 Gilat is required to withhold is 17.5%. For
residents of other countries, unless a different rate is provided in a treaty between
Israel and the country of residence of such holder of our convertible notes, Gilat may be
required to withhold income tax at the maximum rate of 25% on all distributions of
interest.

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, effective commencing January 1,
2003, gains from sales of ordinary shares incurred after December 31, 2002, are subject to
15% capital gains tax for individuals and Israeli companies not subject to the Income Tax
Law (Inflation Adjustments)  1985 (the Adjustment Law)and 35%
(34% in 2005, 32% in 2006 and 30% in 2007 and thereafter) capital gain tax for Israeli
companies subject to the Adjustment Law if the ordinary shares are quoted on the Nasdaq
National market or listed on a stock exchange recognized by the Israeli Ministry of
Finance. For individuals and Israeli companies not subject to the Adjustment Law the
purchase price for purposes of capital gains commencing January 1, 2003, for shares
purchased before this date, will be the higher of the tax basis or the average market
value in the three days before January 1, 2003 . Gains incurred until December 31, 2002,
are exempt from capital gains tax for so long as (i) the ordinary shares are listed on a
stock exchange recognized by the Israeli Ministry of Finance and (ii) Gilat Qualifies as
an Industrial Company or Industrial Holding Company under the law for Encouragement of
Industry (Taxes)- 1969. We believe that we qualify as an Industrial Company under the law
for Encouragement of Industry (Taxes)- 1969. Gains incurred until December 31, 2002 are
subject to 36%  capital gains tax
for Israeli companies subject to the adjustment law. If our shares are delisted, gains
from sales of ordinary shares will be subject to 25% capital gain tax on the capital gain
derived since December 31, 2002, and 35% (34% in 2005, 32% in 2006 and 30% in 2007 and there after) capital gain tax for companies and up to 49%
capital gain tax for individuals on the capital gain derived until December 31, 2002,
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 and certain withholding
obligations may apply.

Dividends

Dividend
income generated by an Approved Enterprise is subject to income tax at a rate of 15%. 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 25% for individuals and will be exempt from income tax for
corporations. Gilat may be required to withhold income tax at the maximum rate of 25% (0%
for corporations) on all such distributions (15% for dividends generated by an Approved
Enterprise).

89

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Interest

Residents
of Israel are subject to income tax on income their worldwide income. These sources of
income may include passive income, such as interest paid on our convertible notes. If our
convertible notes are traded in a market which is regarded as a stock exchange recognized
by the Israeli Ministry of Finance, the interest accrued and paid after January 1, 2003,
is subject to 15% tax. Otherwise, the interest accrued and paid after January 1, 2003,
is subject to tax of 35% (34% in 2005, 32% in 2006 and 30% in 2007 and thereafter) for
companies and up to 49% for individuals. We may be required to withhold income tax at a
rate of up to 35% on all distributions of interest.

# Tax Consequences of the
restructuring of debt arrangements to the Company

The
Company obtained a ruling from the Israeli Tax Authorities regarding the tax treatment of
the March 2003 arrangement. According to the ruling (i) a payment of $1.1 million was due
after the completion of the arrangement; (ii) the capital gains for tax purposes according
to the ruling was decreased from the tax basis of the Companys assets as of January
1, 2001; (iii) an amount equal to the difference between the part of our debt to Bank
Hapoalim that was converted into ordinary shares under the arrangement and the value of
our ordinary shares that were issued in consideration for that part of the debt was
considered as taxable income in tax year 2003; (iv) the value of our ordinary shares for
the purposes of the ruling is considered $0.5 per share; (v) the Companys tax
returns beginning with the 2001 tax year will be submitted according to the ruling; (vi)
the ruling can not be used by the holders of the old notes as approval of their losses by
the Israel Tax Authorities and the ruling shall not otherwise apply to the holders of the
old notes; and (vii) we committed not to transfer our activities abroad or, for tax
purposes, cease to be considered an Israeli resident.

We
did not apply for a ruling regarding the tax treatment of the November 2003 conversion of
debt to equity. We believe we have enough carry forward tax losses to offset the income
from this event.

# 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 Code, existing and proposed U.S. Treasury
regulations and administrative and judicial interpretations in effect as of the date of
this annual report. All of these authorities are subject to change (possibly with
retroactive effect) and to differing interpretations. In addition, this summary does not
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;
| | - | -------------------------

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

| |  | 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 Gilat.
| | - | -------------------------------------------------------------------------------------------------

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.

90

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THE
FOLLOWING SUMMARY DOES NOT ADDRESS THE IMPACT OF A U.S. SHAREHOLDERS INDIVIDUAL TAX
CIRCUMSTANCES. ACCORDINGLY, EACH U.S. SHAREHOLDER 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 Gilats
current or accumulated earnings and profits as determined for U.S. federal income tax
purposes. Distributions in excess of Gilats 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. Gilats dividends will not qualify
for the dividends-received deduction otherwise available to U.S. corporations. In the
event that Gilat pays 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.

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, 2008. Dividends received with respect to ordinary shares
should qualify for the 15 percent rate provided that either: (i) Gilat is entitled to
benefits under the income tax treaty between the United States and Israel; or (ii) the
ordinary shares currently are readily tradeable on an established securities market in the
U.S. (the Treaty). Gilat believes that it is 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.

91

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Subject
to complex limitations, any Israeli withholding tax imposed on dividends paid by Gilat
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
income or, in the case of certain U.S. Holders, financial services income for United
States foreign tax credit purposes.  U.S. Holders should note that recently enacted
legislation eliminates the financial services income category with respect to
taxable years beginning after December 31, 2006.  Under this legislation, the foreign
tax credit limitation categories will be limited to passive category income
and general category income.  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 30-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.

# Passive Foreign
Investment Company

For
U.S. federal income tax purposes, Gilat 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 Gilat 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 Gilats current and projected income, assets and activities, Gilat believes that
it is not currently a PFIC. However, because the determination of whether Gilat is a PFIC
is based upon the composition of its income and assets from time to time, there can be no
assurances that Gilat will not become a PFIC for any future taxable year.

|If
Gilat were treated as a PFIC for any taxable year, then, 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, dividends would not qualify for the reduced maximum tax rate, discussed above, and
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 Gilat is considered a PFIC 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,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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, 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 Gilats ordinary earnings as ordinary income and your pro rata
share of Gilats 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 Gilat complies 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 treated as ordinary income or loss.

# 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.

93

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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. Such information
on our website is not part of this annual report.

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

# General

The
currency of our primary economic environment is the dollar. However, we have balances and
activities in other currencies. We are therefore exposed to market risks arising from
changes in currency exchange rates. We are also exposed to market risks arising from
changes in interest rates.

# Exchange Rate Risk
Management

Our
functional currency and that of most of our subsidiaries is the dollar. Accordingly, we
attempt to protect ourselves against exposure arising from the difference between assets
and liabilities in each currency other than the dollar, or Balance Sheet
Exposure. We strive to limit our exposure through natural hedging, i.e.,
attempting to maintain similar levels of assets and liabilities in any given currency, to
the extent possible. However, this method of natural hedging is not always
achievable.

Due
to the existence of assets and liabilities with different interest rates and maturity
dates, we are exposed to changes in interest rates.

94

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

|                                                                       | 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                                                 |                        
|
|In other currency:                                                     |                        
|
|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                                                 |                        
|
|Long-term other - in NIS     (including current     maturities):       |                        
|
|Weighted interest rate                                                 |                        

95

---

---



For
details regarding long-term restricted cash, please see Item 5: Liquidity and
Capital Resources.

For
details regarding long-term loans from banks and the convertibles notes, please see
Item 4: Details Regarding the Restructuring of our Debt in 2003".

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

Not
Applicable.

# PART II

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

Not
Applicable.

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

Not
Applicable.

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

Our
management, including our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures (as defined in
Securities Exchange Act Rule 13a-15(e)) as of the end of the period covered by this
Form 20-F/A.  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 to ensure that information required to be disclosed by our
company in reports that we file or submit under the U.S. Securities Exchange Act of 1934,
as amended, 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 was made known to them by others within the company, as appropriate to allow
timely decisions regarding required disclosure.

All
internal control systems no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective may not prevent or detect
misstatements and can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

# PART III

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

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

Our
board of directors has determined that Mr. Chitayat meets 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.

96

---

---



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

# 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 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 2004, we did not engage in the purchasing of any of our own stock.

97

---

---



|ITEM 17: | 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-65 hereof.

|Index to Consolidated Financial Statements                                                         | PAGE
|-------------------------------------------------------------------------------------------------- | ----
|
|
|
|
|Reports of Independent Auditors                                                                    |     
|Consolidated Balance Sheets at December 31, 2002 and 2003                                          |     
|Consolidated Statements of Operations for the Years Ended December 31, 2001, 2002 and 2003         |     
|Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001, 2002 and 2003 |     
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003         |     
|Notes to Consolidated Financial Statements                                                         |     
|Reports of Independent Auditors with respect to consolidated subsidiaries                          |     

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

|1.1 |  | Memorandum
of Association, as amended. Previously filed as Exhibit 1.1 to Gilats 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 Gilats
Annual Report on Form 20-F for the fiscal year ending December 31, 2003, which Exhibit is
incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.1 |  | Form
of 4.00% Convertible Subordinated Note due 2012. Previously filed as Exhibit T3C to the
Registration Statement on Form F-3 (No. 022-38667) which Exhibit is incorporated herein
by reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Agreement
between the Company and Bank Hapoalim B.M. dated March 6, 2003. Previously filed as
Exhibit 4.1 to our Annual report on Form 20-F for the fiscal year ending December 31,
2002, which Exhibit is incorporated herein by reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Amendment
to the Loan Agreement with Bank Hapoalim dated April 4, 2004.  Previously filed as Exhibit 4.3 to the Annual Report on Form 20-F for the fiscal year ending
       December 31, 2004, which Exhibit is incorporated herein by reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | 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 Gilats Annual Report on Form
20-F for the fiscal year ending December 31, 2000, which Exhibit is incorporated herein
by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Acquisition
Agreement, among Gilat Satellite Networks (Holland) BV, Gilat        Satellite Networks
Ltd., Spacenet International Holdings Inc., Spacenet        International Ventures Inc.,
Gilat Satellite Networks (Luxembourg) S.A. dated April        2002. Previously filed as
Exhibit 4.8 to the Annual Report on Form 20-F for the        fiscal year ending December
31, 2001, which Exhibit is incorporated herein by        reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of subsidiaries.  Previously filed as Exhibit 8.1 to the Annual Report on Form 20-F for the fiscal year ending
       December 31, 2004, which Exhibit is incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Consent
Kost Forer Gabbay and 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 Chief 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 Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------

98

---

---



GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2004

IN U.S. DOLLARS

INDEX

|                                                           |  |            
|---------------------------------------------------------- |  | -----------
|                                                           |  | Page       
|                                                           |  |            
|Report of Independent Registered Public Accounting Firm    |  | F-2        
|                                                           |  |            
|Consolidated Balance Sheets                                |  | F-3 - F4   
|                                                           |  |            
|Consolidated Statements
of Operations                      |  | F-5        
|                                                           |  |            
|Statements of Changes in
Shareholders Equity (Deficiency) |  | F-6 - F-7  
|                                                           |  |            
|Consolidated Statements of Cash Flows                      |  | F-8 - F-10 
|                                                           |  |            
|Notes to Consolidated Financial Statements                 |  | F-11 - F-68

F - 1



---

---

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, 2003 and 2004, and the related consolidated statements of operations, changes in
 shareholders equity (deficiency) and cash flows for each of the three years in the period ended
 December 31, 2004. 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
a consolidated subsidiary, which statements reflect total assets of approximately 2.38% as of December 31, 2004,
 and total revenues of approximately 11.74% for the year ended December 31, 2004 of the related consolidated totals.
 Those financial statements were audited by other auditors, whose reports have been furnished to us, and our opinion,
 insofar as it relates to amounts included for this subsidiary, is based solely on the reports 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. An audit includes 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, assessing the accounting principles used and significant estimates
 made by management, and evaluating the overall financial statement presentation. We believe that our audits and the
 reports 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, 2003 and 2004, and the consolidated results of their operations and cash flows, for each of the three
 years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

As
 discussed in Note 1b to the consolidated financial statements, the Company adopted FASB Interpretation No. 46 Consolidation of
 Variable Interest Entities effective in 2004.

As
 discussed  in Note 1e, the  consolidated  financial  statements  as of December  31,
2004 and for the year then ended have been restated for the matters set forth therein.

|                                                                                                                                    |                                 
|----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------
|Tel-Aviv, Israel                                                                                                                    | KOST FORER GABBAY & KASIERER    
|February 2, 2005, except for Notes 1e, 2s,
8j, 10c, 12d, 12e, 12f, 12g, 13b, 14d and 15d, as to which the date is November 29, 2005 | 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,
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                                            |  |             
|                                                                                                                            |  | 2003        
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|ASSETS                                                                                                                      |  |             
|                                                                                                                            |  |             
|CURRENT ASSETS:                                                                                                             |  |             
|Cash and cash
    equivalents                                                                                               |  | $           
|Short-term restricted
    cash                                                                                              |  |             
|Restricted cash held by
      trustees                                                                                      |  |             
|Trade receivables (net of allowance
      for doubtful accounts: 2003 -
               $18,102; 2004
      -$14,506) *)     |  |             
|Inventories                                                                                                                 |  |             
|Receivables in respect of capital
      leases, prepaid expenses and other
               accounts
      receivable         |  |             
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|Totalcurrent assets                                                                                                         |  |             
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|LONG-TERM
      INVESTMENTS AND RECEIVABLES:                                                                                |  |             
|Long-term restricted
    cash                                                                                               |  |             
|Long-term restricted cash held by
      trustees                                                                            |  |             
|Severance pay fund                                                                                                          |  |             
|Long-term trade receivables,
      receivables in respect of capital leases
               and other
      receivables, net |  |             
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|PROPERTY AND
      EQUIPMENT, NET                                                                                           |  |             
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|INTANGIBLE ASSETS
      AND DEFERRED CHARGES, NET                                                                           |  |             
|                                                                                                                            |  |             
|                                                                                                                            |  |             
|Totalassets                                                                                                                 |  | $           
|                                                                                                                            |  |             

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 data)

|                                                                                                                                                                                                                                                                                                                      |  | December 31,
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  | 2003        
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|LIABILITIES
      AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                                                                            |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|CURRENT
      LIABILITIES:                                                                                                                                                                                                                                                                                            |  |             
|Short-term bank credit                                                                                                                                                                                                                                                                                                |  | $           
|Current maturities of long-term loans
      *)                                                                                                                                                                                                                                                                        |  |             
|Trade payables                                                                                                                                                                                                                                                                                                        |  |             
|Accrued expenses *)                                                                                                                                                                                                                                                                                                   |  |             
|Short-term advances from customer
      held by trustees                                                                                                                                                                                                                                                              |  |             
|Other accounts payable
    *)                                                                                                                                                                                                                                                                                         |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|Totalcurrent
      liabilities                                                                                                                                                                                                                                                                                        |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|LONG-TERM
      LIABILITIES:                                                                                                                                                                                                                                                                                          |  |             
|Accrued severance pay                                                                                                                                                                                                                                                                                                 |  |             
|Long-term advances from customer held
      by trustees                                                                                                                                                                                                                                                               |  |             
|Long-term loans, net of current
      maturities *)                                                                                                                                                                                                                                                                   |  |             
|Accrued interest related to
      restructured debt *)                                                                                                                                                                                                                                                                |  |             
|Other long-term liabilities
      *)                                                                                                                                                                                                                                                                                  |  |             
|Excess of losses over investment in
      affiliates                                                                                                                                                                                                                                                                  |  |             
|Convertible subordinated
      notes                                                                                                                                                                                                                                                                                  |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|Totallong-term
      liabilities                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|COMMITMENTS AND
      CONTINGENCIES                                                                                                                                                                                                                                                                                   |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|MINORITY
      INTEREST                                                                                                                                                                                                                                                                                               |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|SHAREHOLDERS
      EQUITY :                                                                                                                                                                                                                                                                                          |  |             
|Share capital - Ordinary shares of
NIS 0.2 par value: Authorized
      -          27,500,000 and
      37,500,000 as of December 31, 2003 and 2004,
               respectively;
      Issued and outstanding - 22,225,146 and  22,312,487
               shares as of December 31, 2003 and
      2004, respectively |  |             
|Additional paid in
    capital                                                                                                                                                                                                                                                                                        |  |             
|Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                  |  |             
|Accumulated
      deficit                                                                                                                                                                                                                                                                                             |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|Totalshareholders equity                                                                                                                                                                                                                                                                                             |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                                                                      |  |             
|Totalliabilities and shareholders equity                                                                                                                                                                                                                                                                             |  | $           
|                                                                                                                                                                                                                                                                                                                      |  |             

|*) | Includes
the following balances resulting from transactions with related parties as of December
31, 2003 and 2004 Current maturities of long-term loans - $ 0 and $ 1,000, respectively;
Accrued expenses - $ 4,999 and $ 2,540, respectively; Other accounts payable - $ 1,689
and $ 2,094, respectively; Long-term loans, net of current maturities - $ 71,400 and $
70,400, respectively; Accrued interest related to restructured debt - $ 14,403 and $ 0,
respectively; Other long-term liabilities - $ 2,125 and $ 2,900, 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 per share data)

|                                                                                                                                                                            |  | Year ended December
      31,
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  | 2002                         
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|Revenues:                                                                                                                                                                   |  |                              
|Products *)                                                                                                                                                                 |  | $                            
|Services *)                                                                                                                                                                 |  |                              
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|Cost of
      revenues:                                                                                                                                                     |  |                              
|Products                                                                                                                                                                    |  |                              
|Services *)                                                                                                                                                                 |  |                              
|Write-off of inventories                                                                                                                                                    |  |                              
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|Gross
      profit                                                                                                                                                          |  |                              
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|Research and
      development expenses, net *)                                                                                                                             |  |                              
|Selling,
      marketing, general and administrative expenses *)                                                                                                            |  |                              
|Provision and
      write-off of doubtful accounts and capital lease receivables                                                                                            |  |                              
|Impairment of
      goodwill                                                                                                                                                |  |                              
|Impairment of
      tangible and intangible assets                                                                                                                          |  |                              
|Restructuring
      charges                                                                                                                                                 |  |                              
|Gain from
      derecognition of liability                                                                                                                                  |  |                              
|                                                                                                                                                                            |  |                              
|Operating
      loss                                                                                                                                                        |  |                              
|Financial expenses, net                                                                                                                                                     |  |                              
|Gain from
      restructuring of debts                                                                                                                                      |  |                              
|Other income
      (expenses)                                                                                                                                               |  |                              
|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 profits
      (losses) of affiliated companies                                                                                                                    |  |                              
|Minority interest
      in losses of a subsidiary                                                                                                                           |  |                              
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|Income (loss) from
      continuing operations, before cumulative effect of      a change in an
      accounting principle and loss from
      discontinued      operations |  |                              
|                                                                                                                                                                            |  |                              
|Gain (loss) from
      cumulative effect of a change in an accounting principle                                                                                             |  |                              
|Loss from
      discontinued operations                                                                                                                                     |  |                              
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                           
|Net income
      (loss)                                                                                                                                                     |  | $                            
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|Earnings (loss)
      per share from continuing operations:                                                                                                                 |  |                              
|Basic                                                                                                                                                                       |  | $                            
|                                                                                                                                                                            |  |                              
|Diluted                                                                                                                                                                     |  | $                            
|                                                                                                                                                                            |  |                              
|                                                                                                                                                                            |  |                              
|Basic and diluted
      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                                                                                                                                                                     |  |                              
|                                                                                                                                                                            |  |                              

*)     Includes the following income (expenses) resulting from transactions
with related parties for the years ended December 31, 2002, 2003 and
2004: products revenues - $ 5,300, $ 7,126 and $ 2,336, respectively;
services revenues - $ 1,450, $ 415 and $ 528, respectively; cost of
services - $ (19,695), $ (14,444) and $ (16,802) respectively;
research and development expenses, net - $ 0, $ 1,450 and $ 2,917,
respectively; selling, marketing, general and administrative expenses
- $ 677, $ (35) and $ (642), respectively; financial income
(expenses), net - $ 0, $ 22 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                                  
|------------------------------------------------------------------------------------
|                                                                                    
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)
U.S. dollars in thousands

|                                                                                                  |  | Number ofordinary  shares  (in thousands) |  | Sharecapital |  | AdditionalPaid-incapital |   | Accumulatedothercomprehensiveloss |  | Accumulateddeficit |         | Totalcomprehensiveincome (loss) |  | Totalshareholdersequity(deficiency)
|------------------------------------------------------------------------------------------------- |  | ----------------------------------------- |  | ------------ |  | ------------------------ | - | --------------------------------- |  | ------------------ | ------- | ------------------------------- |  | ------------------------------------
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|                                                                                                  |  |                                           |  |              |  | (as restated)            |   |                                   |  | (as restated)      |         | (as restated)                   |  | (as restated)                       
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|Balance as of January 1, 2002                                                                     |  |                                           |  | 1,170        |  |                          | $ | 69                                |  | $                  | 617,374 |                                 |  | $                                   
|Exercise of options, net                                                                          |  |                                           |  | *) -         |  |                          |   | *) -                              |  |                    | 5       |                                 |  |                                     
|Stock compensation related to options
      issued to a consultant                                |  |                                           |  | -            |  |                          |   | -                                 |  |                    | 107     |                                 |  |                                     
|Issuance of shares in consideration for 
      the acquisition of rStar                           |  |                                           |  | 22           |  |                          |   | 1                                 |  |                    | 311     |                                 |  |                                     
|Foreign currency translation 
      adjustments from the disposal of 
      European subsidiaries |  |                                           |  | -            |  |                          |   | -                                 |  |                    | -       |                                 |  |                                     
|Comprehensive loss - Foreign currency 
      translation adjustments                              |  |                                           |  | -            |  |                          |   | -                                 |  |                    | -       |                                 |  |                                     
|Net loss                                                                                          |  |                                           |  | -            |  |                          |   | -                                 |  |                    | -       |                                 |  |                                     
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|Total comprehensive loss                                                                          |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|Balance as of December 31, 2002                                                                   |  |                                           |  | 1,192        |  |                          |   | 70                                |  |                    | 617,797 |                                 |  |                                     
|Issuance of shares as a result of 
      restructuring of debt on March 14, 
      2003           |  |                                           |  | 11,795       |  |                          |   | 500                               |  |                    | 54,677  |                                 |  |                                     
|Issuance of shares as a result of 
      restructuring of debt on November 10, 
      2003        |  |                                           |  | 9,209        |  |                          |   | 409                               |  |                    | 44,628  |                                 |  |                                     
|Exercise of options, net                                                                          |  |                                           |  | 29           |  |                          |   | 1                                 |  |                    | 35      |                                 |  |                                     
|Stock compensation related to options 
      issued in a subsidiary                               |  |                                           |  | -            |  |                          |   | -                                 |  |                    | 764     |                                 |  |                                     
|Stock compensation related to repricing 
      of options issued to an employee                   |  |                                           |  | -            |  |                          |   | -                                 |  |                    | 91      |                                 |  |                                     
|Stock compensation related to options 
      issued to a consultant                               |  |                                           |  | -            |  |                          |   | -                                 |  |                    | 233     |                                 |  |                                     
|Comprehensive income - Foreign 
      currency translation adjustments                            |  |                                           |  | -            |  |                          |   | -                                 |  |                    | -       |                                 |  |                                     
|Net income                                                                                        |  |                                           |  | -            |  |                          |   | -                                 |  |                    | -       |                                 |  |                                     
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|Total comprehensive income                                                                        |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     
|Balance as of December 31, 2003                                                                   |  |                                           |  | 22,225       |  |                          | $ | 980                               |  | $                  | 718,225 |                                 |  | $                                   
|                                                                                                  |  |                                           |  |              |  |                          |   |                                   |  |                    |         |                                 |  |                                     

*)    Represent an amount lower than $1.

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

F - 6

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



|                                                                                           |  | Number of
  ordinary
  shares
  (in thousands) |  | Share
  capital |  | Additional
  paid-in
  capital |  | Accumulated
  other
  comprehensive
  loss |     | Accumulated
  deficit |  | Total
  comprehensive
  income (loss) |   | Total
  shareholders
  equity(deficiency)
|------------------------------------------------------------------------------------------ |  | ---------------------------------------------- |  | --------------- |  | ------------------------------ |  | ------------------------------------------ | --- | --------------------- |  | ------------------------------------- | - | ------------------------------------------
|                                                                                           |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   |                                           
|                                                                                           |  |                                                |  |                 |  | (as restated)                  |  |                                            |     | (as restated)         |  | (as restated)                         |   | (as restated)                             
|                                                                                           |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   |                                           
|Balance as of December 31, 2003                                                            |  |                                                |  | 22,225          |  |                                |  | $                                          | 980 |                       |  |                                       | $ | 718,225                                   
|                                                                                           |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   |                                           
|Exercise of options, net                                                                   |  |                                                |  | 87              |  |                                |  |                                            | 4   |                       |  |                                       |   | 428                                       
|Stock
  compensation related to 
      purchased options in a subsidiary                   |  |                                                |  | -               |  |                                |  |                                            | -   |                       |  |                                       |   | (764                                      
|Stock   compensation related to       options issued to a consultant                       |  |                                                |  | -               |  |                                |  |                                            | -   |                       |  |                                       |   | 207                                       
|Gain from extinguishment of Bank Hapoalim loan                                             |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   | 15,486                                    
|Foreign
  currency translation 
      adjustments from the disposal of a 
      subsidiary |  |                                                |  | -               |  |                                |  |                                            | -   |                       |  |                                       |   | -                                         
|Comprehensive
  income - Foreign 
      currency translation adjustments                   |  |                                                |  | -               |  |                                |  |                                            | -   |                       |  |                                       |   | -                                         
|Net loss                                                                                   |  |                                                |  | -               |  |                                |  |                                            | -   |                       |  |                                       |   | -                                         
|                                                                                           |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   |                                           
|Total comprehensive loss                                                                   |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   |                                           
|                                                                                           |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   |                                           
|                                                                                           |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   |                                           
|Balance as of December 31, 2004                                                            |  |                                                |  | 22,312          |  |                                |  | $                                          | 984 |                       |  |                                       | $ | 733,582                                   
|                                                                                           |  |                                                |  |                 |  |                                |  |                                            |     |                       |  |                                       |   |                                           

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

F - 7

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---

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

|                                                                                                                                                     |  | Year ended December 31, |         
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                                                                                     |  |                         |         
|                                                                                                                                                     |  | 2002                    |         
|                                                                                                                                                     |  |                         |         
|                                                                                                                                                     |  |                         |         
|Cash flows from operating activities:                                                                                                                |  |                         |         
|Net income (loss)                                                                                                                                    |  | $                       | (348,204
|Less loss for the year from discontinued operations                                                                                                  |  |                         | 1,937   
|Adjustments required to reconcile net income (loss) to net cash
  provided by
       (used in) operating activities:                                 |  |                         |         
|Depreciation and amortization                                                                                                                        |  |                         | 46,230  
|Gain from restructuring of debt                                                                                                                      |  |                         | -       
|Non cash cumulative effect relating to a
  subsidiary                                                                                                |  |                         | -       
|Loss from disposal of subsidiaries                                                                                                                   |  |                         | -       
|Stock compensation relating to options  issued to a consultant                                                                                       |  |                         | 107     
|Stock compensation related to option in
  a subsidiary                                                                                               |  |                         | -       
|Stock compensation relating to repricing of options issued to an employee                                                                            |  |                         | -       
|Impairment of goodwill                                                                                                                               |  |                         | 69,765  
|Impairment of intangible assets                                                                                                                      |  |                         | 8,255   
|Write off of investments                                                                                                                             |  |                         | 11,989  
|Write
  off of long-term note                                                                                                                        |  |                         | 39,390  
|Write-off of inventories                                                                                                                             |  |                         | 20,107  
|Impairment
  of property and equipment and other tangible assets                                                                                     |  |                         | 42,411  
|Equity in losses (earnings) of
  affiliated companies                                                                                                |  |                         | 29,334  
|Accrued severance pay, net                                                                                                                           |  |                         | (1,568  
|Interest accrued on bank deposits                                                                                                                    |  |                         | (163    
|Interest accrued on short and long-term
  restricted cash                                                                                            |  |                         | -       
|Exchange rate on long-term loans                                                                                                                     |  |                         | 983     
|Minority interest in losses of a
  subsidiary                                                                                                        |  |                         | (3,517  
|Capital gain from disposal of property
  and equipment                                                                                               |  |                         | (177    
|Deferred income taxes, net                                                                                                                           |  |                         | (41     
|Decrease in trade receivables                                                                                                                        |  |                         | 62,485  
|Decrease in receivables in respect of
  capital leases, prepaid expenses          and other accounts
  receivable, (including long-term receivables) |  |                         | 13,737  
|Decrease (increase) in inventories                                                                                                                   |  |                         | 24,742  
|Decrease in trade payables                                                                                                                           |  |                         | (19,797 
|Decrease in accrued expenses                                                                                                                         |  |                         | (16,825 
|Increase (decrease) in other accounts
  payable and other long-term liabilities                                                                      |  |                         | 13,196  
|Increase in advances from customer held
  by trustees (including long-term)                                                                          |  |                         | -       
|Cash used for discontinued operations                                                                                                                |  |                         | (1,185  
|                                                                                                                                                     |  |                         |         
|                                                                                                                                                     |  |                         |         
|Net cash provided by (used in) operating activities                                                                                                  |  |                         | (6,809  
|                                                                                                                                                     |  |                         |         
|                                                                                                                                                     |  |                         |         
|Cash flows from investing activities:                                                                                                                |  |                         |         
|Purchase of property and equipment                                                                                                                   |  |                         | (9,739  
|Purchase of minority shares of rStar                                                                                                                 |  |                         | -       
|Disposal of subsidiaries (a)                                                                                                                         |  |                         | -       
|Consolidation of StarBand
  (b)                                                                                                                      |  |                         | -       
|Investment in affiliated companies                                                                                                                   |  |                         | (13,461 
|Proceeds from long-term note                                                                                                                         |  |                         | -       
|Investment in short-term bank deposits                                                                                                               |  |                         | -       
|Proceeds from short-term bank deposits                                                                                                               |  |                         | 11,400  
|Disposal of subsidiaries (c)                                                                                                                         |  |                         | 7,671   
|Proceeds from disposal of property and
  equipment                                                                                                   |  |                         | 832     
|Investment in short-term and long-term
  restricted cash                                                                                             |  |                         | (12,495 
|Proceeds from short-term and long-term
  restricted cash                                                                                             |  |                         | 2,652   
|Investment in restricted cash held by
  trustees                                                                                                     |  |                         | -       
|Proceeds from restricted cash held by
  trustees                                                                                                     |  |                         | -       
|Investment in other assets                                                                                                                           |  |                         | (2,098  
|                                                                                                                                                     |  |                         |         
|                                                                                                                                                     |  |                         |         
|Net cash used in investing activities                                                                                                                |  |                         | (15,238 
|                                                                                                                                                     |  |                         |         

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

F - 8

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

|                                                             |                                | Year ended December 31,                                                                                      |        
|------------------------------------------------------------ | ------------------------------ | ------------------------------------------------------------------------------------------------------------ | -------
|                                                             |                                |                                                                                                              |        
|                                                             |                                | 2002                                                                                                         |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|Cash flows from financing activities:                        |                                |                                                                                                              |        
|Exercise of options, net                                     |                                |                                                                                                              | 5      
|Prepaid expenses related to restructuring of debts           |                                |                                                                                                              | (2,240 
|Short-term bank credit, net                                  |                                |                                                                                                              | (2,838 
|Proceeds from long-term loans                                |                                |                                                                                                              | 1,220  
|Cash paid to minority shareholders of a subsidiary           |                                |                                                                                                              | (9,997 
|Repayments of long-term loans                                |                                |                                                                                                              | (13,443
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|Net cash used in financing activities                        |                                |                                                                                                              | (27,293
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|Effect of exchange rate changes on cash and cash equivalents |                                |                                                                                                              | 87     
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|Increase (decrease) in cash and cash equivalents             |                                |                                                                                                              | (49,253
|Cash and cash equivalents at the beginning of the year       |                                |                                                                                                              | 97,325 
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|Cash and cash equivalents at the end of the year             |                                | $                                                                                                            | 48,072 
|                                                             |                                |                                                                                                              |        
|Supplementary cash flows activities:                         |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|(a)                                                          | Cash paid during the year for: |                                                                                                              |        
|                                                             |                                | Interest                                                                                                     |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                | Income taxes                                                                                                 |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|(b)                                                          | Non-cash
  transactions:       |                                                                                                              |        
|                                                             |                                | Classification between property and equipment and 
      inventories                                         |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                | Conversion of convertible subordinated notes, net (see 
      Note 10a)                                      |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                | Arrangement with SES Americom (see Note
  10a)                                                               |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                | Issuance of shares in consideration of the acquisition ofrStar(see Note 1c)                                  |        
|                                                             |                                |                                                                                                              |        
|                                                             |                                | Gain from extinguishment of Bank Hapoalim loan  classified
      as Additional paid-in capital(see Note 1e) |        
|                                                             |                                |                                                                                                              |        

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                         

|    |                                                                                | Yearended  
|--- | ------------------------------------------------------------------------------ | -----------
|    |                                                                                | December31,
|    |                                                                                | 2004       
|    |                                                                                |            
|(a) | Disposal of subsidiaries consolidated in previous periods (see
  also Note 1d) |            
|    | Assets and liabilities of the subsidiaries at date of
  deconsolidation:       |            
|    | Working capital
  (excluding cash and cash equivalents)                        |            
|    | Loss on
  disposal of subsidiaries                                             |            
|    |                                                                                |            
|    |                                                                                |            
|    |                                                                                |            
|    |                                                                                |            

|    |                                                                        | Year ended  
|--- | ---------------------------------------------------------------------- | ------------
|    |                                                                        | December 31,
|    |                                                                        | 2004        
|    |                                                                        |             
|(b) | Consolidation of StarBand (see also Note
  1b)                         |             
|    |                                                                        |             
|    | Assets and liabilities of StarBand at
  date of consolidation:         |             
|    | Non-cash assets
  and liabilities consolidated                         |             
|    | Negative
  goodwill                                                    |             
|    | Property, plant
  and equipment and deferred charges                   |             
|    | Other long-term
  liabilities                                          |             
|    |                                                                        |             
|    |                                                                        |             
|    | Net cash and cash equivalent included in the consolidation of StarBand |             
|    |                                                                        |             

|    |                                                                                                 | Year ended  
|--- | ----------------------------------------------------------------------------------------------- | ------------
|    |                                                                                                 | December 31,
|    |                                                                                                 | 2002        
|    |                                                                                                 |             
|(c) | Disposal of European subsidiaries consolidated in previous periods
  (see also 
       Note 4c) |             
|    |                                                                                                 |             
|    | Assets and liabilities of the subsidiaries at date of
  deconsolidation:                        |             
|    | Working capital
  (excluding cash and cash equivalents)                                         |             
|    | Equity
  investment                                                                             |             
|    | Long-term trade
  receivables and other receivables                                             |             
|    | Property, plant
  and equipment and deferred charges                                            |             
|    | Other long-term
  liabilities                                                                   |             
|    | Foreign
  currency translation                                                                  |             
|    |                                                                                                 |             
|    |                                                                                                 |             
|    |                                                                                                 |             
|    |                                                                                                 |             

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

F - 10

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- |  | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- |  | GENERAL
|         |  |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |  | a.      | Organization:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        
|         |  |         | Gilat Satellite Networks Ltd. (the Company) and its wholly-owned and
majority-owned subsidiaries (the Group) is a leading provider of
products and services for satellite-based communications networks. The Company
designs, develops, manufactures, markets and sells products and provides
services that enable complete end-to-end telecommunications and data networking
solutions, based on very small aperture terminal (VSAT) satellite
earth stations and related central station (hub) equipment.
Beginning January 1, 2005, the Group operates its business under two business
units: (i) Gilat Network Systems, which is a provider of network systems and
associated professional services to service providers and operators and (ii)
Spacenet, which provides managed services for enterprises and businesses through
our U.S. Subsidiary, Spacenet Inc., for consumers through our U.S. subsidiary,
StarBand Communications Inc. and for rural communities through Spacenet Rural
Communications.For a description of principal markets and customers, see Note
15.
|        
|         |  |         | On February 24, 2004, the Company commenced trading its ordinary
shares on the Tel Aviv Stock Exchange in addition to the Nasdaq
National Market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        
|         |  | b.      | StarBand Communications Inc.:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        
|         |  |         | As of December 31, 2001, the Group held approximately 34.9% of the
outstanding shares of StarBand Communications Inc., a North American
broadband satellite internet service provider (StarBand). On May
31, 2002, StarBand filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. During the bankruptcy
proceeding, the Company provided StarBand with approximately $ 14
million of debtor-in-possession financing, the majority of which
was in the form of transponder capacity, and additional financing of
approximately $ 11.2 million primarily in services and equipment
financing. All amounts provided, including the debtor-in-possession
financing, were recorded as equity in losses of affiliated companies
in the amount of approximately $ 25.2 million. As of December 31,
2002, the carrying amount of the investment in StarBand amounted to
zero.                                                                                                                                                                          
|        
|         |  |         | In November 2003, StarBand received approval from the U.S. Bankruptcy
Court in Delaware to emerge from its Chapter 11 proceeding and to
implement a reorganization plan. As part of StarBands plan of
reorganization, and in settlement of all claims against StarBand by
its banking lenders and the Company in accordance therewith,
StarBands bank debts and approximately $ 84 million of debt to the
Company were converted to equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        
|         |  |         | Pursuant to StarBands plan of reorganization, all equity interests
in StarBand prior to its emergence from its bankruptcy proceeding
were called and new shares were issued. Of this issuance to the
Company and certain banks, the Company was issued 3,839 shares of
common stock which represents 49.1% of the issued shares (based upon
a one for one conversion ratio of preferred to common stock). The
preferred stock, which is all held by Bank Leumi LeIsrael BM, has
certain rights to receive additional proceeds from the sale of all,
or substantially all, of StarBands shares or assets, in accordance
with the formulas set forth in the Amended and Restated Certificate
of Incorporation, but does not provide for a preference in the event
of a liquidation of its assets or in the event of a distribution of
dividends. The preferred shares also hold certain rights of
anti-dilution with respect to the exercise of warrants outstanding.                                                                                                                      

F - 11

---

---



|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------- |  | --------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- |  | GENERAL (Cont.)
|        
|         |  |                 | In addition, StarBand and the Company entered into three agreements that became
effective upon StarBands emergence from Chapter 11: (i) a Restated Master
Agreement for the supply of equipment and services; (ii) a Note and Loan
Agreement providing for the repayment of $ 14 million of financing provided by
the Company to StarBand during 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. As of December 31, 2003,
StarBand utilized $ 2.3 million of this amount. As of December 31, 2003, the
excess of losses over the investment in StarBand amounted to approximately $ 0.2
million (See Note 4).                                                                                                                                                                                                                               
|        
|         |  |                 | In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). The objective of FIN 46 is to improve
financial reporting by companies involved with variable interest entities. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of the entitys residual
returns or both. The consolidation requirements of FIN 46 apply to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to entities established before January 31, 2003, in the first fiscal year
or interim period ending after March 15, 2004. Since StarBand was established
before January 31, 2003, FIN 46 was not applicable as of December, 31, 2003.
|        
|         |  |                 | Upon emergence from Chapter 11 and as of December 31, 2003, the Company
determined that it did not control StarBand since it did not hold the majority
of the voting interest of StarBand and it could not gain control over StarBand,
except through acquisition of shares from other shareholders. As such, as of
December 31, 2003 StarBand was accounted for under the equity method of
accounting in accordance with APB 18 and the excess of losses over the
investment in StarBand amounted to approximately $ 0.2 million. StarBands board
of directors is currently comprised of three members, all of which are senior
management of the Group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        
|         |  |                 | As of January 1, 2004 the Company evaluated the applicability of FIN 46 on its
investment in StarBand. In accordance with FIN 46, variable interests are
contractual, ownership, or other money interests in an entity that changes with
changes in the entitys net assets value. The Company believes the equity
investment in StarBand, as well as the outstanding Note, Loan Agreement and the
commercial Master Agreement between the companies, Constitute a variable
interest in StarBand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        
|         |  |                 | The Company analyzed whether StarBand can finance its activities without
additional subordinated financial support from other parties and concluded that
the equity investment at risk was not greater than the expected losses of the
entity. Accordingly the Company believes that StarBand is a Variable Interest
Entity (VIE).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F - 12

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------- |  | --------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- |  | GENERAL (Cont.)
|        
|         |  |                 | As StarBand is considered a VIE, the new consolidation model, under FIN 46
applies. The Company performed an analysis on which it allocated the expected
losses and expected residual returns to the Company and to the other investors
in StarBand using expected cash flows derived by projecting possible cash flows
and assigning each projection with a probability weight. Through its analysis,
the Company concluded that it absorbs the majority of StarBands expected losses
and receives the majority of the residual return. Accordingly the Company
believes that the Company is the primary beneficiary of StarBand, and therefore
StarBand should be consolidated into the Companys consolidated financial
statements.
|        
|         |  |                 | Following is a condensed balance sheet of StarBand as of January 1, 2004, the
time StarBand was consolidated for the first time:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                           |  |                                          |        |  
|------------------------------------------ |  | ---------------------------------------- | ------ | -
|                                           |  | January 1,2004
U.S. dollars
in thousands
|                                          
|Current assets                             |  |                                          | 4,264  |  
|Non-current assets                         |  |                                          | 13,010 |  
|                                           |  |                                          |       
|Total assets                               |  |                                          | 17,274 |  
|                                           |  |                                          |       
|                                          
|Current liabilities                        |  |                                          | 7,316  |  
|Non-current liabilities                    |  |                                          | 10,508 |  
|Shareholders equity                       |  |                                          | (550   | )
|                                           |  |                                          |       
|Total liabilities and shareholders equity |  |                                          | 17,274 |  
|                                           |  |                                          |       

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | According to the transition provision of FIN 46, the net amount added
to the balance sheet of the Company and the amount of previously
recognized interest in StarBand shall both be recognized as an
accumulated effect of an accounting change. The accumulated effect as
of January 1, 2004 was $ 0.6 million.In addition, a negative
goodwill of approximately $ 11.6 million was recorded as a result of
the consolidation of StarBand, which offset StarBands non-current
assets.                                                                                                                                                                                                                                                                               
|
| |  |    | Subsequent to December 31, 2004, the Group announced the purchase of
all of the remaining shares in StarBand. See also Note 16b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | c. | rStar Corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |    | As of December 31, 2000, the Group held approximately 66% of the
outstanding shares of rStar Corporation (rStar), then a public
company traded on the Nasdaq National Market. In April 2001, the
Group signed an agreement with rStar, which was amended in September
2001 and again in December 2001. According to the amended agreement,
rStar acquired StarBand Latin America (Holland) BV (StarBand Latin
America), a wholly-owned subsidiary, from the Group in exchange for
43,103,448 shares of rStar common stock. rStar also reacquired
approximately 29% of its common stock from its shareholders (other
than from shares held by the Group) in exchange for 23,305 ordinary
shares of the Company and cash consideration in the amount of $ 10
million.

F - 13

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------- |  | --------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- |  | GENERAL (Cont.)
|        
|         |  |                 | Pursuant to this acquisition and tender offer, consummated on August
2, 2002, the Group held approximately 85% of rStars outstanding
common stock. Pursuant to the amended agreement, in the event
StarBand Latin America did not reach certain net income levels in the
two years in the period ending June 2004, rStar shareholders were to
be entitled to receive in each of these two years, cash consideration
in the amount of $ 2.5 million or $ 5 million per year, subject to
those results (the special distribution).                                                                                                                
|        
|         |  |                 | The Company guaranteed the payment of the special distribution. In
2002, the Group assessed that it was probable that the special
distribution would need to be paid for the second year and as such,
provided a provision for $ 5 million for this contingent liability.                                                                                                                                                                                                                                                                                                                                                                          
|        
|         |  |                 | In 2003, the Group provided an additional provision for $ 5 million
for contingent liabilities with respect to the minority shareholders
of rStar.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        
|         |  |                 | In 2002, the Company recorded an impairment of the remaining goodwill
of $ 3.1 million as of January 1, 2002 upon the adoption of SFAS No.
142, Goodwill and Other Intangible Assets (SFAS 142), which is
included in the cumulative effect of a change in an accounting
principle. A further impairment of rStar goodwill, which arose
subsequent to the adoption of SFAS 142 in the amount of $ 13 million,
was recorded in operating expenses. In 2003, the Company recorded an
impairment of rStar goodwill, which arose in 2003 in the amount of $
5 million, in operating expenses (see note 11b).                                       
|        
|         |  |                 | Effective November 25, 2003, the Company entered into an agreement
with certain rStar minority shareholders to acquire an additional
9.25% of rStar shares (9,123,555 shares) for $ 0.60 per share in
cash. In addition, at that time, the Company agreed to pay to certain
of the minority shareholders, who had been directors in rStar in the
past, an amount of $ 950,000 in consideration of the waiver of the
Companys obligation to pay directors and officers insurance until
2006. Since this amount was paid to the minority shareholders as
former directors and not as shareholders, this amount was recorded as
an operating expense.
|        
|         |  |                 | Following the aforementioned acquisition, the Company held more than
90% of rStars Common Stock. As such, on April 7, 2004, the Company
completed a short-term merger with rStar, by acquiring the remaining
5,398,745 shares for $ 0.60 per share in cash, pursuant to which the
Company became the 100% owner of all outstanding shares of rStar.
Concurrent with the short-form merger, the following transactions
occurred:                                                                                                                                                                                                                   

| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 1. | rStar purchased the vested stock options of its CEO (see Note 9c)
in consideration of $ 440,000 ($ 0.60 less the exercise price for
each option).                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | 2. | rStar purchased all its vested employees stock options in
consideration of $ 674,000 ($ 0.60 less the exercise price for each
option). This acquisition was accounted for under FIN 44 Accounting
for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25 and EITF 00-23 Issues Related
to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44 as a modification of a stock based
compensation arrangement. Accordingly the consideration of $ 674,000
was recorded as compensation expenses.

F - 14

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | --------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- |  | GENERAL (Cont.)
|        
|         |  |                 | Immediately following the consummation of the acquisition, a Form 15
was filed with the SEC and rStars common shares were subsequently
delisted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        
|         |  |                 | The Company accounted for the acquisition of the remaining minority
interest in rStar based on the purchase method of accounting in
accordance with SFAS No. 141 Business Combination (SFAS 141). The
Company used the Discounted Cash Flow method to evaluate the value of
the purchased shares of rStar.                                                                                                                                                                                                                                                                                                                                                                             
|        
|         |  |                 | According to this method, the value was approximately $ 1.1 million.
The consideration paid by the Company for the shares purchased from
the minority interest holders was approximately $ 8.7 million. The
difference between the consideration for the shares and the value of
the shares, in the amount of $ 7.6 million was attributed to the
settlement of the $ 10 million contingent liabilities described
above. The reversal of the $ 10 million accrual against the payment
for the settlement, net of the insurance payment and consideration
paid for the employees options results in a gain of $ 0.2 million,
which was recorded as a gain from derecognition of liability.
|        
|         |  |                 | Furthermore, the Company recorded a negative goodwill in the amount
of $ 1.7 million, representing the excess of minority interest in the
Companys books over the value of the minority held common shares.
The negative goodwill was allocated to the assets purchased.                                                                                                                                                                                                                                                                                                                                                                                                                
|        
|         |  | d.              | Servicio Satelital S.A. and Spacenet International Services Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        
|         |  |                 | In September 2004, the Company closed an agreement for the sale of
Spacenet International Services Inc. and it only subsidiary, Servicio
Satelital S.A., an Argentinean company. The consideration received
was $ 0.6 million paid upon the closing and an additional of $ 0.5
million to be paid in installments through September 2006. The
Company recorded a loss from this transaction in the amount of
approximately $ 0.2 million.                                                                                                                                                                                                                                                

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | e. | Restatement of financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |    | As
described in Note 10c. to the consolidated financial statements, in April 2004, the
Company revised the terms of its loan from Bank Hapoalim. In its previously filed
financial statements, the modification of the terms of the loan was accounted for as an
extinguishment of the debt that had been recorded prior to the modification and the
recognition of a new debt, based on the fair value of the debt immediately after the
modification of the terms of the loan. In accounting for the modification of the terms of
the old debt as an extinguishment of that debt, the Company did not eliminate all balances
related to the debt recorded in its financial statements at the date of the modification
of the terms of the loan and inadvertently did not write-off in its accounting for the
extinguishment accrued interest of approximately $15.5 million that had been recorded as a
deferred liability in connection with its March 2003 troubled debt restructuring.

F - 15

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The  elimination of the debt's accrued  interest  creates an "excess" of book value over
fair                      value of the modified  debt at the date of debt
 extinguishment.  Because Bank  Hapoalim is a                      related party the
 extinguishment  gain from the  transaction  has been recorded as an equity
                     contribution.  Future interest accruals arising under the new loan
agreement will be expensed                      as incurred in current and future
 periods'  income  statements  (instead of  decreasing  the                      accrued
 interest  that had been  recorded in March 2003).  Based on this  updated  analysis,
                     amounts  previously  reported  have been revised and the
 accompanying  financial  statements                      restated.
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | The impact of the aforementioned  restatement with respect to the financial  statements as of
                     December 31, 2004 and for the year then ended is summarized below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | Consolidated statements of operations data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                                  | Year ended December 31, 2004
|------------------------------------------------- | ----------------------------
|
|
|
|
|Financial income (expenses), net                  |                             
|                                                  |                             
|                                                  |                             
|Income (loss) before taxes on income              |                             
|                                                  |                             
|                                                  |                             
|Income (loss) after taxes on income               |                             
|                                                  |                             
|                                                  |                             
|Income (loss) from continuing operations, before  |                             
|cumulative effect of a change in an accounting    |                             
|principle and loss from discontinued operations   |                             
|                                                  |                             
|                                                  |                             
|Net income (loss)                                 |                             
|                                                  |                             
|                                                  |                             
|Basic earnings (loss) per share from continuing   |                             
|operations                                        |                             
|                                                  |                             
|                                                  |                             
|Diluted earnings (loss) per share from continuing |                             
|operations                                        |                             
|                                                  |                             
|                                                  |                             
|Basic net earnings (loss) per share               |                             
|                                                  |                             
|                                                  |                             
|Diluted net earnings (loss) per share             |                             
|                                                  |                             
|                                                  |                             

F - 16

---

---



|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

| |  |  |                    
| |  |  | -------------------
|
| |  |  | Balance sheet data:

|                                              | December 31, 2004
|--------------------------------------------- | -----------------
|
|
|
|
|Accrued expenses                              |                  
|                                              |                  
|                                              |                  
|Total current liabilities                     |                  
|                                              |                  
|                                              |                  
|Accrued interest related to restructured debt |                  
|                                              |                  
|                                              |                  
|Total long-term liabilities                   |                  
|                                              |                  
|                                              |                  
|Additional paid in capital                    |                  
|                                              |                  
|                                              |                  
|Accumulated deficit                           |                  
|                                              |                  
|                                              |                  
|Total shareholders' equity                    |                  
|                                              |                  

| |  |  |                
| |  |  | ---------------
|
| |  |  | Cash flow data:

|                                                    | Year ended December 31, 2004
|--------------------------------------------------- | ----------------------------
|
|
|
|
|Net income (loss)                                   |                             
|                                                    |                             
|                                                    |                             
|Decrease in accrued expenses                        |                             
|                                                    |                             
|                                                    |                             
|Net cash provided by (used in) operating activities |                             
|                                                    |                             
|                                                    |                             
|Non-cash transactions:                              |                             
|Gain from extinguishment of Bank Hapoalim loan -    |                             
|classified as Additional paid-in capital            |                             
|                                                    |                             

F - 17

---

---



|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 is incurred in Dollar. 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 the
average exchange rate for the period. The resulting translation
adjustments are reported as a component of shareholders equity in
accumulated other comprehensive income (loss).               
|        
|         |  | c.                                                                                                                                                       | Principles of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        
|         |  |                                                                                                                                                          | The consolidated financial statements include the accounts of the
Company and its wholly owned, majority-owned and controlled
subsidiaries. The accounts for VIEs as described by FIN 46 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.                                                                                                                                                                                                                                                                                                                                                                 

F - 18

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                                         |                                                                                                                                                                                                                                                                                           
|-------- |  | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  | e.                                      | Short-term restricted cash:                                                                                                                                                                                                                                                               
|        
|         |  |                                         | Short-term restricted cash is primarily invested in certificates of
deposit, which mature within one year. It is used as collateral for
the lease of the Groups offices, a sale and lease back transaction
and performance guarantees to customers and bear weighted interest as
follows:

|Weighted averageinterest rate
|-----------------------------
|                             
|In
      Dollars             
|In Other
      currencies    

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | f. | Restricted cash held by trustees:                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |    | Short-term and long-term restricted cash held by trustees is
primarily invested in certificates of deposit, which mature within
one year. As of year end, 94% of the total amount is linked to the
Dollar and 6% is linked to the Colombian Peso, bears interest at
rates of 1.35% and 7.00%, respectively, and is 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
impairment loss is recognized in the consolidated statement of
operations (see Note 11b).                                                                               
|
| |  |    | Cost is determined as follows:                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |    | Raw materials, parts and supplies - using the average cost method
with the addition of allocable indirect costs.                                                                                                                                                                                                                                                                                                                      
|
| |  |    | Work-in-progress - represents the cost of manufacturing with the
addition of allocable indirect manufacturing costs.                                                                                                                                                                                                                                                                                                                  
|
| |  |    | Finished products  calculated on the basis of direct manufacturing
costs with the addition of allocable indirect manufacturing costs.                                                                                                                                                                                                                                                                                                
|
| |  | h. | Long-term restricted cash:                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |    | Long-term restricted cash is primarily invested in certificates of
deposit, which mature in more than one year, is linked to the dollar
and bear an annual weighted average interest rate of 1.80%. This
long-term restricted cash is used as collateral for the lease of the
Groups offices, a sale and lease back transaction, performance
guarantees to customers and loans.                                                      

F - 19

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------- |  | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  | i.                                      | Investment in affiliated companies:                                                                                                                                                                                                                                                                                                                                                                                                     
|        
|         |  |                                         | In these consolidated financial statements, affiliated companies are
companies held by the Company to the extent of 20% or more (which are
not subsidiaries), where the Company 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 Company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
Company does not have the ability to exercise significant influence
over operating and financial policies of the investments.                                                                                                                                                                                                                                            
|        
|         |  |                                         | The Company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 (see Note 11b).                                                                                                                 
|        
|         |  | k.                                      | Long-term trade receivables:                                                                                                                                                                                                                                                                                                                                                                                                            
|        
|         |  |                                         | Long-term receivables from extended 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 interest
income in the accompanying statements.                                                             
|        
|         |  | 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 - 12.5                                                                                                    
|Office furniture
      and equipment     |  | 5 -
      17                                                                                                
|Vehicles                                 |  | 7                                                                                                           
|Leasehold
      improvements             |  | Over the term
      of the lease orthe useful
      life ofthe
      improvements, whicheveris
      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.

F - 20

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------- |  | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  | m.                                      | Intangible assets and deferred charges:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        
|         |  |                                         | Intangible assets and deferred charges 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
accordable with FAS 142.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        
|         |  | n.                                      | Impairment of Long-Lived Assets and Long-Lived Assets to be
disposed of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        
|         |  |                                         | The Company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. 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. The impairment loss
shall reduce the carrying amount of the long-lived assets of a Group
covered by SFAS 144 on a pro-rata basis using the relative carrying
amounts of those assets. However, the carrying amount of a long-lived
asset of the Group would not be reduced below its fair value, if
determinable. 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 11b).
|        
|         |  | 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. Any impairment
loss is recognized in the consolidated statement of operations (see
Note 11b).                                                                                                                                                                                                                                                                                                                                          

F - 20

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------- |  | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  | 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 VSATs and hubs and services
include access to and communication via satellites (space segment),
installation of network equipment, telephony 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 Company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. The Group
does not grant rights of return. Service revenues are recognized
ratably over the contractual period or as services are performed.                                                                                                                                                                   
|        
|         |  |                                         | Arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets are recognized in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables (EITF 00-21).                                                                                                                                                                                                                                                                                                                                                                          
|        
|         |  |                                         | A multiple-element arrangement 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.                                                                                                                                                                                                                                                                                                      
|        
|         |  |                                         | 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 others 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.                     
|        
|         |  |                                         | Revenue from products and services under operating leases of
equipment are recognized ratably over the lease period, in accordance
with SFAS No. 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F - 22

---

---

|GILAT SATELLITE NETWORKS LTD.
AND ITS SUBSIDIARIES
|--------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------- |  | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  | q.                                      | Research and development:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        
|         |  |                                         | Research and development expenses, net of grants received, are
charged to expenses as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        
|         |  | r.                                      | Grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        
|         |  |                                         | The Company received royalty-bearing grants and non-royalty-bearing
grants from the Government of Israel, U.S.-Israel Science and
Technology Foundation (USISTF), from SES Global S.A (see Note 8d)
and from other funding sources, for funding 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 amounted to $ 3.9 million, $ 5.1
million and $ 5.3 million in 2002, 2003 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                
|        
|         |  |                                         | As for one-time expense related to the settlement with the Office of
the Chief Scientist in the Israeli Ministry of Industry and Trade
(OCS) program. (see Note 13g).                                                                                                                                                                                                                                                                                                                                                                         
|        
|         |  | s.                                      | Accounting for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        
|         |  |                                         | The Company has elected to follow APB No. 25 Accounting for Stock
Issued to Employees (APB 25) and FASB Interpretation (FIN) No.
44 Accounting for Certain Transactions Involving Stock Compensation
(FIN 44) in accounting for its employee stock option plans. Under
APB 25, when the exercise price of the Companys stock options is
less than the market price of the underlying shares on the date of
grant, compensation expense is recognized.                                                                                
|        
|         |  |                                         | The Company applies SFAS No. 123 Accounting for Stock Based
Compensation (SFAS 123) and EITF 96-18 Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services (EITF 96-18) with
respect to options issued to non-employees. SFAS 123 requires use of
an option valuation model to measure the fair value of the options on
the date of grant.                                                                                                           
|        
|         |  |                                         | The Company adopted the disclosure provisions of SFAS 148,
Accounting for Stock-Based Compensation - Transition and Disclosure
(SFAS 148), which amended certain provisions of SFAS 123. The
Company continues to apply the provisions of APB 25 in accounting for
stock-based compensation.                                                                                                                                                                                                                                                

F - 23

---

---

|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|-------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  |                                         | Pro forma information regarding the Companys net income (loss) and net earnings
(loss) per share is required under SFAS 123 and has been determined as if the Company had accounted for its employees
share options under the fair value method of SFAS 123. The fair value of these options is amortized over their vesting
period and estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average
 assumptions: risk-free interest rates of 3% for 2002, 2003 and 2004. A dividend yield of 0% for each of those years;
 a volatility factor of the expected market price of the Companys ordinary shares of 0.73 for 2002, 0.43 for 2003 and
0.33 for 2004; and a weighted average expected life of the option of 3 years for each of those years.
|        
|         |  |                                         | The weighted average of the fair value of options granted for which the exercise
price on the grant date equals the market price was $ 38.82, $ 2.49 and $ 1.66 during 2002, 2003 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        
|         |  |                                         | The weighted average of the fair value of options granted for which the
 exercise price on the grant date was higher than the market price was $ 0, $ 1.39 and $ 0.89 during 2002, 2003
and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        
|         |  |                                         | 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,                         
|                                                                                                                |  | 2002                                             |          | 2003 |  | 2004         
|                                                                                                                |  | U.S. dollars In thousands(except per share data)
|                                                                                                                |  |                                                  |          |      |  | (as restated)
|                                                                                                                |  |                                                  |          |      |  |               |         |   |  |   |         |  
|Net income (loss) as reported                                                                                   |  | $                                                | (348,204 | )    |  | $             | 143,631 |   |  | $ | (11,535 | )
|                                                                                                               
|Add: stock based employee compensation
   expenses included in reported net income (loss)
    - intrinsic value |  |                                                  | -        |      |  |               | 91      |   |  |   | -       |  
|                                                                                                               
|Deduct: total stock-based employee compensation
   expense determined under fair value based
   method          |  |                                                  | (12,896  | )    |  |               | (2,580  | ) |  |   | (1,017  | )
|                                                                                                                |  |                                                  |          |      |  |               |         |   | 
|                                                                                                               
|Pro forma net income (loss)                                                                                     |  | $                                                | (361,100 | )    |  | $             | 141,142 |   |  | $ | (12,552 | )
|                                                                                                                |  |                                                  |          |      |  |               |         |   | 
|                                                                                                               
|Basic net earnings (loss) per share as reported                                                                 |  | $                                                | (295.33  | )    |  | $             | 12.09   |   |  | $ | (0.52   | )
|                                                                                                                |  |                                                  |          |      |  |               |         |   | 
|                                                                                                               
|Diluted net earnings (loss) per share as reported                                                               |  | $                                                | (295.33  | )    |  | $             | 11.31   |   |  | $ | (0.52   | )
|                                                                                                                |  |                                                  |          |      |  |               |         |   | 
|                                                                                                               
|Pro forma basic earnings (loss) per share                                                                       |  | $                                                | (306.26  | )    |  | $             | 11.88   |   |  | $ | (0.56   | )
|                                                                                                                |  |                                                  |          |      |  |               |         |   | 
|                                                                                                               
|Pro forma diluted earnings (loss) per share                                                                     |  | $                                                | (306.26  | )    |  | $             | 11.12   |   |  | $ | (0.56   | )
|                                                                                                                |  |                                                  |          |      |  |               |         |   | 

F - 24

---

---

|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|-------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------- |  | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  | t.                                      | 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.                                                                                                                                         
|        
|         |  | u.                                      | 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 and long-term restricted cash, short-term and long-term restricted cash held by trustees, trade receivables, short-term and long-term receivables in respect to capital lease and long-term trade receivables.                                                                                                                                                                                                                                                                                                                                                            
|        
|         |  |                                         | The majority of the Groups cash and cash equivalents 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 Dollar deposits and in Colombian Peso deposits with major banks in Colombia and in the U.S. As of December 31, 2004, restricted cash held by the trustees amounted to approximately $ 29.6 million. The Company is entitled to 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 in respect with capital leases and long-term trade receivables of the Group are 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 $ 14.0 million and $ 11.3 million, respectively). 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 - 25

---

---

|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|-------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------- |  | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  |                                         | A significant portion of the Groups restricted cash held by
trustees, trade receivable 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        
|         |  |                                         | The Group has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        
|         |  | v.                                      | Retirement 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 made 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, 2002, 2003 and 2004, amounted to approximately $ 1.9 million, $ 6.8 million and $ 3.4 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        
|         |  |                                         | The severance pay expenses for the year 2003 include expenses in an amount of $ 3.2 million as per the settlement agreement with the retired management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        
|         |  |                                         | 401K profit sharing plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        
|         |  |                                         | The Company has a number 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 2002, 2003 and 2004 for all the plans were $ 0.9 million, $ 0.5 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.

F - 26

---

---

|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|-------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------- |  | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  | w.                                      | 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 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 $ 4.9 million and $ 15.5 million as of December 31, 2003, respectively and $ 10.1 million and $ 16.2 million as of December 31, 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        
|         |  | x.                                      | 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 year. Diluted net earnings (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each year, plus dilutive potential ordinary shares considered outstanding during the year, in accordance with SFAS No. 128, Earnings Per Share.                                                                                                                                                                                                                                                                                                                                                                                  
|        
|         |  |                                         | The difference between the weighted average number of shares used in computing basic net earnings per share and the weighted average number of shares used in computing diluted net earnings per share for the year ended December 31, 2003 is derived from potential ordinary shares attributable to the convertible subordinated notes and stock options. For 2002, the shares attributable to the convertible subordinated notes and stock options have been excluded from the calculation of the diluted net loss per ordinary share and for 2004, the shares attributable to the convertible subordinated notes, stock options and warrant granted to Bank Hapoalim have been excluded from the calculation of the diluted net loss per ordinary share because such securities were anti-dilutive.
|        
|         |  |                                         | In the year ended December 31, 2003, there was an adjustment to net income in computing diluted earnings per share to exclude interest expenses related to the convertible subordinated notes in the amount of $ 1.4 million. In the years ended December 31, 2002 and 2004, there were no adjustments to net loss in computing diluted loss per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                

F - 27

---

---

|                                                 
|-------------------------------------------------
|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------- |  | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  |                                         | Convertible subordinate notes, outstanding stock options and warrant to the bank to
purchase 495,875 ordinary shares in 2002, 3,487,320 ordinary shares in 2003 and 9,990,282
ordinary shares in 2004 were outstanding, but were not included in the computation of diluted
earnings per share because a) the Company had a loss; or b) the exercise prices of the
convertible subordinate notes, outstanding stock options and warrant were greater than the
average market price of the ordinary shares and, therefore, the effect would have been
anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        
|         |  | y.                                      | Impact of recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        
|         |  |                                         | In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151,
 Inventory Costs, an amendment of ARB No. 43, Chapter 4. (SFAS 151). SFAS 151 amends
ARB No. 43, Chapter 4, to clarify that abnormal amount of idle facility expense, freight
handling costs and wasted materials (spoilage) should be recognized as current-period
charges. In addition, SFAS 151 requires that allocation of fixed production overheads to
 inventory based on the normal capacity of the production facilities. SAFS 151 is effective
 for inventory costs incurred during fiscal years beginning after June 15, 2005. The
 Company does not expect that the adoption of SFAS 151 will have a material effect on
 its financial position or results of operations.                                                                                                                                                                                                                                                                                                                               
|        
|         |  |                                         | In December 2004, the FASB issued Statement of Financial Accounting Standard No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS 153). The guidance
 in APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29), is based on the
 principle that exchanges of nonmonetary assets should be measure based on fair value of
 the assets exchanged. APB 29 included certain exceptions to that principle. SFAS 153
 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets
 and replaces it with a general exception for exchanges of nonmonetary assets that do not
 have commercial substance. A nonmonetary exchange has commercial substance if the future
 cash flows of the entity are expected to change significantly as a result of the exchange. SFAS
 153 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning after
 June 15, 2005. The Company does not expect that the adoption of SFAS 153 will have a material effect on
its financial position or results of operations.
|        
|         |  |                                         | On December 16, 2004, the FASB issued FASB Statement No. 123 (Revised), Share Based Payment, which is revision of
 FASB Statement No. 123, Accounting for Stock Based Compensation. SFAS 123R supersedes APB Opinion No. 25, Accounting
 for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flow. Generally, the approach in
 SFAS 123R is similar to the approach described in Statement 123. However, SFAS 123R requires all share-based payments
 to employees, including grants of employee stock options, to be recognized in the income statement based on their fair
 value. Pro forma disclosure is no longer an alternative.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |  |                                         | SFAS 123R must be adopted no longer than July 1, 2005. Early adoption is permitted in periods in which financial
 statement have not yet been issued. The Company expects to adopt SFAS 123R on July 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F - 28

---

---

|                                                 
|-------------------------------------------------
|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |                                         |                                                                                   
|-------- |  | --------------------------------------- | ----------------------------------------------------------------------------------
|NOTE 2:- |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|        
|         |  |                                         | SFAS 123R permits companies to adopt its requirement using one of the two methods:

| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 1. | A modified prospective method in which compensation cost is recognized beginning with the effective date (a)
 based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based
 on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that
 remain unvested in the effective date.
|
| |  |  | 2. | A modified retrospective method which includes the requirements of the modified prospective method described
above, but also permits entities to restate based in the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either: (a) all prior periods presented or (b) prior interim period of the year of adoption.                                      

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | The Company plans to adopt SFAS 123R using the modified prospective method. As permitted by SFAS 123, the Company
 currently accounts for share based payments to employees using APB 25s intrinsic value method and, as such, generally
 recognizes no compensation cost for employees stock options. Accordingly, the adoption of SFAS 123R fair value method
will have a significant impact in the Companys result of operations, although it will have no impact on its overall
 financial position. The impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on
levels of share based payments granted in the future. However, had the Company adopted SFAS 123R in prior periods, the
 impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net
 income and earnings per share in Note 9b.
|
| |  | z. | Reclassification:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |    | Certain 2002 and 2003 figures have been reclassified to conform to the 2004 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F - 29

---

---

|                                                 
|-------------------------------------------------
|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |             |                                                
|-------- |  | ----------- | -----------------------------------------------
|NOTE 3:- |  | INVENTORIES
|        
|         |  | a.          | The inventories are comprised of the following:

|                                  |  |                           |        |      |  |   |        | 
|--------------------------------- |  | ------------------------- | ------ | ---- |  | - | ------ | 
|                                  |  | December 31,             
|                                  |  | 2003                      |        | 2004
|                                  |  | U.S. dollars in thousands
|Raw materials, parts and supplies |  | $                         | 8,731  |      |  | $ | 5,598  | 
|Work in progress                  |  |                           | 7,451  |      |  |   | 5,553  | 
|Finished products                 |  |                           | 21,578 |      |  |   | 12,126 | 
|                                  |  |                           |        |      |  |  
|                                 
|                                  |  | $                         | 37,760 |      |  | $ | 23,277 | 
|                                  |  |                           |        |      |  |  

| |  |    |                                                               
| |  | -- | --------------------------------------------------------------
| |  | b. | As for write-off of inventory and other charges, see Note 11b.

|         |  |                                                                           |                                                                                                              
|-------- |  | ------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------
|NOTE 4:- |  | INVESTMENTS IN AFFILIATED COMPANIES AND EXCESS OF LOSSES OVER INVESTMENTS
|        
|         |  | a.                                                                        | The investments in affiliated companies and excess of losses over investments are comprised of the following:

|                                        |  |                           |         |      |  |   |        |  
|--------------------------------------- |  | ------------------------- | ------- | ---- |  | - | ------ | -
|                                        |  | December 31,             
|                                        |  | 2003                      |         | 2004
|                                        |  | U.S. dollars in thousands
|Cost                                    |  | $                         | 26,303  |      |  | $ | 2,388  |  
|Share in accumulated losses             |  |                           | (28,846 | )    |  |   | (4,490 | )
|                                        |  |                           |         |      |  |  
|                                       
|Total excess of losses over investments |  | $                         | (2,543  | )    |  | $ | (2,102 | )
|                                        |  |                           |         |      |  |  

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | b. | Since StarBand was consolidated as of January 1, 2004, it is no longer included
under investments in affiliated companies, see Note 1b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | c. | Investment in Satlynx                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |    | In May 2002, the Company completed an agreement with SES Global S.A (formerly known as SES Finance S.A), a related
 party of the Group, to form Satlynx S.A. (Satlynx), a company that provides two-way satellite broadband communications
 services to enterprises, consumers and Small-office home-office (Soho) users in Europe. The Company and SES Global
 S.A contributed cash and in kind contributions, which included existing facilities, transponders capacity, hubs,
terminals, technology and technical and marketing assistance (some of these assets were immediately purchased by Satlynx
from SES Global S.A and from the Company with the cash investment). As part of the agreement, the Company sold to Satlynx
its existing European operations and service-based enterprise customers in France, Italy, Germany, Holland, England and
Czechoslovakia for $ 12 million in cash and approximately $ 2.5 million in a note (the Satlynx Note).

F - 30

---

---

|                                                 
|-------------------------------------------------
|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------- |  | --------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4:- |  | INVESTMENTS IN AFFILIATED COMPANIES AND EXCESS OF LOSSES OVER INVESTMENTS (Cont.)
|        
|         |  |                                                                                   | In June 2003, Alcatel Space and Skybridge LP, subsidiaries of Alcatel, invested certain intangible assets and committed
 to provided certain services to Satlynx, including technical, engineering and marketing support,  8 million in cash
 and in addition in-kind contributions, in exchange for approximately 10% of Satlynx (decreasing the Companys ownership
 in Satlynx to approximately 45%). In February and March 2004, Alcatel Space and Skyridge invested in Satlynx additional
 in-kind contributions and  7 million in cash. Subsequent to these transactions, the Company holds approximately 40.6%
 of Satlynx issued shares. The Companys shareholdings may further decrease to 17%, pending negotiations currently
 underway with the shareholders of Satlynx.                                                                                                                                                                               
|        
|         |  |                                                                                   | The Company accounted for its investment in Satlynx as a contribution of assets to the newly formed entity at the
 transferors basis, which was equal to the amount of the Satlynx Note, in accordance with EITF 89-7 (as was
 codified into EITF 01-2) and APB 18. The Company has determined that it does not control Satlynx for the following
 reasons: (i) the Company owned approximately 50%, 45% and 40.6% of the outstanding shares, in May 2002, June 2003
 and March 2004, respectively, which is less than a majority of the shares; (ii) the CEO of Satlynx has been appointed
 by SES Global S.A (the other major shareholder); and (iii) the shareholders agreement entered into between the Company
 and SES Global S.A provides SES Global S.A with certain veto and management rights which enable SES Global S.A to
participate in significant financial and operating decisions that would normally be made in the ordinary course of
 business.
|        
|         |  |                                                                                   | As such, SES Global S.A has the ability to block significant business decisions that the Company might otherwise choose
 to undertake. As such, the Company ceased to consolidate its European operations as of May 1, 2002. Equity in earnings
 (losses) of affiliates companies include payments received on account of note, interest and certain receivables, which
 were all written-off in prior years. The Company recognized equity profits (losses) in the amount of ($ 4.1) million,
 ($ 1.6) million and $ 1.2 million in the years ended December 31, 2002, 2003 and 2004, respectively. During the above
 years, the Company did not record any amount on account of its shares in the affiliates losses. As of December 31, 2004,
 the excess of losses over the investment in Satlynx amounted to approximately $ 2.1 million.                                                                                                                       
|        
|         |  |                                                                                   | The Company analyzed whether Satlynx can finance its activities without additional financial support from other parties
 and concluded that the equity investment at risk was not greater than the expected losses of the entity. Accordingly
 the Company believes that Satlynx is a VIE, as defined in FIN 46.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        
|         |  |                                                                                   | As Satlynx is considered a VIE, the Company performed an analysis in which it allocated the expected losses and
expected residual returns to the Company and to the other investors in Satlynx using expected cash flows derived by
projecting possible cash flows and assigning each projection with a probability weight. Through its analysis, the Company
 concluded it does not absorb the majority of Satlynxs expected losses and does not receive the majority of the residual
 return. Accordingly the Company believes that the Company is not the primary beneficiary of Satlynx, and therefore
 Satlynx should not be consolidated into the Companys consolidated financial statements.                                                                                                                                                                                                                                                                

F - 31

---

---

|                                                 
|-------------------------------------------------
|GILAT SATELLITE NETWORKS LTD.AND ITS SUBSIDIARIES
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       

|         |  |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------- |  | ------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5:- |  | INVESTMENTS IN OTHER COMPANIES
|        
|         |  | a.                             | On June 30, 2001, the Companys subsidiary, GTHLA completed a transaction with Communication y Telefonia Rural S.A.
 (CTR) via Rural Telecommunications Chile S.A. (RT), an entity formed by CTR to facilitate this transaction,
 whereby GTHLA transferred to RT its Chilean rural telephony network, comprised of property and equipment totaling
 approximately $ 4.7 million, capitalized software totaling approximately $ 3.4 million, and inventory totaling
 approximately $ 3.1 million, in exchange for 13% of the outstanding shares of CTR.                                                                                                                                                                                                                                                                                                                                                                                                                   
|        
|         |  | b.                             | In April 2000, Gilat BV and the other shareholders of Gilat To Home Latin America (Antilles) N.V.
(formerly - Global Village Telecom (Antilles) N.V.) (GTHLA) entered into an agreement, pursuant to which the
 latter were to exchange all of their rights in GTHLA for the rights that GTHLA held in two Brazilian entities
 formed to provide telephone and other communications services in south central Brazil, and a cash payment of
 $ 5.3 million. As part of the transaction, the Company granted a $ 40 million long-term loan (the "Note"), to
 a new entity formed by those investors, in exchange for a note convertible into common shares of the new entity
equal to approximately 9.1% of the then outstanding shares of the new entity. The note bore interest at 5% per annum
and was to mature in May 2002.                                                                                                                                           
|        
|         |  |                                | On May 14, 2002, the Company accepted an amendment and restatement of the Note. Under the terms of the restated Note,
 the Note was to mature on December 27, 2002 and a portion of the interest ($ 3 million) was due in installments,
 the last of which was paid on September 30, 2002. In addition, the amended Note improved the conversion terms for
 the Company and also provided for a cash pre-payment of certain amounts to the Company in certain events. Due to
 financial difficulties of the debtors, the Note was not repaid. On June 16, 2003, the Company accepted a second
 amendment to the Note. Under the terms of the second amendment, the debtor was granted an option exercisable until
 December 31, 2003, to purchase the Note from the Company against payment to the Company of $ 4.3 million in cash and
 issuance of 2% of the issued and outstanding shares of the debtor. As of December 31, 2003, the option was exercised
 and fully paid.
|        
|         |  | c.                             | As for impairment of investment in other companies, see Note 11b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 32

---

---

|GILAT SATELLITE NETWORKS LTD. 
  AND ITS SUBSIDIARIES
|-----------------------------------------------------
|                                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS           
|                                                     

|NOTE 6:- | PROPERTY AND EQUIPMENT, NET
|-------- | ---------------------------
|         |                            
|         | a.                         

| |                                                                   |                                    |  | December
  31,              |        
| | ----------------------------------------------------------------- | ---------------------------------- |  | --------------------------- | -------
| |                                                                   |                                    |  |                             |        
| |                                                                   |                                    |  | 2003                        |        
| |                                                                   |                                    |  |                             |        
| |                                                                   |                                    |  | U.S.
  dollars in thousands |        
| |                                                                   |                                    |  |                             |        
| | Cost:                                                             |                                    |  |                             |        
| |                                                                   | Buildings and land                 |  | $                           | 90,827 
| |                                                                   | Computers and electronic equipment |  |                             | 165,626
| |                                                                   | Equipment leased to others         |  |                             | 37,156 
| |                                                                   | Office furniture and equipment     |  |                             | 12,167 
| |                                                                   | Leasehold improvements             |  |                             | 5,278  
| |                                                                   | Vehicles                           |  |                             | 258    
| |                                                                   |                                    |  |                             |        
| |                                                                   |                                    |  |                             |        
| |                                                                   |                                    |  |                             | 311,312
| | Accumulated depreciation and provision 
       for impairment (*) |                                    |  | 169,731                     |        
| |                                                                   |                                    |  |                             |        
| |                                                                   |                                    |  |                             |        
| |                                                                   | Depreciated cost                   |  | $                           | 141,581
| |                                                                   |                                    |  |                             |        

|          |                                               | (*)                                                                                                                       | The accumulated depreciated of equipment
  leased to others as of December 31, 2004 and 2003 is $ 14.3 million and $ 34.3
  million, respectively.
|--------- | --------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                               |                                                                                                                           |                                                                                                                                                   
|          | b.                                            | Depreciation expenses
  totaled $ 41.7 million, $ 23.9 million and $ 30.0 million in 2002, 2003 and
  2004, respectively.
|          |                                               |                                                                                                                           |                                                                                                                                                   
|          | c.                                            | As for impairment of
  property and equipment and other charges, see Note 11b.                                           
|          |                                               |                                                                                                                           |                                                                                                                                                   
|          | d.                                            | As for pledges and
  securities, see Note 13f.                                                                           
|          |                                               |                                                                                                                           |                                                                                                                                                   
|NOTE 7: - | INTANGIBLE ASSETS AND DEFERRED
  CHARGES, NET
|          |                                               |                                                                                                                           |                                                                                                                                                   
|          | a.                                            | Composition of
  intangible assets and deferred charges, grouped by major classifications, is
  as follows:              

| |       |                                                                                            |  | December
  31,              | 
| | ----- | ------------------------------------------------------------------------------------------ |  | --------------------------- | 
| |       | Weighted                                                                                   |  |                             | 
| |       | average                                                                                    |  | 2003                        | 
| |       | amortization                                                                               |  |                             | 
| |       | period                                                                                     |  | U.S.
  dollars in thousands | 
| |       |                                                                                            |  |                             | 
| | Cost: |                                                                                            |  |                             | 
| |       | Identifiable
  intangible assets 
      resulting from acquisitions of 
      subsidiaries |  | 12.8                        | 
| |       | Deferred income
  taxes (see 
      Note 12d)                                              |  | -                           | 
| |       | Customer
  acquisition costs                                                               |  | 6.3                         | 
| |       | Other                                                                                      |  | 2.8                         | 
| |       |                                                                                            |  |                             | 
| |       |                                                                                            |  |                             | 
| |       |                                                                                            |  | 10.7                        | 
| |       | Accumulated
  amortization and 
      provision for impairment                             |  |                             | 
| |       |                                                                                            |  |                             | 
| |       |                                                                                            |  |                             | 
| |       | Amortized cost                                                                             |  |                             | 
| |       |                                                                                            |  |                             | 

F - 33

---

---

|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

|NOTE 7: - |  | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET (Cont.)
|--------- |  | ---------------------------------------------------
|          |  |                                                    
|          |  | b.                                                 
|          |  |                                                    
|          |  | c.                                                 
|          |  |                                                    
|          |  | d.                                                 

|Year ending
 December 31, |  | In thousands
|------------------------- |  | ------------
|                          |  |             
|                          |  |             
|2005                      |  | $           
|2006                      |  |             
|2007                      |  |             
|2008                      |  |             
|2009                      |  |             
|2010 and thereafter       |  |             
|                          |  |             
|                          |  |             
|                          |  | $           
|                          |  |             

|NOTE 8:- |  | COMMITMENTS AND CONTINGENCIES
|-------- |  | -----------------------------
|         |  |                              
|         |  | a.                           
|         |  |                              
|         |  | b.                           
|         |  |                              
|         |  |                              

|                          |  |  |  | Grosscommitments          |        |  | Receivablesfrom subleases |  |   | Netcommitments
|------------------------- |  |  |  | ------------------------- | ------ |  | ------------------------- |  | - | --------------
|                          |  |  |  |                           |        |  |                           |  |   |               
|Year
 ending December 31, |  |  |  | U.S. dollars in thousands
|                          |  |  |  |                          
|                          |  |  |  |                           |        |  |                           |  |   |               
|2005                      |  |  |  | $                         | 6,062  |  |                           |  | $ | 811           
|2006                      |  |  |  |                           | 5,371  |  |                           |  |   | 631           
|2007                      |  |  |  |                           | 5,013  |  |                           |  |   | 474           
|2008                      |  |  |  |                           | 4,624  |  |                           |  |   | 237           
|2009 and thereafter       |  |  |  |                           | 35,025 |  |                           |  |   | 602           
|                          |  |  |  |                           |        |  |                           |  |   |               
|                          |  |  |  | $                         | 56,095 |  |                           |  | $ | 2,755         
|                          |  |  |  |                           |        |  |                           |  |   |               

F - 34

---

---

|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

|NOTE 8:- |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|-------- |  | -------------------------------------
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  | c.                                   
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      

|Year ending
 December 31, |  | U.S. dollars in thousands
|------------------------- |  | -------------------------
|                          |  |                          
|                          |  |                          
|2005                      |  | $                        
|2006                      |  |                          
|2007                      |  |                          
|2008                      |  |                          
|2009 and thereafter       |  |                          
|                          |  |                          
|                          |  | $                        
|                          |  |                          

| |  |    |  | Space segment
 services expenses, mainly to SES Americom, a related party, totaled $ 25.5 million, $
 18.6 million and $ 27.4 million in 2002, 2003 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 
| |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 
| |  | d. |  | In June 2003,
 the Company entered into the development agreements with SES Global S.A, a related
 party of the Group. Under the agreements, SES Global S.A is to invest up to an aggregate
 of $ 6 million in research to be performed by the Company. In addition, the Company
 is required to pay SES Global S.A a 10% royalty per outdoor unit, as described blow,
 sold for up to a total recoup by SES Global S.A of its investment and thereafter,
 the royalties decrease to 5% per unit. Royalties will be payable for sales of product
 units which include components developed under the agreements. As of December 31,
 2004, the Company has not finalized the development and as such no royalties have
 been paid or accrued. As of December 31, 2004, the amounts invested by SES Global
 S.A amounted to $ 4.4 million, see Note 14a. |  | 

F - 35

---

---

|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

|NOTE 8:- |  | COMMITMENTS AND CONTINGENCIES (Cont.) |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------- |  | ------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |  |                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |  | e.                                    |  | In December
 2003 and October 2004, the Company received initial tax assessments for the tax
 years 1998 and 1999-2001, respectively, for approximately  $ 45 million plus $ 7 million
 in penalties based on various claims of the Israeli Tax Authorities. In January
 2005, the Company received a final tax assessment for the tax year 1998 for approximately $
 0.5 million including penalties, reduced from the $ 10.5 million in the initial tax
 assessment. The Company intends to vigorously defend itself in the 1998 and 1999-2001
 actions. In addition, the claims made by the tax authorities may also be made in
 the years 2002 through 2004. Any such claims, if substantiated and proven, could
 have a significant adverse effect on the financial condition of the Company. The
 Israeli Tax authorities and the tax authorities in the jurisdictions in which the
 Group operates might raise additional claims, which might result in payment of additional
 taxes. The Company believes that it has adequate provisions to cover those exposures
 in accordance with SFAS 5.
|         |  |                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |  | f.                                    |  | The Company
 has received notice from the Israeli Stamp Tax authorities requiring that Gilat
 disclose all documentation which may be subject to Stamp Tax duties from June 1,
 2003 to date. The authorities right to demand Stamp Tax duty is pending deliberation
 by Israels High Court. The Company intends to challenge any demands for payments
 received from the Stamp Tax authorities should such demands be received. The Company
 believes that it has adequate provisions to cover those exposures in accordance
 with SFAS 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |  |                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |  | g.                                    |  | In 2003, the
 Company entered into a consulting agreement with Israel Literage & Supply Co.
 Ltd., a company under the ownership and control of Shlomo Rodav, the Chairman of
 the Board of Directors of the Company and a related party. The agreement specifies
 management services to be provided to the Company through Mr. Rodav. Pursuant to
 the agreement, Israel Literage & Supply Co. Ltd. receives: (i) $ 25,000 per
 month; (ii) an annual bonus of 2.5% of the net profits after tax for each fiscal
 year beginning in 2003; and (iii) participation in the Companys employee stock
 option and bonus plans. In addition, Shlomo Rodav was granted 150,000 options exercisable
 at $ 5.00 per share over a three-year vesting period (see Note 9e).                                                                                                                                                                                                                                                                                                                                   
|         |  |                                       |  | In February
 2005, the Companys shareholders approved an additional payment to be made
 to Israel Literage & Supply Co. Ltd. for services rendered to the Company by
 Shlomo Rodav in his capacity as its chief executive officer from July 1, 2004 through
 December 31, 2004. The compensation approved was an additional monthly payment of $
 25,000 for the six-month period beginning July 1, 2004 and a $ 300,000 bonus for
 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |  |                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |  |                                       |  | In 2003 and
 2004, as a result of the above agreements the Company recorded an expense in the
 amount of $ 1.4 million and $ 1.0 million, respectively, which is included in selling,
 marketing, general and administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F - 36

---

---

|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

|NOTE 8:- |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|-------- |  | -------------------------------------
|         |  |                                      
|         |  | h.                                   
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      

F - 37

---

---

|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

|NOTE 8:- |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|-------- |  | -------------------------------------
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  | i.                                   
|         |  |                                      
|         |  | j.                                   
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      
|         |  |                                      

F - 38

---

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|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

|NOTE 9:- |  | SHAREHOLDERS EQUITY (DEFICIENCY) |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------- |  | --------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |  |                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  | a.                                |  | Share capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |  |                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  |                                   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |  |                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  | b.                                |  | Stock Option
 Plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |  |                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  |                                   |  | The Company
 has three stock option plans, the 1993, the 1995 and the 2003 Stock Option and Incentive
 Plans (the Plans). The 1995 plan was amended in 1997, 1998 and 1999. Under the
 Plans, options may be granted to employees, officers, directors and consultants
 of the Group. Pursuant to the Plans, as of December 31, 2004, the Company reserved
 for issuance a total of 1,704,500 ordinary shares. As of December 31, 2004, an aggregate
 of 231,789 ordinary shares of the Company are still available for future grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |  |                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  |                                   |  | Options granted
 under the Plans generally vest quarterly over 2 to 4 years, 25% of the options granted
 under the tender offer on November 27, 2001 vested immediately and the remainder
 vested quarterly over two years. Options granted in December 2003 and thereafter
 vest quarterly over two years. Those options will expire ten years from the date
 of grant. Any options, which are forfeited or canceled before expiration, become
 available for future grants. The exercise price per share under the 1993 and 1995
 plans was not less than the market price of an ordinary share at the date of grant.
 The exercise price for the 2003 Plan shall be 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. No compensation expenses in connection
 with options that were granted to employees has been charged against income in the
 years ended December 31, 2002, 2003 and 2004, except as discussed in c and d below.
|         |  |                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  |                                   |  | In January
 2002, the Companys Board of Directors resolved to accelerate the vesting period
 for all the Companys employees whose employment was to be terminated as part
 of the change of control of six European subsidiaries sold to Satlynx S.A. (see
 Note 4c). In addition to immediate vesting of all options, effective upon the change
 of control, the exercise period of the options was modified such that Satlynx employees
 have a 60-day period to exercise their options in the event their employment is
 terminated by Satlynx. The Company did not record any compensation expenses as a
 result of these modifications in accordance with FIN 44.                                                                                                                                                                                                                                                                                                                                                                                         

F - 39

---

---

|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

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

A summary of the status of the Plans as of December 31, 2002, 2003 and 2004, and
 changes during the years ended on those dates, is presented below:

|                                                  | Year ended December 31,
|------------------------------------------------- | -----------------------
|                                                  |                        
|                                                  | 2002                   
|                                                  |                        
|                                                  | Number of Options      
|                                                  |                        
|                                                  |                        
|                                                  |                        
|Options
 outstanding at the beginning of the year |                        
|Changes during
 the year:                         |                        
|Granted                                           |                        
|Exercised                                         |                        
|Expired                                           |                        
|Forfeited
 and cancelled                          |                        
|                                                  |                        
|                                                 
|Options outstanding
 at the end of the year       |                        
|                                                  |                        
|                                                 
|Options exercisable
 at the end of the year       |                        
|                                                  |                        

The options outstanding as of December 31, 2004, have been separated into ranges
 of exercise price as follows:

|Ranges
 ofexerciseprice |  |  | Optionsoutstandingas ofDecember 31,2004 |           | Weightedaverageremainingcontractuallife |  |         | Weightedaverageexerciseprice |  | Optionsexercisableas ofDecember 31,2004 |  |   | Weightedaverage exerciseprice ofexercisableOptions
|----------------------- |  |  | --------------------------------------- | --------- | --------------------------------------- |  | ------- | ---------------------------- |  | --------------------------------------- |  | - | --------------------------------------------------
|                        |  |  |                                         |           |                                         |  |         |                              |  |                                         |  |   |                                                   
|                        |  |  |                                         |           |                                         |  | (Years) |                              |  |                                         |  |   |                                                   
|                        |  |  |                                         |           |                                         |  |         |                              |  |                                         |  |   |                                                   
|$ 5.0                   |  |  |                                         | 1,132,409 |                                         |  |         | 9.0                          |  |                                         |  | $ | 5.0                                               
|$ 5.36-42.4             |  |  |                                         | 191,223   |                                         |  |         | 9.6                          |  |                                         |  | $ | 6.4                                               
|$ 77.2-79.0             |  |  |                                         | 98,191    |                                         |  |         | 7.0                          |  |                                         |  | $ | 77.6                                              
|$ 159.6-3,197.5         |  |  |                                         | 16,821    |                                         |  |         | 4.1                          |  |                                         |  | $ | 597.8                                             
|                        |  |  |                                         |           |                                         |  |         |                              |  |                                         |  |   |                                                   
|                        |  |  |                                         | 1,438,644 |                                         |  |         | 8.9                          |  |                                         |  | $ | 17.1                                              
|                        |  |  |                                         |           |                                         |  |         |                              |  |                                         |  |   |                                                   

|c. |  | In August
 2003, rStar granted 2.8 million options of rStar common stock to its CEO in accordance
 with the terms of his employment agreement. The exercise price was  $ 0.16 per share
 of common stock. The options were treated in the subsidiary under APB 25 as variable
 plan and compensation expense of  $ 764,000 has been 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 CEO (see Note
 1c), in consideration of  $ 440,000 ($ 0.60 less the exercise price for each option).
 The difference between the  $ 764,000 compensation expenses and the cash consideration
 was recorded as a reduction of selling, marketing, general and administrative expenses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

|NOTE 9:- |  | SHAREHOLDERS EQUITY (DEFICIENCY) (Cont.) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------- |  | ----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |  |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  | d.                                        | In 2003, the Company reduced the weighted exercise price of 29,016 options granted
 to its then CFO as part of a separation agreement from $ 88.6 to $ 1.26 per share.
 As a result, the Company recorded compensation expenses of $ 91,000, which is included
 in selling, marketing, general and administrative expenses in accordance with APB
 25 and FIN 44. The Companys CFO exercised those options in September and December
 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  | e.                                        | In 2003, the Company granted 150,000 stock options to its Chairman of the Board of
 Directors, a related party, in accordance with the terms of his consultancy agreement.
 The exercise price is $ 5.00 per share. The Company accounted for its options under
 the fair value method of SFAS 123 and EITF 96-18. The fair value of these options
 was estimated using a Black-Scholes option-pricing model with the following weighted-average
 assumptions for 2003 and 2004: 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
 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 2003 and 2004, the Company recorded compensation expense
 of $ 233,000 and $ 207,000, respectively which included in selling, marketing, general
 and administrative expenses. |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  | f.                                        | In 2003, the Company granted 225,000 stock options to its then CEO in accordance
 with the terms of his employment agreement. The exercise price is $ 5.00 per share.
 The options were treated under APB 25 as variable plan. No compensation expense
 has been recorded in the years ended December 31, 2003 and 2004 since the market
 price of the underlying share was lower than the exercise price of the option. All
 such options vested upon the former CEO separation from the Company in July 2004.
 All options shall expire if not earlier exercised by July 14, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  | g.                                        | 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 13f), the Company is restricted
 from paying cash dividends to its shareholders without initial approval from the
 bank.                                                                                                                                                                                                                                           
|         |  |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                  

F - 41

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|                                            | GILAT
 SATELLITE NETWORKS LTD.
|------------------------------------------- | ------------------------------
|                                            | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |                               
|                                           

|NOTE 10:- |  | RESTRUCTURING OF DEBTS |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------- |  | ---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  | a.                     | In March 2003, the Company completed a plan of arrangement with its bank lenders,
 holders of the Companys convertible subordinated notes, and certain other
 creditors (herein the arrangement). The arrangement resulted in an increase of
 share capital and additional paid-in capital in approximately $ 55.2 million, net
 of expenses in the amount of $ 2.8 million and a gain of approximately $ 185.6 million,
 net of related expenses in the amount of approximately $ 11.9 million and $ 5.7 million
 in tax expenses. The related expenses included settlement payments to outgoing management
 in the amount of $ 2.4 million and debenture issuing expenses in the amount of $ 4.1
 million. |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        | As part of the arrangement, the Company amended the following agreements, as detailed
 herein:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 4.25% Convertible
 Subordinated Notes due in 2005 (the Old Notes):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Under an Offering
 Memorandum issued at the end of February 2000, the Company issued in March 2000, $
 350 million 4.25% Convertible Subordinated Notes due 2005 (the Old Notes), traded
 in the United States on the Private Offerings, Resales and Trading through Automated
 Linkages (PORTAL) market and due March 15, 2005. As part of the arrangement, the
 Company converted the old notes into equity and New Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | In exchange
 for the Old Notes, which had a principal amount of $ 350 million plus $ 12 million
 in accrued interest, the Company issued (i) 10,104,195 ordinary shares and (ii) $
 83.3 million in principal amount of 4.00% Convertible Notes due in 2012, also called
 New Notes. The Company shall pay interest on the New Notes semiannually in arrears
 on April 1 and October 1 of each year, beginning on April 1, 2005. The first interest
 payment shall be payable with respect to the period from January 1, 2005 to April
 1, 2005. Prior to January 1, 2005, interest will be accrued and compounded semi-annually.
 The Company shall pay $ 2.5 million of the principal amount of the New Notes on each
 of April 1 and October 1, in both 2010 and 2011, and the remaining principal amount
 at maturity. The New Notes are convertible at the option of the holder into the
 Companys ordinary shares at a conversion price of $ 17.4 per ordinary share
 at any time after one year from the date of issuance of the New Notes and before
 close of business on October 1, 2012, unless the New Notes have been converted pursuant
 to a mandatory conversion clause. Commencing January 1, 2005, the Company may, at
 its option, require the conversion right to be exercised under certain circumstances
 set forth in the indenture. The collateral for the New Notes is a second priority
 security interest consisting of a floating charge on all of the Companys assets
 and a pledge of all of the shares of Spacenet Inc., a wholly owned subsidiary of
 the Company.
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The interest
 of the holders of the New Notes in the collateral is subordinated to the security
 interest granted for the benefit of the lending banks. As of December 31, 2003 and
 2004, the outstanding amount of the convertible Subordinated notes is $ 15.5 million
 and $ 16.2 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 42

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|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           
|                                            |  |                               
|NOTE 10:-
 RESTRUCTURING OF DEBTS (Cont.)   |  |                               

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. |  | Bank Hapoalim:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |  | Of the $ 102
 million in principal amount due from the Company to Bank Hapoalim in six semiannual
 payments until July 2, 2005, (i) $ 25.5 million was converted into 924,430 ordinary
 shares of the Company, (ii) $ 5.1 million was converted into New Notes of the same
 principal amount, and (iii) the remaining debt amount of $ 71.4 million remains as
 a loan on revised terms. To secure repayment of the loan, the Company granted a
 first priority security interest in favor of Bank Hapoalim consisting of a floating
 charge over all the Companys assets and pledged all of the shares of Spacenet
 Inc. held by the Company. These liens are pari passu with the charges granted in
 the framework of the arrangement to Bank Leumi and Discount Bank. Following the
 arrangement, Bank Hapoalim is considered a related party.                                                                                                                                                                                                                                                                                                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3. |  | Bank Leumi:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |  | Under the
 arrangement, Bank Leumi revised the terms of the restructured loan to include principal
 payments in the amount of $ 1 million annually during each of 2003 and 2004, and
 principal payments of $ 4 million annually during each of the years 2005 through
 2011. The loan bears interest at the six-month LIBOR rate plus 2.5%, and is secured
 by a first priority charge on the Companys real property located in Petach
 Tikva, Israel. In addition, Bank Leumi agreed to maintain its line of credit utilized
 for performance guarantees for the Companys benefit and for its direct and
 indirect subsidiaries in the then existing aggregate amount of $ 15 million for at
 least one year terminated in March 2004, subject to the limitation that continued
 availability of the line of credit may be affected by the overall collateral made
 available by the Company in support of credit used by the Company in the future
 for the issuance of guarantees. To secure the line of credit of Bank Leumi, the
 Company granted to Bank Leumi a second priority charges on its real property in
 Petach Tikva, Israel, which is pari passu with the charges granted to Discount Bank.
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4. |  | Bank Discount:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |  | Under the
 arrangement, Bank Discount agreed to maintain its performance guarantees for the
 Companys benefit and its subsidiaries in the then existing amount of $ 11 million
 for at least one year terminated in March 2004. The Companys obligations to
 Bank Discount are secured by a second priority charge on its real estate property
 in Petach Tikva, Israel, which is pari passu with the second priority charge granted
 to Bank Leumi.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F - 43

---

---

|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           
|                                            |  |                               
|NOTE 10:-
 RESTRUCTURING OF DEBTS (Cont.)   |  |                               

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. |  | SES Americom:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | Under the
 arrangement, the Company entered into a new agreement with SES Americom, a related
 party of the Group and its major supplier of satellite transponder capacity. According
 to the agreement, SES Americom agreed to allow Spacenet Inc. to defer payments of
 certain transponder capacity charges due in 2003 and 2004, with payments of those
 deferred charges to commence in 2005. As part of this agreement, the Company issued
 SES Americom 713,052 ordinary shares of the Company equal to approximately 5.5%
 of the Companys ordinary shares. The agreement reduced the Companys
 liability to SES Americom with respect to its transponder agreements with Spacenet
 Inc., which related to StarBand, from an aggregate amount of $ 26.9 million to be
 paid in 2003 to an aggregate amount of $ 13.5 million. In addition, a $ 3.5 million
 payment was deferred from 2002 to 2003. In 2002, the Company recorded a provision
 for the settlement in the amount of $ 5.7 million, representing the fair value of
 the ordinary shares issued at the closing date of the arrangement. This amount was
 reduced to $ 3.4 million at the closing date of the arrangement to reflect the actual
 fair value of the shares issued. The amounts are included in the statements of operations
 as equity in profits (losses) of affiliated companies.
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | As of March
 7, 2005, SES is no longer a reported shareholder. However, one of the Companys
 board members is an executive officer of SES Global S.A, an affiliate of SES Americom.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|6. |  | Other creditors:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | Under the
 arrangement, the Company also restructured its debt with respect to an outstanding
 loan of approximately $ 6.5 million. The revised terms of the loan included the conversion
 of $ 1.3 million into 53,386 ordinary shares and a change of the terms of the remaining
 loan in an amount of $ 5.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| | Except for
 the arrangement with Bank Leumi, the Company accounted for the troubled debt restructuring
 included in the arrangement on the basis of Combination of Types of Restructuring
 and on the basis of Modification of Terms pursuant to Statement of the Financial
 Accounting Standard (SFAS) No. 15 Accounting by Debtors and Creditors for Troubled
 Debt Restructurings, Emerging Issues Task Force (EITF) Issue No. 02-4 Debtor
s Accounting for a Modification or an Exchange of Debt Instruments in Accordance
 with FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt
 Restructurings and SFAS No. 145, Rescission of SFAS No. 4, 44 and 64, Amendment
 of SFAS No. 13, and Technical Corrections. As a result of the arrangement, the
 Company recorded the shares issued at their fair value in its shareholders
 equity at the date of the closing.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In addition,
 the Company recorded the estimated future interest payments to be made in connection
 with the repayments of the New Notes and the loans in its consolidated balance sheet
 and recognized a gain from restructuring of debts in the amount of approximately $
 185.6 million. This amount is net of related expenses in the amount of $ 11.9 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F - 44

---

---



|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           
|                                            |  |                               
|NOTE 10:-
 RESTRUCTURING OF DEBTS (Cont.)   |  |                               

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b. |  | In November
 2003, the Company completed a restructuring through conversion of debt to equity
 with its holders of the New Notes issued as part of the arrangement. Under this
 restructuring through conversion of debt to equity, the Company issued an exchange
 offer to exchange the New Notes for ordinary shares of the Company with a new conversion
 ratio, of 125 ordinary shares for each $ 1,000 of new notes in principal converted.
 Out of the $ 91.8 million carrying amount of the New Notes as of the date of the
 closing, which included $ 3.0 million accrued interest, $ 76.0 million, which included $
 2.3 million accrued interest, was converted to 9,208,270 ordinary shares, and the
 remainder is presented as convertible subordinated notes in the consolidated balance
 sheet.                                                                                                                                                                                                                                   
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |  | The Company
 accounted for this debt restructuring through conversion of debt to equity on the
 basis of grant of equity interest in full settlement pursuant to SFAS 15, EITF 02-4
 and SFAS 145. As a result of the arrangement, the Company recorded the ordinary
 shares issued at their fair value in its shareholders equity at the date of
 the closing. In addition, the Company recognized an additional gain from the restructuring
 of debt in the amount of approximately $ 58.6 million, which included the respective
 part of accrued interest that was accrued as a result of the first round of the
 restructuring of debt and net of related expenses in the amount of $ 0.2 million.                                                                                                                                                                                                                                                                                                                                         
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|c. |  | In April 2004,
 the Company further revised the terms of its loan from Bank Hapoalim, to whom it
 owes a principal debt amount of $ 71.4 million. The new loan terms reduced the principal
 installments due on July 1, 2005 and January 1, 2006 from $ 4.463 million to $ 1 million
 and $ 1.5 million respectively, with the remainder due for payment in 2012. Other
 principal payments for $ 4.463 million due semi-annually thereafter remain unchanged
 and the last installment of $ 15.3 million is due on July 2, 2012. In addition, under
 the revised loan terms, the interest on the loan was reduced from a six-month LIBOR
 rate plus 2.5% to be paid semi-annually with principal installments to the following
 new terms: (i) for each interest period commencing from April 1, 2004 until March
 31, 2008 interest due shall be six- month LIBOR plus 2% per annum, and (ii) for
 each interest period commencing from April 1, 2008 until the final maturity date
 interest due shall be six-month LIBOR plus 1.5% per annum.
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |  | In consideration
 for the banks agreement to amend the interest rates, defer principal payments
 and modify certain covenants, the bank is entitled to provide the Company with written
 instructions to issue a warrant or warrants for the purchase of its ordinary shares
 (the Warrant). The Warrant shall be issued to the bank or to third parties as
 designated by the bank (each a Holder). The maximum exercise amount that may be
 paid under the Warrant shall be equal to the then outstanding balance on the loan
 due by the Company to the bank. The Warrant can be issued at any time at the request
 of the bank between July 1, 2004 and June 30, 2007.                                                                                                                                                                                                                                                                                                                                                                  

F - 45

---

---

|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           

NOTE 10:- RESTRUCTURING OF DEBTS (Cont.)

| |  |  |  | The exercise
 price of the ordinary shares underlying the Warrant shall be equal to the average
 closing sale price of the Companys shares, as published by the NASDAQ over
 the thirty (30) consecutive trading days immediately preceding the day of the notice
 of exercise by the Warrant holder plus 1%, however, in no event shall the per share
 price be less than $ 7.50 or in excess of $ 21.00 if exercised between July 1, 2004
 and June 30, 2005, $ 30.00 if exercised between July 1, 2005 and June 30, 2006 and $
 40.00 if exercised between July 1, 2006 and June 30, 2007. In addition, in the event
 that in the three-year period in which the bank can request the issuance of the
 Warrant, the Company may complete a private placement investment by a third party
 in the Company for an amount which exceeds $ 20 million, the Company shall enable
 the Holder to exercise such warrant based on the same price offered in the private
 placement. Once issued to a Holder, the Warrant is exercisable for a thirty-day
 period only. The proceeds paid to the Company from the exercise of a warrant shall
 be applied to reduce all future installments of the principal due to the bank, on
 a pro-rata basis.
| |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |  | The modification in the loan terms
was accounted for as a 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 is a related party, the extinguishment gain of
approximately $15.5 million was recorded as an equity contribution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

NOTE 11:- RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES

| |  | a. |  | Restructuring
 charges
| |  | -- |  | ----------------------
| |  |    |  |                       
| |  |    |  | 1.                    

F - 46

---

---

|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           

NOTE 11:- RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES (Cont.)

| |  |  |  |  |  | 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            |        | Accrued        
|                                            |  | Year ended                |        | liability as of
|                                            |  | December 31,              |        | December 31,   
|                                            |  | 2003                      |        | 2004           
|                                            |  |                           |        |                
|                                            |  | U.S. dollars In thousands
|                                            |  |                          
|                                            |  |                           |        |                 |  
|Employee terminations,
 including potential |  |                           |        |                 |  
|claims                                      |  | $                         | 11,785 |                 | $
|Termination
 of lease commitments           |  |                           | 7,826  |                 |  
|Compensation
 to customers and suppliers    |  |                           | 9,167  |                 |  
|Other                                       |  |                           | 1,506  |                 |  
|                                            |  |                           |        |                
|                                            |  | $                         | 30,284 |                 | $
|                                            |  |                           |        |                

| |  |  |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  | 2. |  | In June 2003,
 the Group recorded additional restructuring charges of approximately $ 3.9 million,
 pursuant to a restructuring plan committed to by management, of which in 2003, $
 1.6 million was paid in cash, $ 0.6 million was a non-cash expense and $ 1.7 million
 was accrued as short-term and long-term liabilities. In 2004, $ 0.2 million was a
 non-cash expense. The restructuring costs consist of employee termination benefits
 associated with involuntary termination of 88 employees and compensation to certain
 suppliers. The terminations resulted from the Groups strategy to further reduce
 costs and improve profitability                            
| |  |  |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  |  |    |  | Restructuring
 charges 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.

F - 47

---

---

|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           

NOTE 11:- RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES (Cont.)

|                                  |  | Restructuring             |       |                 |  
|--------------------------------- |  | ------------------------- | ----- | --------------- | -
|                                  |  | charges in the            |       | Accrued        
|                                  |  | Year ended                |       | liability as of
|                                  |  | December 31,              |       | December 31,   
|                                  |  | 2003                      |       | 2004           
|                                  |  |                           |       |                
|                                  |  | U.S. dollars In thousands
|                                  |  |                          
|Employee terminations             |  | $                         | 1,682 |                 | $
|Termination
 of lease commitments |  |                           | 1,614 |                 |  
|Other                             |  |                           | 609   |                 |  
|                                  |  |                           |       |                
|                                 
|                                  |  | $                         | 3,905 |                 | $
|                                  |  |                           |       |                

| |  |    |  |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -- |  | ------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |  | 3.                                         |  | As of January
 2004, the Company has started to consolidate StarBand (see Note 1b) and as a result
 a balance of $ 1.7 million was consolidated into the group financial statements.
 In 2004, $ 0.9 million was paid in cash and $ 0.7 million was a non-cash expense and $
 0.1 million was accrued as a short-term liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    |  |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | b. |  | Write-offs
 and other significant charges:
| |  |    |  | 1.                                         |  | In the year
 2002, the Group did not meet its projected sales targets. The Group experienced
 a continued slowdown in orders and sales in virtually all of its markets - vertical,
 consumer and enterprise. Furthermore, certain circumstances such as the global decrease
 in telecommunication companies and depressed market conditions indicated that the
 carrying amount of certain assets would not be recoverable. As detailed above, In
 October 2002, the Company commenced an arrangement to restructure its debt, which
 was successfully completed in March 2003. Prior to and while the arrangement was
 under negotiation, the Companys ability to sell products and retain customers
 was affected. As a result of the above, the Company recorded in 2002 the following
 charges:

| |  |  |  |  |  | a) |  | Write-off
 and mark down of $ 7.0 million, $ 4.3 million and $ 8.8 million of excess inventory,
 inventory expected to be sold at prices lower than their carrying value and discontinued
 products, respectively.
| |  |  |  |  |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  |  |  |    |  |                                                                                                                                                                                                                   
| |  |  |  |  |  | b) |  | Increase in
 bad debt provision and write-offs in an amount of approximately $ 34.7 million. The
 provisions are included in provision and write-off for doubtful accounts and capital
 lease receivables.        
| |  |  |  |  |  |    |  |                                                                                                                                                                                                                   
| |  |  |  |  |  | c) |  | Impairment
 of tangible, goodwill and intangible assets as follow:                                                                                                                                                

| |  |  |  |  |  |  | 1) |  | Property and
 equipment and current assets in an amount of approximately $ 42.4 million. The impairments
 are included as impairment of tangible and intangible assets, in the consolidated
 statement of operations.
| |  |  |  |  |  |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---

|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           

NOTE 11:- RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES (Cont.)

| |  |  |  |  |  |  |  | 2) |  | Goodwill in
 an amount of approximately $ 69.7 million, of which an impairment adjustment recognized
 at adoption of SFAS 142 in the amount of $ 56.7 million was recorded as a cumulative
 effect of change in accounting principle in the first quarter of 2002 statement
 of operations. The impairment adjustments recognized after adoption, in the amount
 of $ 13.0 million, was recorded as impairment of goodwill in the operating expenses.
| |  |  |  |  |  |  |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  |  |  |  |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  |  |  |  |  |  | 3) |  | Intangible
 assets in an amount of approximately $ 8.3 million. The impairment is included in
 impairment of tangible and intangible assets, in the consolidated statement of operations.                                                                                                                                                                                                                                                            

| |  |  |  |  |  | d) |  |  | Impairment
 of investment in CTR in an amount of approximately $ 11.2 million, which is included
 in write-off of investments in the consolidated statements of operations (see Note
 5a). In addition, the Companys management decided to record a write-off of
 investment in other company in an amount of $ 0.8 million. The impairment was due
 to certain circumstances, such as low capital valuation and cumulative losses which
 indicated that the carrying amount of the investment may not be recoverable.
| |  |  |  |  |  | -- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  |  |  |    |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  |  |  |  | e) |  |  | Impairment
 of long-term note in an amount of approximately $ 39.4 million in accordance with
 Accounting Standard No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS
 144"). The impairment was recorded as a write- off of investments in the consolidated
 statement of operations. In 2003, the Company reversed $ 3.3 million due to option
 exercise by the debtor, see Note 5b.                                                                                                                  
| |  |  |  |  |  |    |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  |  |  |  | f) |  |  | Discontinued
 operations at rStar:During the third quarter of 2002, the Companys management
 decided to suspend activities relating to all operational components of rStar before
 the consummation of the transaction (see Note 1c), which was mainly AutoNetworks,
 Inc., an 85% subsidiary of rStar.The loss from discontinued operations consisted
 of the following:                                                                                                                                             

|                                   | Year ended December 31, 2002
|---------------------------------- | ----------------------------
|                                   |                             
|                                   |                             
|                                   | U.S. dollars In thousands   
|                                   |                             
|Costs and
 expenses:               |                             
|Cost of revenues                   |                             
|Sales and
 marketing               |                             
|General and
 administrative        |                             
|Research and
 development          |                             
|                                   |                             
|Loss from
 discontinued operations |                             
|                                   |                             

F - 49

---

---

|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           

NOTE 11:- RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES (Cont.)

| | 2. |  | In 2003, market
 conditions impact on the Groups orders globally and in particular in
 the United States continued. Furthermore, the Group concluded the arrangement to
 restructure its debt with creditors, bank lenders and note holders in March 2003.
 At that time, the Groups management went through significant changes, with
 the resignation of the Companys CEO and President. In June 2003, new management
 imposed an additional set of lay-offs and budget cuts and embarked on an effort
 to streamline the Groups operations in order to increase efficiency and reduce
 costs. In November 2003, the Group concluded a restructuring through conversion
 of debt to equity by closing an exchange offer pursuant to which the majority of
 holders of the Companys New Notes converted the notes into equity (see Note
 10). As a result of the above, in 2003, the Companys management recorded the
 following charges: | 
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | a) |  | Restructuring
 charges of approximately $ 3.9 million (see a above).                                                                                                                                              
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |  |                                                                                                                                                                                                                   
| | b) |  | Write-off
 and mark down of $ 1.5 million, $ 0.9 million and $ 4.0 million of excess inventory,
 inventory expected to be sold at prices lower than their carrying value and discontinued
 products, respectively.
| |    |  |                                                                                                                                                                                                                   
| | c) |  | Impairment
 of tangible, goodwill and intangible assets as follow:                                                                                                                                                

| | 1) |  | Property and
 equipment in an amount of approximately $ 18.1 million. The impairments are included
 as impairment of tangible and intangible assets, in the consolidated statement of
 operations.                                                                                                                                                            
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |  |                                                                                                                                                                                                                                                                                                                                                               
| | 2) |  | Goodwill in
 the amount of $ 5.0 million relating to the closing of the rStar acquisition on August
 2, 2002. The impairment was recorded to reduce the carrying value of goodwill to
 its implied fair value and was prompted by decrease in the projected income of rStar.
 The impairment was recorded as impairment of goodwill in the operating expenses.
| |    |  |                                                                                                                                                                                                                                                                                                                                                               
| | 3) |  | Intangible
 assets in an amount of approximately $ 5.6 million. The impairment is included in
 impairment of tangible and intangible assets, in the consolidated statement of operations.                                                                                                                                                                     
| |    |  |                                                                                                                                                                                                                                                                                                                                                               
| | 4) |  | Impairment
 of long-lived assets to be disposed of in an amount of $ 3.2 million in connection
 with the Companys plan to dispose its subsidiary in Argentina. The impairment
 is included in impairment of tangible and intangible assets in the consolidated
 statements of operations.                                                                    
| |    |  |                                                                                                                                                                                                                                                                                                                                                               

| | d) |  | Reversal of $
 3.3 million due to the option exercise related to long-term note.
| | -- |  | --------------------------------------------------------------------------------

F - 50

---

---

|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           

NOTE 11:- RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES (Cont.)

| | 3. |  | In 2004:
| | -- |  | --------
| |    |  |         
| |    |  | a)      
| |    |  |         
| |    |  | b)      
| |    |  |         

NOTE 12:- TAXES ON INCOME

| | a. |  | The Company:
| | -- |  | ------------
| |    |  |             
| |    |  | 1.          
| |    |  |             
| |    |  |             
| |    |  |             
| |    |  |             
| |    |  |             
| |    |  |             
| |    |  |             

F - 51

---

---

|                                            |  | GILAT SATELLITE
 NETWORKS LTD.
|------------------------------------------- |  | ------------------------------
|                                            |  | AND ITS
 SUBSIDIARIES         
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS |  |                               
|                                           

NOTE 12:- TAXES ON INCOME (Cont.)

| |    |  |                                                                                                                                                                                                                 |  | The Company
 is entitled to claim accelerated depreciation with respect to equipment used by
 Approved Enterprises during the first five 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 above mentioned 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. |  | 
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |    |  |                                                                                                                                                                                                                 |  | Income from
 sources other than the Approved Enterprise during the benefit period are subject
 to tax at the regular corporate tax rate of 36% until 2003, 35% in 2004, 34% in
 2005, 32% in 2006 and 30% in 2007 and thereafter.                                                                                                                                                                                                                                                                                                                               |  | 
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |    |  | 2.                                                                                                                                                                                                              |  | Measurement
 of results for tax purposes under the Income Tax (Inflationary Adjustments) Law,
 1985: Under this law, results for tax purposes are measured in real terms, in accordance
 with the changes in the Israeli CPI, or in the exchange rate of the Dollar for a
 "foreign investors company". The Company has elected to measure its results
 for tax purposes on the basis of the changes in the exchange rate of the Dollar,
 which as stated in Note 2b, is the Companys reporting currency.                                                       |  | 
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |    |  | 3.                                                                                                                                                                                                              |  | The Law for
 the Encouragement of Industry (Taxes), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |    |  |                                                                                                                                                                                                                 |  | The Company
 is an "industrial company" as defined by this law and, as such, is entitled to certain
 tax benefits, mainly accelerated depreciation, as prescribed by regulations published
 under the Inflationary Adjustments Law, and amortization of patents, certain other
 intangible property rights and deduction of share issuance expenses.                                                                                                                                                                                                              |  | 
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| | b. |  | Non-Israeli subsidiaries:                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |    |  | Non-Israeli subsidiaries are taxed based on tax laws in their countries of residence.                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| | c. |  | Carryforward tax losses and credits:                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |    |  | At December 31, 2004, the Company had operating loss carryforwards for Israeli income
 tax purposes of approximately $ 91.3 million, which are available to offset against
 future taxable income indefinitely. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |    |  | In addition, the Group had carryforward tax losses and research and development tax
 credits relating to non-Israeli subsidiaries, mainly in the U.S.                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |  |                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 

F - 52

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 12:- TAXES ON INCOME (Cont.)



| |    |  | Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the change in ownership provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses before utilization. In connection with the debt restructurings described in Note 10, the Company expects the expiration or deferral of significant portion of these carryforward tax losses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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,             
|    |  |  |                                                                                                             |  |  | 2003                      |          | 2004
|    |  |  |                                                                                                             |  |  | U.S. dollars in thousands
|1.  |  |  | Provided in respect of the following:                                                                       |  |  |                           |          |      |  |   |          |  
|    |  |  | Carryforward tax losses and research and development credits                                                |  |  | $                         | 93,315   |      |  | $ | 89,642   |  
|    |  |  | Other  (1)                                                                                                  |  |  |                           | 59,212   |      |  |   | 58,939   |  
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|   
|    |  |  | Gross deferred tax assets                                                                                   |  |  |                           | 152,527  |      |  |   | 148,581  |  
|    |  |  | Valuation allowance                                                                                         |  |  |                           | (139,178 | )    |  |   | (126,383 | )
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|   
|    |  |  | Net deferred tax assets                                                                                     |  |  |                           | 13,349   |      |  |   | 22,198   |  
|   
|    |  |  | Gross deferred tax liabilities                                                                              |  |  |                           | (12,950  | )    |  |   | (23,630  | )
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|   
|    |  |  | Net deferred tax assets (liabilities)                                                                       |  |  | $                         | 399      |      |  | $ | (1,432   | )
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|   
|    |  |  | Domestic                                                                                                    |  |  | $                         | -        |      |  | $ | -        |  
|    |  |  | Foreign                                                                                                     |  |  |                           | 399      |      |  |   | (1,432   | )
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|   
|    |  |  |                                                                                                             |  |  | $                         | 399      |      |  | $ | (1,432   | )
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|2.  |  |  | Deferred taxes are included in the consolidated  balance sheets, as follows:                                |  |  |                           |          |      |  |   |          |  
|   
|    |  |  | Current assets                                                                                              |  |  | $                         | 1,812    |      |  | $ | -        |  
|    |  |  | Non-current assets                                                                                          |  |  |                           | 57       |      |  |   | -        |  
|    |  |  | Current liabilities                                                                                         |  |  |                           | (310     | )    |  |   | (418     | )
|    |  |  | Non-current liabilities                                                                                     |  |  |                           | (1,160   | )    |  |   | (1,014   | )
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|   
|    |  |  |                                                                                                             |  |  | $                         | 399      |      |  | $ | (1,432   | )
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|    |  |  |                                                                                                             |  |  |                           |          |      |  |  
|(1) |  |  | Composed mainly of temporary differences relating to property and equipment, revenues and accrued expenses.

F - 53



---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 12:- TAXES ON INCOME (Cont.)



| |  | 3. |  | As of December 31, 2004, the Group has decreased
the valuation allowance by approximately $ 12.8
million resulting from carryforward tax losses and
other temporary differences. Management currently believes that
it is more likely than not that the deferred tax regarding the loss
carryforwards 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:
| | -- |  | -------------------------------------------------------------------------------------------

|                                                  | 2002 | 2003 | 2004
|------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Income (loss)  before  taxes,  as reported in the |      |      |     
|consolidated statements of operation              |      |      | $   
|Statutory tax rate                                |      |      |     
|                                                  |      |      |     
|Theoretical  tax benefit expenses) on the above   |      |     
|amount at the Israeli statutory tax rate          |      |      |     
|Debt restructuring arrangements                   |      |      |     
|Write-off of investments and capital losses       |      |      |     
|Currency differences                              |      |      |     
|                                                  |      |     
|Tax adjustment in respect of foreign subsidiaries |      |     
|different tax rates and  "Approved  Enterprise"   |      |     
|status                                            |      |      |     
|Unrecognized inter-company charges and other      |      |     
|permanent differences                             |      |      |     
|Changes in valuation allowance                    |      |      |     
|Income taxes in respect of prior years            |      |      |     
|                                                  |      |      |     
|                                                  |      |      | $   
|                                                  |      |      |     

| | * | Included within, is the effect of certain foreign NOL, amounting to $125,812, expected
to be lost due to local tax regulatory limitations resulting from change of control.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | Not including the deduction of $5,421
which reflect the reduction in temporary differences resulting from the elimination of
accrued interest liability in the debt extinguishment. The respective capital gain has
been recorded as an equity contribution. See further discussion in Note 1e.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 54

---

---



GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 12:- TAXES ON INCOME (Cont.)



| | f. |  | Taxes on income included in the consolidated statements of operations:
| | -- |  | ----------------------------------------------------------------------

|                                          | Year ended December 31,
|----------------------------------------- | -----------------------
|
|
|
|
|Provision for income tax:                 |                        
|                                          |                        
|Tax expenses related to restructuring of  |                        
|debts                                     |                        
|Other current tax expenses                |                        
|Tax expenses related to previous years    |                        
|                                          |                        
|                                          |                        
|                                          |                        
|Deferred income taxes                     |                        
|                                          |                        
|Deferred tax expenses related to          |                        
|restructuring of debts                    |                        
|Adjustments of the beginning of the year  |                        
|balance of a valuation allowance          |                        
|because of a change in circumstances that |                        
|caused a change in judgment about the     |                        
|realizability of the related deferred tax |                        
|asset in future years                     |                        
|Other deferred income taxes               |                        
|                                          |                        
|                                          |                        
|                                          |                        
|                                          |                        
|                                          |                        
|                                          |                        
|                                          |                        
|                                          |                        
|Domestic                                  |                        
|Foreign                                   |                        
|                                          |                        
|                                          |                        
|                                          |                        
|                                          |                        



| | g. |  | Income (loss) before taxes on income from continuing operations:
| | -- |  | ----------------------------------------------------------------

|         |  |                           |          |      |  |               |         |   |  |   |         |  
|-------- |  | ------------------------- | -------- | ---- |  | ------------- | ------- | - |  | - | ------- | -
|         |  | Year ended December 31,  
|         |  | 2002                      |          | 2003 |  | 2004         
|         |  | U.S. dollars in thousands
|         |  |                           |          |      |  | (as restated)
|         |  |                           |          |      |  |               |         |   |  |   |         |  
|Domestic |  | $                         | (102,376 | )    |  | $             | 195,288 |   |  | $ | (39,117 | )
|Foreign  |  |                           | (160,429 | )    |  |               | (43,326 | ) |  |   | 29,994  |  
|         |  |                           |          |      |  |               |         |   | 
|         |  | $                         | (262,805 | )    |  | $             | 151,962 |   |  | $ | (9,123  | )
|         |  |                           |          |      |  |               |         |   | 



| | h. |  | The Company obtained a ruling from the Israeli tax authorities regarding the March 2003 restructuring of debt arrangement for payment of $ 1.1 million and deferral of the taxes on the capital gains for tax purposes based on the realization of the Companys assets as of December 31, 2000. As part of the ruling the Company committed to the Israeli tax authorities not to transfer its activities abroad or, for tax purposes, cease to be considered an Israeli resident.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 55



---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 13:- SUPPLEMENTARY BALANCE SHEET INFORMATION



| | a. |  | Receivables in respect of capital leases, prepaid expenses and other accounts receivable:
| | -- |  | -----------------------------------------------------------------------------------------

|                                                       |  |                           |        |      |  |   |        | 
|------------------------------------------------------ |  | ------------------------- | ------ | ---- |  | - | ------ | 
|                                                       |  | December 31,             
|                                                       |  | 2003                      |        | 2004
|                                                       |  | U.S. dollars in thousands
|Receivables in respect of capital leases (see c below) |  | $                         | 13,916 |      |  | $ | 12,198 | 
|VAT receivables                                        |  |                           | 4,003  |      |  |   | 4,918  | 
|Prepaid expenses                                       |  |                           | 2,992  |      |  |   | 3,397  | 
|Deferred Customer Premises Equipment costs             |  |                           | -      |      |  |   | 3,016  | 
|Tax receivables                                        |  |                           | 1,767  |      |  |   | 2,922  | 
|Employees                                              |  |                           | 1,007  |      |  |   | 655    | 
|Deferred income taxes (see Note 12d)                   |  |                           | 1,812  |      |  |   | -      | 
|Other                                                  |  |                           | 5,264  |      |  |   | 2,175  | 
|                                                       |  |                           |        |      |  |  
|                                                       |  | $                         | 30,761 |      |  | $ | 29,281 | 
|                                                       |  |                           |        |      |  |  



| | b. |  | 1.    Long-term trade receivables, receivables in respect of capital leases and other receivables:
| | -- |  | --------------------------------------------------------------------------------------------------

|                                                                  |  |                           |        |      |  |   |        | 
|----------------------------------------------------------------- |  | ------------------------- | ------ | ---- |  | - | ------ | 
|                                                                  |  | December 31,             
|                                                                  |  | 2003                      |        | 2004
|                                                                  |  | U.S. dollars in thousands
|Long-term receivables in respect of capital leases (see c  below) |  | $                         | 24,038 |      |  | $ | 15,396 | 
|Long-term trade receivables                                       |  |                           | 12,530 |      |  |   | 9,191  | 
|Other receivables                                                 |  |                           | 2,544  |      |  |   | 3,141  | 
|                                                                  |  |                           |        |      |  |  
|                                                                  |  | $                         | 39,112 |      |  | $ | 27,728 | 
|                                                                  |  |                           |        |      |  |  

| |  |  | 2.    The following
 amounts  represent the unbilled  amounts of the  longterm  receivables  as of December 31,
2004:
| |  |  | ----------------------------------------------------------------------------------------------------------------------

|Year ending December 31, | U.S. dollars inthousands
|------------------------ | ------------------------
|
|
|
|
|2006                     |                         
|2007                     |                         
|2008                     |                         
|2009 and thereafter      |                         
|                         |                         
|                         |                         
|                         |                         
|Unearned interest income |                         
|                         |                         
|                         |                         
|                         |                         
|                         |                         



| | 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 - 56



---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 13:- SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)



| |  |  | The aggregate minimum future payments to be received by the Group under these contracts as of December 31, 2004, are as follows (including unearned interest income in the amount of $ 3.2 million):
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |  |                           |        |                 |  |       |       |  |  |   |        | 
|------------------------ |  | ------------------------- | ------ | --------------- |  | ----- | ----- |  |  | - | ------ | 
|                         |  | Capital lease             |        | Operating lease |  | Total
|Year ending December 31, |  | U.S. dollars in thousands
|2005                     |  | $                         | 15,511 |                 |  | $     | 2,225 |  |  | $ | 17,736 | 
|2006                     |  |                           | 10,026 |                 |  |       | 1,759 |  |  |   | 11,785 | 
|2007                     |  |                           | 3,913  |                 |  |       | 988   |  |  |   | 4,901  | 
|2008                     |  |                           | 1,051  |                 |  |       | 387   |  |  |   | 1,438  | 
|2009 and thereafter      |  |                           | 295    |                 |  |       | 96    |  |  |   | 391    | 
|                         |  |                           |        |                 |  |       |       |  | 
|                         |  | $                         | 30,796 |                 |  | $     | 5,455 |  |  | $ | 36,251 | 
|                         |  |                           |        |                 |  |       |       |  | 



| |  |  | The net investments in capital lease receivables as of December 31, 2004, are $ 27.6 million. Total revenues from capital and operating leases amounted to $ 19.9 million, $ 16.8 million and $ 5.7 million in the years ended December 31, 2002, 2003 and 2004, respectively.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. |  | Short-term bank credit:
| | -- |  | -----------------------



| |  | 1. |  | The following is classified by currency and interest rates:
| |  | -- |  | -----------------------------------------------------------

|                            |  |                  |       |                           |  |      |      |      |  |   |       |  |  |   |       | 
|--------------------------- |  | ---------------- | ----- | ------------------------- |  | ---- | ---- | ---- |  | - | ----- |  |  | - | ----- | 
|                            |  | Weighted average |       |                           |  |      |      |      |  |  
|                            |  | interest rate    |       |                           |  |      |      |      |  |  
|                            |  | December 31,     |       | December 31,             
|                            |  | 2003             |       | 2004                      |  | 2003 |      | 2004
|                            |  | %                |       | U.S. dollars in thousands
|In Dollars                  |  |                  | 1.90  |                           |  |      | 2.82 |      |  | $ | 1,676 |  |  | $ | 2,742 | 
|In NIS and other currencies |  |                  | 18.86 |                           |  |      | 7.36 |      |  |   | 94    |  |  |   | 1,417 | 
|                            |  |                  |       |                           |  |      |      |      |  |   |       | 
|Total                       |  |                  | 2.80  |                           |  |      | 2.46 |      |  | $ | 1,770 |  |  | $ | 4,159 | 
|                            |  |                  |       |                           |  |      |      |      |  |   |       | 



| |  | 2. |  | As of utilization of credit lines, see Note 13f.
| |  | -- |  | ------------------------------------------------

F - 57

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---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 13:- SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)



| | e. |  | Other accounts payable:
| | -- |  | -----------------------

|                                                                                         |  |                           |        |      |  |   |        | 
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- |  | - | ------ | 
|                                                                                         |  | December 31,             
|                                                                                         |  |                          
|                                                                                         |  | 2003                      |        | 2004
|                                                                                         |  |                           |        |     
|                                                                                         |  | U.S. dollars in thousands
|                                                                                         |  |                          
|Taxes payable                                                                            |  | $                         | 8,704  |      |  | $ | 10,642 | 
|Deferred revenue                                                                         |  |                           | 7,086  |      |  |   | 10,482 | 
|Payroll and related employees accruals                                                   |  |                           | 6,533  |      |  |   | 7,850  | 
|Provision for vacation pay                                                               |  |                           | 3,213  |      |  |   | 3,371  | 
|Advances from customers                                                                  |  |                           | 8,682  |      |  |   | 3,255  | 
|Current maturities of long-term liabilities with respect to capital lease agreements **) |  |                           | 1,598  |      |  |   | 2,102  | 
|VAT payable                                                                              |  |                           | 1,876  |      |  |   | 940    | 
|Deferred Taxes                                                                           |  |                           | 310    |      |  |   | 418    | 
|Other                                                                                    |  |                           | 1,498  |      |  |   | 988    | 
|                                                                                         |  |                           |        |      |  |  
|                                                                                         |  | $                         | 39,500 |      |  | $ | 40,048 | 
|                                                                                         |  |                           |        |      |  |  



| | f. |  | Long-term loans:
| | -- |  | ----------------

|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |   |         | 
|-------------------------------- |  | ------- | ------ | - |  | -------- | ---------- | -------- |  | -------- | ---------- | ------------------------- |  | ---- | --------- |  |  | - | ------- |  |  | - | ------- | 
|                                 |  |         |        |   |  | Interest |            | Interest |  |          |            |                           |  |     
|                                 |  |         |        |   |  | rate for |            | rate for |  |          |            | December 31,             
|                                 |  |         |        |   |  | 2003     |            | 2004     |  | Maturity |            | 2003                      |  | 2004
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |     
|                                 |  | Linkage |        | % |  | %        |            |          |  |          |            | U.S. dollars in thousands
|                                 |  |         |        |   |  |          |            |          |  |          |            |                          
|Restructured loans (a):          |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |   |         | 
|Loan from Bank Hapoalim (b)/(c)  |  |         | Dollar |   |  |          | Libor+2.5% |          |  |          | Libor+2.0% |                           |  |      | 2005-2012 |  |  | $ | 71,400  |  |  | $ | 71,400  | 
|Loan from Bank Leumi (b)/(d)/(g) |  |         | Dollar |   |  |          | Libor+2.5% |          |  |          | Libor+2.5% |                           |  |      | 2005-2011 |  |  |   | 29,000  |  |  |   | 28,000  | 
|Other long-term loans (e)        |  |         | Dollar |   |  |          | 5.0%       |          |  |          | 5.0%       |                           |  |      | 2005-2008 |  |  |   | 5,224   |  |  |   | 5,224   | 
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |  
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   | 105,624 |  |  |   | 104,624 | 
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |  
|Other loans:                     |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |   |         | 
|Loans from a bank (f)            |  |         | DM     |   |  |          | 5.86%-6.3% |          |  |          | 5.86%-6.3% |                           |  |      | 2005-2021 |  |  |   | 7,141   |  |  |   | 7,412   | 
|Loans from a bank                |  |         | Dollar |   |  |          | 1.4%       |          |  |          | 1.4%       |                           |  |      | 2005-2008 |  |  |   | 2,317   |  |  |   | 1,846   | 
|Other long-term loans            |  |         | Dollar |   |  |          | 0%         |          |  |          | 0%         |                           |  |      | 2005-2008 |  |  |   | 4,025   |  |  |   | 2,787   | 
|Other long-term loans            |  |         | Dollar |   |  |          | 3.0%-5.0%  |          |  |          | 3.0%-5.0%  |                           |  |      | 2005-2008 |  |  |   | 419     |  |  |   | 382     | 
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |  
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   | 13,902  |  |  |   | 12,427  | 
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |  
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   | 119,526 |  |  |   | 117,051 | 
|Less - current maturities        |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   | 3,000   |  |  |   | 8,869   | 
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |  
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  | $ | 116,526 |  |  | $ | 108,182 | 
|                                 |  |         |        |   |  |          |            |          |  |          |            |                           |  |      |           |  |  |   |         |  |  |  



| |  | (a) |  | In March 2003, the Company concluded a restructuring process reaching an agreement with the banks and other creditors, which revised the loan terms (see Note 10).
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (b) |  | In addition to existing security interests in their favor, the Company granted the banks referred to in Note 10, 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
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 58



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 13:-SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)



| |  | (c) |  | As of December 31, 2004, the Company is in compliance with its covenants.                                                                                                                                                                                                
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     |  |                                                                                                                                                                                                                                                                          
| |  | (d) |  | The Company granted the lender a first priority security interest of approximately $ 28 million in its facilities in Israel.                                                                                                                                             
| |  |     |  |                                                                                                                                                                                                                                                                          
| |  | (e) |  | Spacenet Inc. granted the lender a security interest of approximately $ 5.2 million in certain of its computer, 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, 2003, is  5.4 million, collateralized by the facilities in Germany.                                                      
| |  |     |  |                                                                                                                                                                                                                                                                          
| |  | (g) |  | In order to secure credit lines provided by Bank Leumi and one other Israeli Bank, the Company granted those banks a second priority security charge on its facilities. As of December 31, 2004, the Company utilized approximately $ 12.6 million of those credit lines.



| |  |  | Long-term debt maturities for loans after December 31, 2004, are as follows:
| |  |  | ----------------------------------------------------------------------------

|                         |  |                          |         | 
|------------------------ |  | ------------------------ | ------- | 
|Year ending December 31, |  | U.S dollars in thousands
|                         |  |                          |        
|2005                     |  | $                        | 8,869   | 
|2006                     |  |                          | 13,702  | 
|2007                     |  |                          | 15,979  | 
|2008                     |  |                          | 13,743  | 
|2009 and thereafter      |  |                          | 64,758  | 
|                         |  |                          |        
|                         |  | $                        | 117,051 | 
|                         |  |                          |        



| |  |  | Interest expenses on the long-term loans amounted to $ 6.8 million, $ 3.0 million and $ 1.7 million for the years ended December 31, 2002, 2003 and 2004, respectively.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. |  | Other long-term liabilities:
| | -- |  | ----------------------------

|                                                                   |  |                           |        |      |  |   |        | 
|------------------------------------------------------------------ |  | ------------------------- | ------ | ---- |  | - | ------ | 
|                                                                   |  | December 31,             
|                                                                   |  |                          
|                                                                   |  | 2003                      |        | 2004
|                                                                   |  | U.S. dollars in thousands
|                                                                   |  |                          
|Deferred revenue                                                   |  | $                         | 4,472  |      |  | $ | 6,822  | 
|Liability for space segment                                        |  |                           | 2,125  |      |  |   | 4,038  | 
|Restructuring charges (see Note 11a)                               |  |                           | 2,361  |      |  |   | 1,359  | 
|Long-term liability in respect of OCS agreement *)                 |  |                           | 2,113  |      |  |   | 1,119  | 
|Deferred taxes                                                     |  |                           | 1,160  |      |  |   | 1,014  | 
|Long-term liabilities with respect to capital lease agreements **) |  |                           | 2,078  |      |  |   | 110    | 
|Other                                                              |  |                           | 1,453  |      |  |   | 1,489  | 
|                                                                   |  |                           |        |      |  |  
|                                                                  
|                                                                   |  | $                         | 15,762 |      |  | $ | 15,951 | 
|                                                                   |  |                           |        |      |  |  

F - 59



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 13:-SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)



| |  | *)  |  | In October 2001, the Company filed a request with the OCS for the commitment to pay all royalties arising from future sales with respect to previous OCS grants. The Company recorded expenses in the amount of $ 3.4 million payable over the years 2003 to 2006, bear variable interest of the Accountant Generals index and limited to the change in the CPI. The amount was recorded in selling, marketing, general and administrative expenses. This agreement enables the Company to participate in a new OCS program under which it would be eligible to receive future research and development grants for generic research and development projects without any royalty repayment obligations. The amount payable as of December 31, 2004, is $ 2.2 million.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | **) |  | Future lease payments in respect of capital lease agreements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                        |  |                          |       | 
|--------------------------------------- |  | ------------------------ | ----- | 
|Year ending December 31,                |  | U.S dollars in thousands
|                                        |  |                          |      
|2005                                    |  | $                        | 2,167 | 
|2006                                    |  |                          | 68    | 
|2007                                    |  |                          | 50    | 
|                                        |  |                          |      
|                                        |  |                          | 2,285 | 
|Less amount representing interest       |  |                          | 73    | 
|                                        |  |                          |      
|Present value of minimum lease payments |  | $                        | 2,212 | 
|                                        |  |                          |      

NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA



| | a. |  | Research and development expenses, net:
| | -- |  | ---------------------------------------

|                             |  |                           |        |      |  |      |        |  |  |   |        | 
|---------------------------- |  | ------------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                             |  | Year ended December 31,  
|                             |  |                          
|                             |  | 2002                      |        | 2003 |  | 2004
|                             |  |                           |        |      |  |     
|                             |  | U.S. dollars in thousands
|                             |  |                          
|Total cost                   |  | $                         | 29,012 |      |  | $    | 22,063 |  |  | $ | 19,134 | 
|Less:                        |  |                           |        |      |  |      |        |  |  |   |        | 
|Royalty bearing grants *)    |  |                           | -      |      |  |      | 1,450  |  |  |   | 2,917  | 
|Non - royalty bearing grants |  |                           | 3,946  |      |  |      | 3,664  |  |  |   | 2,338  | 
|                             |  |                           |        |      |  |      |        |  |  |   |        | 
|                             |  | $                         | 25,066 |      |  | $    | 16,949 |  |  | $ | 13,879 | 
|                             |  |                           |        |      |  |      |        |  |  |   |        | 



| |  | *) |  | Including funding from SES Global S.A (see Note 8d).
| |  | -- |  | ----------------------------------------------------

F - 60



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)



| | b. |  | Selling, marketing, general and administrative expenses:
| | -- |  | --------------------------------------------------------

|                           |  |                           |        |      |  |      |        |  |  |   |        | 
|-------------------------- |  | ------------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                           |  | Year ended December 31,  
|                           |  |                          
|                           |  | 2002                      |        | 2003 |  | 2004
|                           |  |                           |        |      |  |     
|                           |  | U.S. dollars in thousands
|                           |  |                          
|Selling and marketing (1)  |  | $                         | 35,990 |      |  | $    | 31,264 |  |  | $ | 33,282 | 
|General and administrative |  |                           | 50,237 |      |  |      | 40,456 |  |  |   | 35,892 | 
|                           |  |                           |        |      |  |      |        |  |  |   |        | 
|                           |  | $                         | 86,227 |      |  | $    | 71,720 |  |  | $ | 69,174 | 
|                           |  |                           |        |      |  |      |        |  | 



| |  | (1) |  | Including shipping expenses in the amounts of $ 3.8 million, $ 2.4 million and $ 1.7 million for the years ended December 31, 2002, 2003 and 2004, respectively.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Allowance for doubtful accounts:
| | -- |  | --------------------------------

|                             |  |                           |          |      |  |      |        |   |  |   |        |  
|---------------------------- |  | ------------------------- | -------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                             |  | Year ended December 31,  
|                             |  |                          
|                             |  | 2002                      |          | 2003 |  | 2004
|                             |  |                           |          |      |  |     
|                             |  | U.S. dollars in thousands
|                             |  |                          
|Balance at beginning of year |  | $                         | 114,703  |      |  | $    | 17,041 |   |  | $ | 18,102 |  
|Increase during the year     |  |                           | 34,714   |      |  |      | 1,383  |   |  |   | 717    |  
|Write-off of bad debts       |  |                           | (132,376 | )    |  |      | (322   | ) |  |   | (4,313 | )
|                             |  |                           |          |      |  |      |        |   |  |   |        |  
|Balance at the end of year   |  | $                         | 17,041   |      |  | $    | 18,102 |   |  | $ | 14,506 |  
|                             |  |                           |          |      |  |      |        |   | 



| |  |  | As of increase in bad debts provision and write-off, see Note 11b.
| |  |  | ------------------------------------------------------------------

F - 61



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)



| | d. |  | Financial income (expenses), net:
| | -- |  | ---------------------------------

|                                                                                |  |                           |         |      |  |               |        |   |  |   |       |  
|------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | ------------- | ------ | - |  | - | ----- | -
|                                                                                |  | Year ended December 31,  
|                                                                                |  |                          
|                                                                                |  | 2002                      |         | 2003 |  | 2004         
|                                                                                |  |                           |         |      |  |              
|                                                                                |  | U.S. dollars in thousands
|                                                                                |  |                          
|                                                                                |  |                           |         |      |  | (as restated)
|                                                                                |  |                           |         |      |  |               |        |   |  |   |       |  
|Income:                                                                         |  |                           |         |      |  |               |        |   |  |   |       |  
|Interest on cash equivalents, bank deposits and restricted cash                 |  | $                         | 1,798   |      |  | $             | 1,558  |   |  | $ | 2,378 |  
|Interest with respect to capital lease                                          |  |                           | 4,625   |      |  |               | 3,121  |   |  |   | 3,168 |  
|Other (mainly translation adjustments)                                          |  |                           | 1,276   |      |  |               | 613    |   |  |   | 298   |  
|                                                                                |  |                           |         |      |  |               |        |   | 
|                                                                                |  |                           | 7,699   |      |  |               | 5,292  |   |  |   | 5,844 |  
|                                                                                |  |                           |         |      |  |               |        |   | 
|Expenses:                                                                       |  |                           |         |      |  |               |        |   |  |   |       |  
|Interest on Convertible Subordinated Notes                                      |  |                           | 14,936  |      |  |               | 868    |   |  |   | -     |  
|Amortization of issuance costs of convertible subordinated notes                |  |                           | 2,127   |      |  |               | 486    |   |  |   | -     |  
|Interest with respect to short-term bank credit and trade payables    and other |  |                           | 1,484   |      |  |               | 2,082  |   |  |   | 1,403 |  
|Interest with respect to long-term loans                                        |  |                           | 6,784   |      |  |               | 3,007  |   |  |   | 3,757 |  
|Interest with respect to capital lease                                          |  |                           | 1,912   |      |  |               | 60     |   |  |   | 9     |  
|Other (mainly translation adjustments)                                          |  |                           | 1,780   |      |  |               | 2,045  |   |  |   | 941   |  
|                                                                                |  |                           |         |      |  |               |        |   | 
|                                                                                |  |                           | 29,023  |      |  |               | 8,548  |   |  |   | 6,110 |  
|                                                                                |  |                           |         |      |  |               |        |   | 
|                                                                                |  | $                         | (21,324 | )    |  | $             | (3,256 | ) |  | $ | (266  | )
|                                                                                |  |                           |         |      |  |               |        |   |  |   |      

NOTE 15:- CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION



| | The Group applies SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information.
| | ------------------------------------------------------------------------------------------------------

F - 62



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 15:- CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)



| | a. |  | Revenues by geographic area:                                                                                                                                                                                                                                      
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |  |                                                                                                                                                                                                                                                                   
| |    |  | Following is a summary of revenues by geographic area. Revenues are attributed to geographic area, based on the location of the end customers, and in accordance with FAS 131, include all countries in which revenues exceeded 10% in any of the reporting years:

|                                                       |  |                           |            |      |  |      |           |  |  |   |         | 
|------------------------------------------------------ |  | ------------------------- | ---------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|                                                       |  | Year ended December 31,  
|                                                       |  |                          
|                                                       |  | 2002                      |            | 2003 |  | 2004
|                                                       |  |                           |            |      |  |     
|                                                       |  | U.S. dollars in thousands
|                                                       |  |                          
|United States                                          |  | $                         | *) 110,256 |      |  | $    | *) 68,050 |  |  | $ | 94,363  | 
|South America and Central America
 (except Brazil)     |  |                           | 31,195     |      |  |      | 43,389    |  |  |   | 67,196  | 
|Asia                                                   |  |                           | 25,834     |      |  |      | 29,749    |  |  |   | 32,650  | 
|Brazil                                                 |  |                           | 9,291      |      |  |      | 20,828    |  |  |   | 21,163  | 
|Africa                                                 |  |                           | 17,325     |      |  |      | 16,059    |  |  |   | 14,096  | 
|Europe *)                                              |  |                           | 14,577     |      |  |      | 8,939     |  |  |   | 11,710  | 
|Other                                                  |  |                           | 277        |      |  |      | 3,163     |  |  |   | 320     | 
|                                                       |  |                           |            |      |  |      |           |  | 
|                                                       |  | $                         | 208,755    |      |  | $    | 190,177   |  |  | $ | 241,498 | 
|                                                       |  |                           |            |      |  |      |           |  | 
|*) Including revenues from related parties as follows: |  |                           |            |      |  |      |           |  |  |   |         | 
|StarBand                                               |  | $                         | 3,220      |      |  | $    | 5,393     |  |  | $ | -       | 
|Satlynx                                                |  |                           | 3,530      |      |  |      | 2,148     |  |  |   | 2,864   | 
|                                                       |  |                           |            |      |  |      |           |  | 
|                                                       |  | $                         | 6,750      |      |  | $    | 7,541     |  |  | $ | 2,864   | 
|                                                       |  |                           |            |      |  |      |           |  | 



| | b. |  | Revenues from single customers which exceed 10% of total revenues in the reported years as a percentage of total revenue:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------

|           |  |                           |       |      |  |      |      |   |  |  |      |  
|---------- |  | ------------------------- | ----- | ---- |  | ---- | ---- | - |  |  | ---- | -
|           |  | Year ended December 31,  
|           |  |                          
|           |  | 2002                      |       | 2003 |  | 2004
|           |  |                           |       |      |  |     
|           |  | U.S. dollars in thousands
|           |  |                          
|Gtech U.S. |  |                           | 10.52 | %    |  |      | 4.01 | % |  |  | 1.63 | %



| | c. |  | The Groups long-lived assets are located as follows:
| | -- |  | -----------------------------------------------------

|              |  |                           |         |      |  |   |         | 
|------------- |  | ------------------------- | ------- | ---- |  | - | ------- | 
|              |  | December 31,             
|              |  |                          
|              |  | 2003                      |         | 2004
|              |  |                           |         |     
|              |  | U.S. dollars in thousands
|              |  |                          
|Israel        |  | $                         | 89,013  |      |  | $ | 81,131  | 
|Latin America |  |                           | 25,765  |      |  |   | 31,161  | 
|United States |  |                           | 19,628  |      |  |   | 21,390  | 
|Europe        |  |                           | 14,028  |      |  |   | 10,417  | 
|Other         |  |                           | 601     |      |  |   | 521     | 
|              |  |                           |         |      |  |  
|              |  | $                         | 149,035 |      |  | $ | 144,620 | 
|              |  |                           |         |      |  |  

F - 63



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTE 15:- 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 years ended December 31, 2002, 2003 and 2004, the Company operated under a single reportable business segment. The following provides proforma information about the Companys business during 2002, 2003 and 2004, as if its business was operating under the new business segments. The financial information was extracted, from the consolidated results reported for those years.                             
| |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |    |  | 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 a network (a Spacenet 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: Spacenet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. The business is divided as follows:                                                                                                                         
| |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |    |  | Enterprise: Provides satellite-based, enterprise-grade broadband wide-area networking solutions for a broad range of commercial organizations and small business customers, primarily in North America.                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |    |  | Consumer:  Provides broadband Internet access via satellite to residential and SoHo in North America                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |    |  | Rural:        Provides satellite-based rural telephony and internet access solutions to remote areas in Latin America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F - 64



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTE 15:- CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)



| |  | 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) |  | The consolidated information set below reflects the effect of unrealized profits derived from the transactions between GNS and Spacenet. The transactions are based on internal transfer pricing between the reportable segments.
| |  |  |    |  |                                                                                                                                                                                                                                  
| |  |  | c) |  | Financial data relating to reportable operating segments:                                                                                                                                                                        

|                                             |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ---------------------------- | ------ | -------- |  | ----- | ------ | ----- |  | ------------- | ------ | ------------- |  | ------------- | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                             |  | Year ended December 31, 2004
|                                             |  | Spacenet                     |        | GNS      | 
|                                             |  | Enterprise                   |        | Consumer |  | Rural |        | Total |  | Sales         |        | Consolidation |  | Total        
|                                             |  |                              |        |          |  |       |        |       |  | (as restated) |        |               |  | (as restated)
|Revenues:                                    |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|External revenues                            |  | $                            | 60,456 |          |  | $     | 28,359 |       |  | $             | 52,243 |               |  | $             | 141,058 |   |  | $ | 100,440 |   |  | $ | -       |   |  | $ | 241,498 |  
|Internal revenues                            |  |                              | -      |          |  |       | -      |       |  |               | -      |               |  |               | -       |   |  |   | 17,908  |   |  |   | (17,908 | ) |  |   | -       |  
|                                             |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   | 
|                                             |  | $                            | 60,456 |          |  | $     | 28,359 |       |  | $             | 52,243 |               |  | $             | 141,058 |   |  | $ | 118,348 |   |  | $ | (17,908 | ) |  | $ | 241,498 |  
|                                             |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   | 
|Impairment of tangible and intangible assets |  | $                            | -      |          |  | $     | -      |       |  | $             | 122    |               |  | $             | 122     |   |  | $ | 2,039   |   |  | $ | -       |   |  | $ | 2,161   |  
|                                             |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   | 
|Financial income (expenses), net             |  | $                            | 1,698  |          |  | $     | (1,796 | )     |  | $             | 1,282  |               |  | $             | 1,184   |   |  | $ | (1,450  | ) |  | $ | -       |   |  | $ | (266    | )
|                                             |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   | 
|Income (loss) before taxes on income         |  | $                            | (8,732 | )        |  | $     | (4,675 | )     |  | $             | (9,280 | )             |  | $             | (22,687 | ) |  | $ | 3,891   |   |  | $ | 9,673   |   |  | $ | (9,123  | )
|                                             |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   | 
|Taxes on income                              |  | $                            | -      |          |  | $     | -      |       |  | $             | 3,148  |               |  | $             | 3,148   |   |  | $ | 1,281   |   |  | $ | -       |   |  | $ | 4,429   |  
|                                             |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   | 
|EBITDA *)                                    |  | $                            | (1,366 | )        |  | $     | 948    |       |  | $             | 7,312  |               |  | $             | 6,894   |   |  | $ | 19,388  |   |  | $ | 725     |   |  | $ | 27,007  |  
|                                             |  |                              |        |          |  |       |        |       |  |               |        |               |  |               |         |   |  |   |         |   | 

F - 65



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 15:- CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)

|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------ |  | ---------------------------- | ------- | -------- |  | ----- | - | ----- |  | ----- | ------- | ------------- |  | ----- | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                 |  | Year ended December 31, 2003
|                                                 |  | Spacenet                     |         | GNS      | 
|                                                 |  | Enterprise                   |         | Consumer |  | Rural |   | Total |  | Sales |         | Consolidation |  | Total
|Revenues:                                        |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|External revenues                                |  | $                            | 58,165  |          |  | $     | - |       |  | $     | -       |               |  | $     | 84,945  |   |  | $ | 105,232 |   |  | $ | -       |   |  | $ | 190,177 |  
|Internal revenues                                |  |                              | -       |          |  |       | - |       |  |       | -       |               |  |       | -       |   |  |   | 31,756  |   |  |   | (31,756 | ) |  |   | -       |  
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|                                                 |  | $                            | 58,165  |          |  | $     | - |       |  | $     | 26,780  |               |  | $     | 84,945  |   |  | $ | 136,988 |   |  | $ | (31,756 | ) |  | $ | 190,177 |  
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|Impairment of tangible and intangible assets     |  | $                            | 21,551  |          |  | $     | - |       |  | $     | 3,570   |               |  | $     | 25,121  |   |  | $ | 1,791   |   |  | $ | -       |   |  | $ | 26,912  |  
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|Impairment of goodwill                           |  | $                            | -       |          |  | $     | - |       |  | $     | 5,000   |               |  | $     | 5,000   |   |  | $ | -       |   |  | $ | -       |   |  | $ | 5,000   |  
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|Restructuring charges                            |  | $                            | 3,777   |          |  | $     | - |       |  | $     | (81     | )             |  | $     | 3,696   |   |  | $ | 209     |   |  | $ | -       |   |  | $ | 3,905   |  
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|Financial income (expenses), net                 |  | $                            | 2,477   |          |  | $     | - |       |  | $     | (1,716  | )             |  | $     | 761     |   |  | $ | (4,017  | ) |  | $ | -       |   |  | $ | (3,256  | )
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|Write-off of investments in affiliated companies |  | $                            | -       |          |  | $     | - |       |  | $     | -       |               |  | $     | -       |   |  | $ | 3,300   |   |  | $ | -       |   |  | $ | 3,300   |  
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|Income (loss) before taxes on income             |  | $                            | (48,157 | )        |  | $     | - |       |  | $     | (36,047 | )             |  | $     | (84,204 | ) |  | $ | 234,272 |   |  | $ | 1,892   |   |  | $ | 151,962 |  
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|Taxes (benefits) on income                       |  | $                            | -       |          |  | $     | - |       |  | $     | (451    | )             |  | $     | (451    | ) |  | $ | 10,141  |   |  | $ | -       |   |  | $ | 9,690   |  
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 
|EBITDA *)                                        |  | $                            | (13,412 | )        |  | $     | - |       |  | $     | (19,779 | )             |  | $     | (33,191 | ) |  | $ | 9,662   |   |  | $ | (1,167  | ) |  | $ | (24,696 | )
|                                                 |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |         |   |  |   |         |   | 

F - 66



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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 15:- CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)

|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   |  |   |         |   |  |   |          |  
|----------------------------------------------------------- |  | ---------------------------- | ------- | -------- |  | ----- | - | ----- |  | ----- | ------- | ------------- |  | ----- | -------- | - |  | - | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                            |  | Year ended December 31, 2002
|                                                            |  | Spacenet                     |         | GNS     
|                                                            |  | Enterprise                   |         | Consumer |  | Rural |   | Total |  | Sales |         | Consolidation |  | Total
|Revenues:                                                   |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   |  |   |         |   |  |   |          |  
|External revenues                                           |  | $                            | 108,078 |          |  | $     | - |       |  | $     | 19,089  |               |  | $     | 127,167  |   |  | $ | 81,588   |   |  | $ | -       |   |  | $ | 208,755  |  
|Internal revenues                                           |  |                              | -       |          |  |       | - |       |  |       | -       |               |  |       | -        |   |  |   | 45,902   |   |  |   | (45,902 | ) |  |   | -        |  
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 
|                                                            |  | $                            | 108,078 |          |  | $     | - |       |  | $     | 19,089  |               |  | $     | 127,167  |   |  | $ | 127,490  |   |  | $ | (45,902 | ) |  | $ | 208,755  |  
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 
|Impairment of tangible and intangible  assets               |  | $                            | 42,370  |          |  | $     | - |       |  | $     | -       |               |  | $     | 42,370   |   |  | $ | 12,467   |   |  | $ | (4,171  | ) |  | $ | 50,666   |  
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 
|Impairment of goodwill                                      |  | $                            | -       |          |  | $     | - |       |  | $     | 13,049  |               |  | $     | 13,049   |   |  | $ | -        |   |  | $ | -       |   |  | $ | 13,049   |  
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 
|Financial income (expenses), net                            |  | $                            | 2,646   |          |  | $     | - |       |  | $     | (954    | )             |  | $     | 1,692    |   |  | $ | (23,016  | ) |  | $ | -       |   |  | $ | (21,324  | )
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 
|Write-off of investments in affiliated  and other companies |  | $                            | (750    | )        |  | $     | - |       |  | $     | (11,230 | )             |  | $     | (11,980  | ) |  | $ | (39,399  | ) |  | $ | -       |   |  | $ | (51,379  | )
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 
|Income (loss) before taxes on income                        |  | $                            | (82,049 | )        |  | $     | - |       |  | $     | (56,748 | )             |  | $     | (138,797 | ) |  | $ | (150,417 | ) |  | $ | 26,409  |   |  | $ | (262,805 | )
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 
|Taxes on income                                             |  | $                            | 82      |          |  | $     | - |       |  | $     | 36      |               |  | $     | 118      |   |  | $ | 811      |   |  | $ | -       |   |  | $ | 929      |  
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 
|EBITDA *)                                                   |  | $                            | (13,328 | )        |  | $     | - |       |  | $     | (23,796 | )             |  | $     | (37,124  | ) |  | $ | (39,827  | ) |  | $ | 16,901  |   |  | $ | (60,050  | )
|                                                            |  |                              |         |          |  |       |   |       |  |       |         |               |  |       |          |   |  |   |          |   | 



| |  |  | *) |  | EBITDA is defined as operating income (loss) before interest, taxation, depreciation and amortization excluding write-off of inventories, impairment of goodwill, impairment of tangible and intangible assets, restructuring charges and gain from derecognition of liability.
| |  |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 16:- SUBSEQUENT EVENTS (UNAUDITED)



| | a. |  | In February 2005, the Companys shareholders increased the pool for the 2003 Plans such that the 2003 Plans provide for the granting of additional options of up to an aggregate of 1,135,000 ordinary shares to its officers, directors, employees or service providers or any of the employees or service providers of its subsidiaries.                                                                                                                                                                                                                                                                                                                                                            
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | b. |  | In March 2005, the Group completed the purchase of all of the remaining StarBand shares not held by the Group and which were held by various Israeli banks. In addition to the initial payment, Spacenet Inc. committed to pay the banks an additional consideration equal to 50% of consideration, should such consideration be received by Spacenet Inc. in the event of, amongst others, sale of the StarBand shares by Spacenet Inc. to a third party, merger of StarBand with a third party, transfer or sale of substantially all of StarBands assets or activities to a third party, or liquidation of StarBand, on condition that any of these events occur prior to December 31, 2007.      
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | c. |  | In March 2005, the Company purchased
the remaining 50.9% of StarBand shares then held by certain Israeli banks (the
Banks) in consideration for $600,000. In addition, in case 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, the Company has agreed to pay the Banks an amount
equal to fifty percent of the consideration received by the Company, directly or
indirectly, as a result of such events. As disclosed in note 1b, the Company has
consolidated StarBand since January 1, 2004, in accordance with FIN 46.
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | d. |  | In July 2005, York Capital Management
purchased Bank Hapoalims loan to Gilat that is described in Notes 10a(2) and
10c. In connection with this transaction, certain of the Companys members
of the board of directors resigned and were replaced with new directors and top
management was replaced.                                                                                                                                                                                                                                                                                                                                                                                               

F - 68



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INDEPENDENT
AUDITORS REPORT

To the Board of Directors

STARBAND COMMUNICATIONS
INC.

We have audited the balance sheets of
StarBand Communications Inc. as of December 31, 2004 and 2003, and the related statements
of operations, shareholders equity and cash flows for the year ended December 31,
2004 and for the one month period December 1, 2003 through December 31, 2003. These
financials statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatements. 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 principals 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, 2004 and 2003 and the results
of its operations and its cash flows for the year ended December 31, 2004 and the
one-month period December 1, 2003-December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.

MAYER HOFFMAN MCCANN P.C.Bethesda, Maryland January 19, 2005

F - 69

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# SIGNATURE

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

| | Date:    December 1, 2005 | GILAT SATELLITE NETWORKS LTD.BY: /S/ Amiram Levinberg
Amiram LevinbergChairman of the Board of Directors
| | ------------------------- | ----------------------------------------------------------------------------------------------------------------------

99

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