---

---

As
filed with the Securities and Exchange Commission on April 7, 2009

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

# FORM 20-F

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

# or

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

# For the fiscal year
ended December 31, 2008

# or

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

For the transition period from __________ to __________

# or

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

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

Commission file number: 0-21218

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

ISRAEL(Jurisdiction of incorporation or organization)

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

Rachel Prishkolnik, +972-3- 9293020 (phone), +972-3-9252945 (fax)
Gilat House, 21 Yegia Kapayim Street, Kiryat Arye, Petah Tikva, 49130 Israel(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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

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



---

---

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

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

# 40,103,662 Ordinary
Shares, NIS 0.20 par value per share.

| | Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
| | -----------------------------------------------------------------------------------------------------------------------

Yes o No x

| | If
this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Yes o No x

Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes x No o

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

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

Indicate by check mark the basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

|x | U.S.
Gaap
|- | ---------

|o | International
Financial Reporting Standards as issued by the International Accounting Standards Board
|- | -----------------------------------------------------------------------------------------------------

|o | Other
|- | -----

If Other has been checked
in response to the previous question, indicate by check mark which financial statement the
registrant has elected to follow.

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

Item 17 o Item 18 o

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

Yes o No x

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

- ii -

---

---

# INTRODUCTION

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

We
have a large installed customer base and have shipped more than 750,000 VSAT units to
customers in over 85 countries on six continents since 1989. We have 16 sales and
service offices worldwide and two call centers to support our customers. Our products are
primarily sold to communication service providers and operators that use VSATs to serve
enterprise, government and residential users. Also, in the U.S. and certain countries in
Latin America, we provide services directly to end-users in various market segments.

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

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

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

Except
for the historical information contained in this annual report, the statements contained
in this annual report are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our business, financial condition
and results of operations. Actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including all the
risks discussed in Item 3: Key InformationRisk Factors and elsewhere in
this annual report.

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

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 onApril 6, 2009 was NIS 4.125 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.

- iii -

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---

# TABLE OF CONTENTS

|         |                                                                              | Page
|-------- | ---------------------------------------------------------------------------- | ----
|
|
|Part I   |                                                                              |     
|        
|Item 1   | Identity of Directors, Senior Management and Advisers                        | 1   
|Item 2   | Offer Statistics and Expected Timetable                                      | 1   
|Item 3   | Key Information                                                              | 1   
|Item 4   | Information on the Company                                                   | 17  
|Item 4A  | Unresolved Staff Comments                                                    | 31  
|Item 5   | Operating and Financial Review and Prospects                                 | 31  
|Item 6   | Directors and Senior Management                                              | 49  
|Item 7   | Major Shareholders and Related Party Transactions                            | 59  
|Item 8   | Financial Information                                                        | 61  
|Item 9   | The Offer and Listing                                                        | 64  
|Item 10  | Additional Information                                                       | 65  
|Item 11  | Quantitative and Qualitative Disclosures about Market Risk                   | 85  
|Item 12  | Description of Securities Other than Equity Securities                       | 85  
|        
|Part II  |                                                                              |     
|        
|Item 13  | Defaults, Dividends, Arrearages and Delinquencies                            | 85  
|Item 14  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 86  
|Item 15  | Controls and Procedures                                                      | 86  
|Item 16  | [Reserved]                                                                   | 87  
|Item 16A | Audit Committee Financial Expert                                             | 87  
|Item 16B | Code of Ethics                                                               | 87  
|Item 16C | Principal Accounting Fees and Services                                       | 87  
|Item 16D | Exemptions from the Listing Standards for Audit Committees                   | 88  
|Item 16E | Purchase of Equity Securities by the Issuer and Affiliated Purchasers        | 88  
|Item 16F | Changes in Registrant's Certifying Accountant                                | 88  
|Item 16G | Corporate Governance                                                         | 88  
|        
|Part III |                                                                              |     
|        
|Item 17  | Financial Statements                                                         | 88  
|Item 18  | Financial Statements                                                         | 89  
|Item 19  | Exhibits                                                                     | 89  

- iv -

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

|A. | Selected
Consolidated Financial Data
|-- | ------------------------------------

The
selected consolidated statement of operations data set forth below for the years ended
December 31, 2008, 2007 and 2006, and the selected consolidated balance sheet data as of
December 31, 2008 and 2007 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, 2005 and 2004 and the selected consolidated balance sheet data as of December
31, 2006, 2005 and 2004 are derived from our audited consolidated financial statements
that are not included in this Annual Report filed on Form 20F.

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, 2008.

1

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|                                     | Year ended December 31.
|------------------------------------ | -----------------------
|
|
|
|
|Statement of Operations Data:        |                        
|Revenues:                            |                        
|Products                             |                        
|Services                             |                        
|                                     |                        
|                                     |                        
|                                     |                        
|Cost of revenues:                    |                        
|Products                             |                        
|Services                             |                        
|                                     |                        
|                                     |                        
|                                     |                        
|Gross profit                         |                        
|Operating expenses:                  |                        
|Research and development expenses,   |                        
|net                                  |                        
|Selling and marketing expenses       |                        
|General and administrative expenses  |                        
|Impairment of long lived assets      |                        
|and other charges                    |                        
|                                     |                        
|Operating income (loss)              |                        
|Financial income (expenses), net.    |                        
|Expenses related to aborted merger   |                        
|transaction                          |                        
|Other income (expense)               |                        
|                                     |                        
|Income (loss) before taxes on income |                        
|Taxes on income                      |                        
|                                     |                        
|Income (loss) after taxes on income  |                        
|Equity in earnings (losses) of       |                        
|affiliated companies                 |                        
|Minority interest in losses of a     |                        
|subsidiary                           |                        
|                                     |                        
|Income (loss) before cumulative      |                        
|effect of a change in an             |                        
|accounting principle                 |                        
|Gain (loss) from cumulative effect   |                        
|of a change in an accounting         |                        
|principle                            |                        
|                                     |                        
|Net income (loss)                    |                        
|                                     |                        
|Earnings (loss) per share before     |                        
|cumulative effect of a change in     |                        
|an accounting principle              |                        
|Basic                                |                        
|                                     |                        
|Diluted                              |                        
|                                     |                        
|Basic and diluted net earnings       |                        
|(loss) per share from cumulative     |                        
|effect of a change in an             |                        
|accounting principle                 |                        
|                                     |                        
|Net earnings (loss) per share:       |                        
|Basic                                |                        
|                                     |                        
|Diluted                              |                        
|                                     |                        
|Weighted average number of shares    |                        
|used in computing net earnings       |                        
|(loss) per share:                    |                        
|Basic                                |                        
|                                     |                        
|Diluted                              |                        
|                                     |                        

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

2

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|B | Capitalization
and Indebtedness
|- | -------------------------------

Not
applicable.

|C. | Reasons
for the Offer and Use of Proceeds
|-- | -----------------------------------------

Not
applicable.

|D. | Risk
Factors
|-- | ------------

Investing in our ordinary shares
involves a high degree of risk and uncertainty. You should carefully consider the risks
and uncertainties described below before investing in our ordinary shares. If any of the
following risks actually occurs, our business, prospects, financial condition and results
of operations could be harmed. In that case, the value of our ordinary shares could
decline, and you could lose all or part of your investment.

# Risks Relating to Our
Business

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

We
had a net loss of approximately $1.1 million in 2008, compared to a net income of
approximately $ 10.1 million in 2007 and approximately $ 10.5 million in 2006 and we have
an accumulated deficit of $635 million. We cannot assure you that we can operate
profitably in the future. If we do not regain profitability, the viability of our company
will be in question and our share price could further decline.

If
commercial satellite communications markets fail to grow, our business could be
materially harmed.

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

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

We
operate in the telecommunication industry and are influenced by trends of the
telecommunications industry, which are beyond our control and may affect our operations.
These trends 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;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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---

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

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

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

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

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

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

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

Continuing
unfavorable global economic conditions could have a material adverse effect on our
business, operating results and financial condition

The
recent crisis in the financial and credit markets has led to a global economic slowdown,
with economies worldwide showing significant signs of weakness. If the economies in any
part of the world continue to be weak or weaken further, our customers may reduce or
postpone their spending significantly. This could result in reductions in sales of our
products or services, longer sales cycles, slower adoption of new technologies and
increased price competition. In addition, weakness in the end-user market could negatively
affect the cash flow of our customers who could, in turn, delay paying their obligations
to us or ask us for vendor financing. This could increase our credit risk exposure and
cause delays in our recognition of revenues on future sales to these customers. Specific
economic trends, such as declines in the demand for telecommunications products and
services, the tightening of credit markets, or weakness in corporate spending, could have
a direct impact on our business. Any of these events would likely harm our business,
operating results and financial condition. If global economic and market conditions do not
improve, or continue to deteriorate, it may have a material adverse effect on our
business, operating results and financial condition.

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

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

4

---

---

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

In
recent years, a significant portion of our revenues has been derived from large-scale
contracts with foreign governments and agencies, including those in Peru, Russia, Colombia
and Mexico. 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. We do not have a
policy of hedging specific contracts. In some cases we hedge the risks involved in our
general operations in Israel and in our subsidiaries abroad. 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
November 2002, we were awarded two large projects by the Colombian government,
including the installation and operation of approximately 550 telecenters to provide
Internet connectivity and telephony services in cities and towns throughout Colombia and a
second network of approximately 3,300 sites with public rural satellite telephony. The
original total value of the contracts was approximately $72 million and the remaining
value of the contracts, which are being held in restricted cash, is approximately
$24.0 million as of December 31, 2008. As of December 31, 2008, we signed new
agreements for the provision of services under these contracts which include the upgrade
of technology, primarily in existing sites, requiring additional capital expenditure by
us. While we expect that most of the $24 million held in restricted cash will be released
during 2009, with the remaining amount to be released in 2010, we cannot make any
assurances that we will be able to comply with the newly negotiated indicators and
agreement terms. In addition, any early unilateral termination by the Colombian government
could have a significant adverse impact on our operating results. Moreover, in the event
that we do not generate new substantial business in Colombia during 2009 or 2010, our
operations in Colombia will most likely generate losses in 2010.

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

The
network communications market, to which our products and services are targeted, is
characterized by rapid technological changes, new product introductions and evolving
industry standards. If we fail to stay abreast of significant technological changes, our
existing products and technology could be rendered obsolete. Historically, we have
enhanced the applications of our existing products to meet the technological changes and
industry standards. Our success is dependent upon our ability to continue to develop new
innovative products, applications and services and meet developing market needs.

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

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

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

5

---

---

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

A
significant part of our business in 2008 was generated from recurring customers, and, as a
result, the termination or non-renewal of our contracts could have a material adverse
effect on our business, financial condition and operating results. Some of our existing
contracts could be terminated due to any of the following reasons, among others:

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

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

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

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

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

If
we are not able to gain new customers and retain our present customer base, our revenues
will decline significantly. In addition, if Spacenet has a higher than anticipated
subscriber churn, or if Spacenet Rural does not win new government related contracts, as
was the case in 2008, this could materially adversely affect our financial position.

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

Several
of the components required to build our VSATs and hubs are manufactured by a limited
number of suppliers. 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 suppliers and subcontractors to obtain components for our
products on favorable terms in order to reduce the overall price of our products. If we
are unable to obtain the necessary volume of components at sufficiently favorable terms or
prices, we may be unable to produce our products at 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. Our suppliers
are not always able to meet our requested lead times. If we are unable to satisfy
customers needs, we could lose their business.

In
2007 we entered into an outsourcing manufacturing agreement with a single source
manufacturer for almost all of our indoor units. This agreement exposes us to certain
risks related to our dependence on a single manufacturer which could include failure in
meeting time tables and quantities, or material price increases which may affect our
ability to provide competitive prices. We estimate that the replacement of the outsourcing
manufacturer would, if necessary, take a period of between six to nine months.

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

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

6

---

---

In
addition, the launch of the SpaceWAY3 satellite by HNS, which enables HNS to offer a
vertically integrated solution to its customers, as well as the announcement concerning
ViaSat Inc.s intention to launch its own satellite (ViaSat-1), may change the
competitive environment in which we operate and could have an adverse effect on our
business.

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

In
Peru and Colombia, where we primarily operate public rural telecom services we typically
encounter competition on government subsidized bids from various service providers, system
integrators and consortiums. Some of these competitors offer solutions based on VSAT
technology and some on alternate technologies (typically cellular, wireless local loop or
WiMAX). As operators that offer terrestrial or cellular networks expand their reach to
certain SRC regions, they compete with our VSAT solutions. In addition, as competing
technologies such as cellular telephones become available in areas where not previously
available in rural communities of Peru and Colombia, our business can be adversely
affected.

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

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

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

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

7

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

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

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

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

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

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

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

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

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

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

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

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

Any
decline in commercial business in any country may 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, such as the current recession,
countries in which we do business will find it more difficult to raise financing from
investors for the further development of the telecommunications industry, and private
companies will find it more difficult to finance the purchase or upgrade of our
technology. Any such changes could adversely affect our business in these and other
countries.

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

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

8

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

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

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

In
the past year, we have seen longer sales cycles, primarily in the emerging markets. If
this trend continues and is exacerbated, it could have an adverse effect on our ability to
achieve profitability.

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 have and may continue to vary significantly from quarter to quarter. The
causes of fluctuations include, among other things:

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

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

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

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

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

| | economic
instability;
|- | ---------------------

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

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

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

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

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

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

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

9

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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 during and following
periods of volatility.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# Risks Related to
Ownership of Our Ordinary Shares

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

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

If
U.S. tax authorities were to treat us as a "passive foreign investment company",
that could have an adverse consequences on U.S. holders.

Holders
of our ordinary shares who are United States residents face income tax risks. There is a
risk that we will be treated as a passive foreign investment company. Our
treatment as a passive foreign investment company could result in a reduction in the
after-tax return to the holders of our ordinary shares and would likely cause a reduction
in the value of such shares. A foreign corporation will be treated as a passive foreign
investment company for U.S. federal income tax purposes if either (1) at least 75% of
its gross income for any taxable year consists of certain types of passive
income, or (2) at least 50% of the average value of the corporations
gross assets produce, or are held for the production of, such types of passive
income. For purposes of these tests, passive income includes dividends,
interest, gains from the sale or exchange of investment property and rents and royalties
other than rents and royalties that are received from unrelated parties in connection with
the active conduct of trade or business. For purposes of these tests, income derived from
the performance of services does not constitute passive income. Those holders
of shares in a passive foreign investment company who are citizens or residents of the
United States or domestic entities would alternatively be subject to a special adverse
U.S. federal income tax regime with respect to the income derived by the passive foreign
investment company, the distributions they receive from the passive foreign investment
company and the gain, if any, they derive from the sale or other disposition of their
shares in the passive foreign investment company. In particular, any dividends paid by us
would not be treated as qualified dividend income eligible for preferential
tax rates in the hands of non-corporate U.S. shareholders.

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

As
of March 31, 2009, York Capital Management, or York, and entities affiliated with them
beneficially own or vote approximately 20% of our outstanding ordinary shares. As a
result, York may have a substantial influence over all matters that require approval by
our shareholders, including the election of directors and approval of significant
corporate transactions. As a result, corporate actions might be taken even if other
shareholders oppose them. This concentration of ownership might also have the effect of
delaying or preventing a change of control of our company that other shareholders may view
as beneficial.

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

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

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

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

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

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

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A
request for a class action lawsuit has been filed against us and the results, if admitted
as a formal class action in the District Court of Jerusalem, could have an adverse effect
on our business.

In
October 2008, a lawsuit and a motion for its approval as a class action proceeding was
filed in the District Court of Jerusalem by eight individuals and Israeli companies
against us, claiming damages based on the amounts the shareholders would have been paid
had the aborted merger agreement with the consortium of investors closed.

We
have filed a response and request to dismiss the motion 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.

# Risks Related To
Regulatory Matters

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

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

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

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

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

13

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Your
rights and responsibilities as a shareholder are governed by Israeli law and differ in
some respects from those under Delaware law.

Because
we are an Israeli company, the rights and responsibilities of our shareholders 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 a Delaware corporation. In particular, a shareholder of an Israeli company
has a duty to act in good faith towards the company and other shareholders and to refrain
from abusing his, her or its 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 to 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 shareholders vote or to appoint or prevent the appointment of a director or
executive officer in the company has a duty of fairness towards the company. However,
Israeli law does not define the substance of this duty of fairness. Because Israeli
corporate law has undergone extensive revisions in recent years, there is little case law
available to assist in understanding the implications of these provisions that govern
shareholder behavior.

As
a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may
follow certain home country corporate governance practices instead of certain NASDAQ
requirements, which may not afford shareholders with the same protections that
shareholders of domestic companies have.

As
a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are
permitted to follow certain home country corporate governance practices instead of certain
requirements of the NASDAQ Marketplace Rules. A foreign private issuer that elects to
follow a home country practice instead of such requirements must submit to NASDAQ in
advance a written statement from an independent counsel in such issuers home country
certifying that the issuers practices are not prohibited by the home countrys
laws. In addition, a foreign private issuer must disclose in its annual reports filed with
the Securities and Exchange Commission each such requirement that it does not follow and
describe the home country practice followed by the issuer instead of any such requirement.
As an Israeli company listed on the NASDAQ Global Market, we expect to follow home country
practice with regard to, among other things, composition of the board of directors,
director nomination procedure, compensation of officers, distribution of annual reports to
shareholders and quorum at shareholders meetings. In addition, we expect to follow
Israeli law instead of the NASDAQ Marketplace Rules that require that we obtain
shareholder approval for certain dilutive events, such as for the establishment or
amendment of certain equity-based compensation plans, an issuance that will result in a
change of control of the company, certain transactions other than a public offering
involving issuances of a 20% or more interest in the company and certain acquisitions of
the stock or assets of another company.

We
may fail to maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002, which could have an adverse effect on our financial results
and the market price of our ordinary shares.

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404, which started in connection
with our 2006 Annual Report on Form 20-F, have resulted in increased general and
administrative expense and a diversion of management time and attention, and we expect
these efforts to require the continued commitment of resources. Section 404 of the
Sarbanes-Oxley Act requires us to provide (i) managements annual review and
evaluation of our internal control over financial reporting and (ii) a statement by
management that its independent registered public accounting firm has issued an
attestation report on our internal control over financial reporting, in connection with
the filing of the Annual Report on Form 20-F for each fiscal year. The rules governing the
standards that must be met for management to assess our internal control over financial
reporting are complex and require significant documentation, testing and possible
remediation to meet the detailed standards under the rules. During the course of its
testing, our management may identify material weaknesses or significant deficiencies,
which may not be remedied prior to the deadline imposed by the Sarbanes-Oxley Act.If we fail to maintain the adequacy of our internal controls, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal controls
over financial reporting. Failure to maintain effective internal controls over financial
reporting could result in investigation or sanctions by regulatory authorities, and could
have a material adverse effect on our operating results, investor confidence in our
reported financial information, and the market price of our ordinary shares.

14

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# Risks Related to Our
Location in Israel

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

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

There
has been an increase in unrest and terrorist activity in Israel, which began in September
2000 and which has continued with varying levels of severity through 2008. The future
effect of this deterioration and violence on the Israeli economy and our operations is
unclear. The election of representatives of the Hamas movement to a majority of seats in
the Palestinian Legislative Council in January 2006 resulted in an escalation in violence
among Israel, the Palestinian Authority and other groups. In July 2006, extensive
hostilities began along Israels northern border with Lebanon and to a lesser extent
in the Gaza Strip. In January 2009, Israel attacked Hamas strongholds in the Gaza strip,
in reaction to rockets that were fired from Gaza and which landed in Israel. Ongoing
violence between Israel and the Palestinians as well as tension between Israel and the
neighboring Syria and Lebanon may have a material adverse effect on our business,
financial condition and results of operations.

Furthermore,
there are a number of countries, primarily in the Middle East, as well as Malaysia and
Indonesia, that restrict business with Israel or Israeli companies, and we are precluded
from marketing our products directly to these countries. Restrictive laws or policies
directed towards Israel or Israeli businesses may have an adverse impact on our
operations, our financial results or the expansion of our business.

Our
results of operations may be negatively affected by the obligation of our personnel to
perform military service.

Many
of our employees in Israel are obligated to perform annual reserve duty in the Israeli
Defense Forces and may be called for active duty under emergency circumstances at any
time. If a military conflict or war arises, these individuals could be required to serve
in the military for extended periods of time. Our operations could be disrupted by the
absence for a significant period of one or more of our key employees or a significant
number of other employees due to military service. Any disruption in our operations could
adversely affect our business.

Because
most of our revenues are generated in dollars or are linked to the dollar while a portion
of our expenses are incurred in NIS, our results of operations would be adversely affected
if inflation in Israel is not offset on a timely basis by a devaluation of the NIS against
the dollar.

Most
of our revenues are in dollars or are linked to the dollar, while a portion of our
expenses, principally salaries and related personnel expenses, are in NIS. Therefore, our
NIS related costs, as expressed in U.S. dollars, are influenced by the exchange rate
between the U.S. dollar and the NIS. During 2008, the NIS appreciated against the U.S.
dollar, which resulted in a significant increase in the U.S. dollar cost of our NIS
expenses. We are also exposed to the risk that the rate of inflation in Israel will exceed
the rate of devaluation of the NIS in relation to the dollar or that the timing of this
devaluation lags behind inflation in Israel. This would have the effect of increasing the
dollar cost of our operations. In the past, the NIS has devalued against foreign
currencies, generally reflecting inflation rate differentials. We cannot predict any
future trends in the rate of inflation in Israel or the rate of devaluation or
appreciation of the NIS against the dollar. If the dollar cost of our operations in Israel
increases, our dollar-measured results of operations will be adversely affected.

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

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

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

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

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

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

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

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

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

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

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

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

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

16

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

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

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

# OUR BUSINESS

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

We
have a large installed customer base and have shipped more than 750,000 VSAT units to
customers in over 85 countries on six continents since 1989. We have 16 sales and service
offices worldwide and two call centers to support our customers. Our products are
primarily sold to communication service providers and operators that use VSATs to serve
enterprise, government and residential users. Also, in the U.S. and certain countries in
Latin America, we provide services directly to end users in various market segments.

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

Gilat
Network Systems, or GNS, is a provider of VSAT-based networks and associated
professional services, including turnkey and management services, to telecom operators
worldwide. According to the latest COMSYS VSAT Report, published in 2007 by Communications
Systems Limited, or COMSYS (which refers to a market study from 2006), a leading satellite
industry research firm, we are the second-largest manufacturer of VSATs, with a 23.5%
market share of shipped VSATs and the leading provider to the international market
(comprised of all countries other than the U.S. and Canada). We also provide industry
specific solutions for cellular backhaul, business continuity and disaster recovery. In
the year ended December 31, 2008, we derived approximately 51% of our revenues from GNS.
GNSs representative customers include Brazil Telecom, Optus in Australia, Bharti in
India, ICE in Costa Rica, Nepal Telecom, Telkom in South Africa and Telefonica in Latin
America.

17

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Spacenet
Inc., or Spacenet, provides satellite and hybrid terrestrial network services to
enterprise, government, small office/home office, or SOHO, and residential customers in
the U.S. Spacenet provides three primary lines of service: custom networks, commercial
grade service known as Connexstar, and StarBand service. According to the COMSYS report,
we have a 19.5% market share of U.S. VSAT enterprise sites. In the year ended December 31,
2008, we derived approximately 40% of our revenues from Spacenet. Spacenets
representative customers include Dollar General, Goodyear, Intercontinental Hotels Group,
USPS/Verizon, Scientific Games, Intralot, Boston Market, Valero, Sunoco and Kroger.

Spacenet
Rural Communications, or SRC, provides telephony, Internet and data services primarily
for rural communities in emerging markets in Latin America under projects that are
subsidized by government entities. We believe that we are the largest rural satellite
telecom provider in Latin America, and currently have approximately 16,000 operational
sites. In the year ended December 31, 2008, we derived approximately 9% of our revenues
from SRC.

We
have diversified revenue streams that result from both sales of products and services. In
the year ended December 31, 2008, approximately 56% of our revenues were derived from
product sales and 44% from services. Our service revenues are derived from long-term
contracts of three to six years, which provide stability and visibility into future
revenues. As of December 31, 2008, we had a backlog of $195 million for
equipment and multi-year service contracts. During the same period, we derived 40% of our
revenues from the U.S., 27% from South and Central America, 15% from Asia, 13% from Africa
and 5% from Europe.

We
were incorporated in Israel in 1987 and shipped our first generation VSAT in 1989. Since
then, we have been among the technological leaders in the VSAT industry. Our continuous
investment in research and development has resulted in the development of new and
industry-leading VSAT products and our intellectual property portfolio includes 60 issued
patents (27 U.S. and 33 foreign). As of December 31, 2008, we had 966 employees,
including 163 persons engaged in research, development and engineering activities.

# Industry Overview

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



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

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

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

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

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

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

| | Timely
implementation  Large networks can be deployed within a few weeks.
| | --------------------------------------------------------------------------

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

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

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

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

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

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

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

According
to a Northern Sky Research report from 2008, the number of broadband satellite sites and
subscribers is expected to grow at a compounded annual growth rate, or CAGR, of 14.2%
through 2017. While the Northern Sky Research measures both consumer and enterprise sites,
Gilat currently provides solutions primarily to the enterprise market.

According
to the Northern Sky Research report, the global broadband satellite services market is
expected to have a CAGR of 10.2% through 2011.

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We
believe that there are four primary categories of markets that require VSAT products and
services:

Enterprise
and Business. These end-users include large companies and organizations, government
entities, small medium enterprises, or SMEs, and SOHO end users. For enterprises, VSAT
networks offer network connectivity and deliver voice, data and video within corporations
(known as corporate intranets), Internet access, transaction-based connectivity to
enable on-line data delivery such as point-of-sale (credit and debit card authorization),
inventory control and real time stock exchange trading. According to the Northern Sky
Research report, SME base of two-way broadband VSAT sites accounted for 19% of the global
installed base in 2007

High-End.          The
high-end market consists of customers that have more demanding requirements           of
network performance. These requirements usually include better level of
          Qualilty of Service, or QoS, than the typical user, higher speed connectivity,
          segregation of their traffic from other users traffic and more control
          over the network. Some examples of customers belonging to the high-end market
          are industrial energy organizations such as oil & gas and mining companies,
          militaries, maritime companies and mobile operators.

Rural
Telecommunications. The rural telecommunications market is comprised of communities
throughout the world that require telephone, facsimile and Internet access in areas that
are underserved by existing telecommunications services. These communication services are
usually provided to the rural population via government-subsidized initiatives. This
market sector is comprised of Build-Operate projects, in which governments
subsidize the establishment and the operation of a rural network to be served by a
satellite, wireless or cellular service provider that is usually selected in a bid
process. According to the 2006 GSM Association Universal Access Report, 57 out of the 92
emerging market and developing countries sampled for their study have plans to establish
universal service funds, or USFs, within their jurisdictions to meet local telephony and
Internet service requirements. According to this report, the USFs jointly collected
approximately $6.0 billion worldwide through 2006, out of which $1.62 billion
has been redistributed to the telecommunications industry. In other instances, local
communications operators have USOs which require them to serve rural areas lacking
terrestrial infrastructure. Some local communications operators elect to fulfill this
obligation by hiring third parties in a model known as Build-Operate-Transfer.
In these instances, the network is established and made operational by a third party
service provider and then transferred to the operator.

Consumer.          The
consumer market consists of residential users. These users require a           high-speed
internet connection similar to a digital subscriber line, or DSL, or           cable
modem service. According to the Northern Sky Research report, in 2008 83%           of
these sites were located in North America.

# Our Competitive Strengths

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

Market
leadership in large and growing markets. Since our inception, we have sold
more than 750,000 VSATs to customers in over 85 countries. Our customer base includes a
large number of satellite-based communications service providers and operators worldwide.
In addition, we provide satellite-based communication services primarily to enterprises in
the U.S. and we are the largest satellite communications service provider to rural
communities in Latin America. The large installed base of our VSAT equipment also provides
opportunities for new and incremental sales to existing customers. According to the latest
COMSYS report, our global market share to the enterprise market was approximately 23.5%,
based on the number of terminals shipped, making us the second largest VSAT manufacturer
in the world for this segment.

Technology
leadership. We have been at the forefront of VSAT technology and services
for 20 years and continue to be an innovator and developer of new satellite
technologies. Our highly customizable single platform VSAT technology enables us to
provide our customers with a wide range of broadband, Internet, voice, data and video
solutions and our product and operations infrastructure is capable of running hubs with
greater than 99.99% availability while rolling out thousands of new VSAT site locations
each month. We have unified all our legacy product lines under SkyEdge (currently we have
a second generation of the platform SkyEdge II) which enables us to focus our research,
development and engineering efforts that are supported by 163 persons. This enables us to
rapidly develop new features and applications. In addition, by directly serving end-users
through our service organizations, we are able to quickly respond to changing market
conditions to ensure we maintain our leadership position.

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

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

Diversified
revenue streams and customer base. For the year ended December 31, 2008,
approximately 56% of our revenues were generated from products and 44% from services. Our
product sales are generally independent equipment orders which often generate maintenance
contracts and additional opportunities for future product sales. Our service sales are
characterized by long-term contracts that provide a recurring revenue base. In the year
ended December 31, 2008, our three business units, GNS, Spacenet and SRC, accounted for
51%, 40% and 9% of our revenues, respectively. We are not overly dependent on any single
customer, project or geographic region and no single customer accounted for more than 10%
of our revenues.

Strong
financial position. Our strong financial position allows us to compete
effectively with other companies in our industry. As of December 31, 2008, our total
cash was $168.9 million (total cash includes cash and cash equivalents, held to maturity
marketable securities, restricted cash and restricted cash held by trustees less short
terms bank credits) and we reduced our debt to $34.7 million as of December 31, 2008,
from $40.4 million at December 31, 2007. Given the current economic environment
our strong cash position gives us a competitive advantage in potential acquisitions and in
ongoing business.

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

# Our Growth Strategy

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

Enhance
our leadership position in our core markets. In the past two years, we have
expanded our position in the VSAT market through the development of new products,
solutions and services within our target markets. Through the development of our SkyEdge
and SkyEdge II products and our end-to-end solution offerings, we are focused on providing
innovative products and services required by our customers and end-users. Our research and
development efforts will focus on reducing our costs and expanding our product portfolio
with new product offerings.

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Expand
our presence across the communications value chain. We are a leading global
provider of VSAT network equipment and services. Gilat is focused on providing more than
VSAT equipment and services to our customers by offering a full turnkey service for the
management and deployment of the project. In these cases we handle the project management,
solution design, equipment procurement, deployment logistics, installation and
integration, operational services, maintenance and support.

Focus
on emerging markets. We have expanded our focus on rural and emerging
markets. Traditionally, it has been considered too costly for service providers to provide
full-terrestrial networks to these regions. As a result, many governments either require
telecommunications operators to provide communications access through USOs to these
communities or provide funding via USFs to subsidize the provision of these services.
Available worldwide USF funding is estimated to be around $4 billion in approximately
15 countries. As this communications rollout is adopted, VSAT-based communication networks
provide a high quality, cost-effective alternative to terrestrial, wireless and cellular
systems. GNS focuses its sales efforts on offering solutions to service providers that are
either being required by USOs to facilitate the rural expansion, or on offering solutions
to service providers that are utilizing the subsidies created through USFs.

Focus
on business continuity/emergency response. We addressed the area of
business continuity and emergency response applications by providing secondary networks
for continuous operations during network failures or natural disasters. Examples of
solutions include integration of a mobile communications kit for a complete on-the-go
communication network and Ciscos iComm offered by Spacenet and business continuity
solutions such as Ciscos VSAT Network Module and standalone VSATs that provide
near-instantaneous failover from a primary circuit to the satellite backup.

Enter
new strategic markets. We have identified a number of markets which we
believe will be strategic to our future growth, including Broadband Wireless Access, or
BWA, solutions and additional government markets. BWA is an emerging technology designed
to solve the last mile connectivity problem of rural and remote locations that lack the
terrestrial infrastructure. Service providers are using BWA systems to provide a link
between end users and communications networks. We have integrated WiMAX into our product
portfolio through an OEM agreement and we are leveraging our established sales and
distribution channels in order to offer solutions that combine satellite technology with
WiMAX.

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

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

# Our Business Units

Gilat
Network Systems (GNS)

Overview

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

Our
SkyEdge product family, including the SkyEdge and SkyEdge II products allows us to deliver
efficient, reliable and affordable broadband connectivity such as Internet, voice, data
and video.

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

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

GNS
is headquartered in Petah Tikva, Israel and has 13 offices worldwide, with 483 employees.
In the year ended December 31, 2008, GNS had revenues of $161.9 million, including
sales of $25.3 million to Spacenet and SRC.

Products
and Solutions

SkyEdge
Family of Products

Our
SkyEdge product family is based on a single hub with multiple VSATs to support a variety
of services and applications. The products were designed using advanced technology to
enable them to process different types of user traffic such as voice, critical data,
Internet traffic and video, to handle each type of traffic in an efficient manner and
provide the necessary quality of service for each traffic stream. The SkyEdge also
includes advanced mechanisms that ensure that the transmissions via the satellite utilize
the available satellite bandwidth efficiently and enhance the user experience.

Below
is a table that shows the main VSAT products Gilat offers. All of these products are
connected to an outdoor RF unit which is mounted on a dish antenna:

Description Interfaces Typical
Applications Target Market Compact IP VSAT IP Internet access ISPs, Consumers Enterprise VSAT IP Internet access, 
VoIP, LAN interconnect SOHO, SME Telco-grade Modular, 
Rack-Mounted 
Multi-Service VSAT IP, voice, mesh Internet access, LAN interconnect,
legacy voice, VoIP trunking, cellular
backhaul, video contribution Enterprises, Government, Telecom, 
Mobile Operators, Military Modular
Multi-Service
VSAT IP, voice, mesh Internet access,
voice Rural USO 
projects Outdoor VSAT IP Outdoor, IP traffic Utilities, SCADA, 
Security


Solutions

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

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We
currently offer the following specialized solutions:

|Solution                               | SkyAbis                                                                             | Disaster Recovery / Rapid 
    Deployment                                                       | Cisco VSAT NM                                                                
|-------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------
|Description                            | Cellular traffic backhaul 
    enabling operators to 
    expand their market reach | Transportable and man-pack 
  units, communication solution                                     | Satellite based 
    networking for Cisco 
    router with Cisco VSAT 
    NM
|Typical 
    Application               | Cellular backhaul for 
    GSM and CDMA 
    networks                               | On-demand access to voice, 
  data and video                                                    | Business continuity, 
    Disaster recovery, 
    Content distribution       
|Type of 
    customers /
    verticals | GSM and CDMA cellular
  operators                                                   | Mobile medical units, Mobile 
    ATM, Military and security 
    forces, Fire and police units | Enterprise, Financial 
  sector, Governments                                 
|Selected 
    customers                | Enitel (Nicaragua), 
  TFL Fiji                                                     | Petrobras (Brazil),
      
      Netpresa
  (Mexico), 
    CACI (U.S), 
    H-E-B (U.S)         | Cisco sales channel 
    customers, 
    Valero (U.S)                        

WiMAX
Solutions

Gilat offers a comprehensive
portfolio of fixed and mobile WiMAX solutions for licensed and license-free frequencies.
The product offering, which is provided through an OEM agreement, enables customers to
address their broadband wireless access and satellite communications needs through Gilat,
as an integrated one-stop-shop solutions provider. The VSAT and WiMAX
platforms have been integrated with each other so that a customer deploying this
integrated solution will have a common Quality of Service, or QoS for the systems and the
WiMAX equipment can be managed via the VSATs.

Turnkey
Implementation Capabilities

We
provide our customers with end-to-end solutions which include the following:

| |  | Project
management  accompanying the customer through all stages of a project and ensuring
that the project objectives are within the predefined scope, time and budget;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Network
design  translating the customers requirements into a system to be deployed,
performing the sizing and dimensioning of the system and evaluating the available
solutions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Deployment
logistics - transportation and rapid installation of equipment in all of the network
sites;
| | - | ------------------------------------------------------------------------------------------------------

| |  | Implementation
and integration  combining our equipment with third party equipment such as solar
panel systems and surveillance systems as well as developing tools to allow the customer
to monitor and control the system;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Operational
services  providing professional services, program management, network operations
and field services;
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | Maintenance
and support  providing 24/7 helpdesk services, on-site technician support and
equipment repairs and updates.
| | - | -------------------------------------------------------------------------------------------------------------------------

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Manufacturing,
Customer Support and Warranty

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

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

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

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

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

We
typically provide a one-year warranty to our customers as part of our standard contract.

GNS
Customers and Markets

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

Enterprise
and service providers use our networks for Internet access, for broadband data, voice and
video connectivity and for applications such as credit card authorizations, online
banking, corporate intranet, interactive distance learning, lottery transactions, retail
point-of-sale, inventory control and Supervisory Control and Data Acquisition, or SCADA,
services.

Service
providers serving the rural communications market are typically public telephony and
Internet operators providing telephony and Internet services through public call offices,
telecenters, Internet cafes or pay phones. Some of the rural communication projects are
for government customers. Examples of our rural telecom customers include Nepal Telecom
and ICE in Costa Rica.

Our
VSAT networks also provide underserved areas with a high-speed Internet connection similar
to DSL service provided to residential users. An example of such a customer is Optus in
Australia.

GNS
Sales and Marketing

We
use both direct and indirect sales channels to market our products, solutions and
services. Most of our revenues are derived from direct sales. Our GNS equipment sales
division has organized its marketing activities by geographic areas, with groups or
subsidiaries covering most regions of the world. Our sales teams are comprised of account
managers and sales engineers (approximately 150 employees), who establish account
relationships and determine technical and business requirements for the network. These
teams also support the other distribution channels with advanced technical capabilities
and application experience. Sales cycles in the VSAT network market vary significantly,
with some sales requiring 18 months from an initial lead through signing of the
contract and others stemming from an immediate need for product delivery within two to
three months. The sales process includes understanding customer needs, several network
design iterations, and network demonstrations.

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Spacenet Inc.

Overview

Spacenet
provides satellite network services to enterprise, government, and small office/home
office (SOHO) customers in North America. In addition, we offer our enterprise customers
value-added services, including hybrid satellite/terrestrial networks, VoIP, and
outsourced network management.

Spacenets
equipment and services are currently deployed at more than 100,000 business, government
and residential locations in the U.S. Our customers include Dollar General, Goodyear,
Intercontinental Hotels Group, USPS/Verizon, Scientific Games, Intralot, Boston Market,
Kroger, Sunoco and Valero. The latest COMSYS report, ranked Spacenet as the second largest
satellite network service provider in North America for the enterprise/government market,
with a19.5% market share. Our market includes WAN services for retail, energy, oil &
gas, financial services, hospitality and government customers, as well as Internet access
services for SOHO and residential customers.

Spacenet
is based in McLean, Virginia, and has 245 employees. In the year ended December 31, 2008,
Spacenet had revenues of $106.3 million.

Services

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

|Service              | StarBand                      | Connexstar
Transaction                                        | Connexstar
Broadband                             | Connexstar
Performance                                                 | Spacenet Custom
Networks                                                                                  
|-------------------- | ----------------------------- | ------------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------
|Description          | VSAT Internet access services | Low-bandwidth VSAT network                                    | Commercial grade broadband VSAT networks         | High-bandwidth VSAT network                                            | VSAT and hybrid terrestrial WANs                                                                          
|Typical applications | Web, E-mail                   | Credit cards, Point-of-sale, SCADA                            | Intranet, Credit cards, Back-office applications | VoIP, Video monitoring, Backup networks                                | Web Based Business Applications, Corporate E-mail, VoIP, Video, Multicast-based file delivery applications
|Target Markets       | SOHOs                         | Utilities pipeline networks, Lottery operators                | Retail Hospitality, Small business               | Disaster recovery, Business continuity, government, Energy exploration | Large enterprise customers                                                                                
|Sample Customers     | Residential users             | Texas Utilities, Avista Utilities, Georgia Transmission Corp. | FedEx Ground, LandTel, Orbital Data Networks     | State and Local Government. Valero                                     | Dollar General, USPS/Verizon, OneOk                                                                       

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

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

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

Network
Operations and Customer Support

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

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

Spacenet
Sales and Marketing

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

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Our
StarBand SOHO services are sold both directly and through approximately 150 sales agents,
that are typically direct-to-home satellite TV resellers and/or satellite Internet service
resellers. Our distribution channel strategy is shown below:



Spacenet
Rural Communications

Overview

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

SRC
has offices in Peru and Colombia and employs 255 persons. In the year ended December 31,
2008 SRC had revenues of $24.5 million

SRC
Services and Solutions

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

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

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Currently,
SRC Colombia operates a network of almost 9,000 rural sites spread throughout the country,
serving over seven million persons. The services for those rural sites include telephony,
Internet, data, fax and other services. In order to comply with government bid
requirements, SRC has integrated a variety of technologies into its VSAT based network
such as wireless local loop and cellular. The number and mix of these sites is changing in
order to meet the requirements of the newly revised agreements with the Ministry of
Communications in Colombia.

In
addition to its well established operations in Peru and Colombia, SRC provides services to
customers in other countries in the region. In Panama, SRC is working with
Cable & Wireless to allow it to fulfill its USO with cost efficient technology
and high quality service.

Customer
Support Operations

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

SRC
Customers and Markets

Public
Rural Telecom Services:

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

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

VSAT
Services to Telecom Operators:

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

Enterprise
and Government Agencies:

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

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SRC
Sales and Marketing

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

# Competition

The
telecommunications industry is a competitive market. In the equipment market, GNS faces
competition from other VSAT manufacturers, such as Hughes Network Systems LLC,
ViaSat, iDirect and a few other smaller manufacturers.

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

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

# Geographic Distribution
of our Business

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

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

Capital
Expenditures and Divestitures. In 2008, 2007 and 2006, our property and equipment
purchases amounted to approximately $13.8 million, $9.3 million and $6.5 million,
respectively. These amounts do not include the reclassification of inventory to property
and equipment made during 2008, 2007 and 2006 in the amount of approximately $3.4 million,
$2.2 million and $9.2 million, respectively. On March 1, 2006 we and SES, a leading
satellite space segment provider, executed an agreement whereby we transferred our
remaining 0.17% interest in Satlynx to SES. As part of this agreement, we received a
waiver from SES on any royalty payments which may be payable by us to SES in accordance
with development agreements signed between the parties in 2002 and SES provided a
corporate guarantee to cover Satlynxs obligations to us.

# Backlog

On
December 31, 2008, our backlog for equipment sales and revenues from multi-year service
contracts for our VSAT products was approximately $195 million, down from approximately
$202 million at year-end 2007. Backlog does not include revenues from future traffic on
our rural networks, future revenues from subscribers from our consumer and enterprise
operation and other cancelable agreements. Backlog is not necessarily indicative of future
sales. Many of our contracts can be terminated at the convenience of the customer. In
addition, some of our contracts may include product specifications that require us to
complete additional product development. Any inability to meet the specifications or
complete the product development could lead to a termination of the related contract.

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# Facilities

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

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

We
lease approximately 137,000 square feet of office space in McLean, Virginia. These offices
house our personnel and also contain a stand by disaster recovery facility. In 2000 and
2002, we purchased and developed facilities on approximately 140,400 square feet of land
in Backnang, Germany. Since May, 2002, these facilities are leased to a third party.

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

We
believe our facilities to be adequate for our needs.

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

There
are no unresolved staff comments.

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

|A. | Operating
Results
|-- | -----------------

The following discussion of our
results of operations should be read together with our audited consolidated financial
statements and the related notes, which appear elsewhere in this annual report. The
following discussion contains forward-looking statements that reflect our current plans,
estimates and beliefs and involve risks and uncertainties. Our actual results may differ
materially from those discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below and elsewhere in
this annual report.

# Introduction

We
were incorporated in 1987 and began trading on the NASDAQ Stock Market in 1993. We are a
leading global provider of Internet Protocol, or IP, based digital satellite communication
and networking products and services. We design, produce and market VSATs, or very small
aperture terminals, and related VSAT network equipment. VSATs are earth-based terminals
that transmit and receive broadband, Internet, voice, data and video via satellite. VSAT
networks have significant advantages to wireline and wireless networks, as VSATs can
provide highly reliable, cost effective, end-to-end communications regardless of the
number of sites or their geographic locations.

We
have a large installed customer base and have shipped more than 750,000 VSAT units to
customers in over 85 countries on six continents since 1989. We have 16 sales and
service offices worldwide and two call centers to support our customers. Our products are
primarily sold to communication service providers and operators that use VSATs to serve
enterprise, government and residential users. Also, in the U.S. and certain countries in
Latin America, we provide services directly to end-users in various market segments.

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

# Financial Statements in
U.S. dollars

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

# Critical Accounting
Policies and Estimates

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

We
believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of the financial information included in this annual
report.

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

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

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

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

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

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

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

Income
Taxes.In July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with FAS 109. This interpretation prescribes a minimum recognition threshold a
tax position is required to meet before being recognized in the financial statements. FIN
48 also provides guidance on derecognition of tax positions, classification on the balance
sheet, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 requires significant judgment in determining what constitutes an individual tax
position as well as assessing the outcome of each tax position. Changes in judgment as to
recognition or measurement of tax positions can materially affect the estimate of the
effective tax rate and consequently, affect the operating results of our company.

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

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

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Impairment
of Intangible Assets and Long-Lived Assets. We periodically evaluate our intangible
assets and long-lived assets for potential impairment indicators. Our judgments regarding
the existence of impairment indicators are based on legal factors, market conditions and
operational performance of our acquired businesses and investments. Our long-lived assets
are reviewed for impairment annually and whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of the
assets to the future undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the
assets. In measuring the recoverability of assets, we are required to make estimates and
judgments in assessing our future cash flows which derive from the estimated useful life
of our current primary assets, and compare that with the carrying amount of the assets.
Additional significant estimates used by management in the methodologies used to assess
the recoverability of our long-lived assets include estimates of future short-term and
long-term growth rates, useful lives of assets, market acceptance of products and
services, our success in winning bids and other judgmental assumptions, which are also
affected by factors detailed in our risk factors section in this prospectus. If these
estimates or the related assumptions change in the future, we may be required to record
impairment charges for our long-lived assets.

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

Most
of the activity of Spacenet Rural in Colombia consists of operating subsidized projects
for the government (the Compartel Projects). In accordance with these
projects, the Colombian government transferred approximately $70 Million to trust
accounts. The money is released from the trusts based on a schedule of payments and
meeting certain operational milestones. As of December 31, 2008, approximately $51 million
has been released from the trusts to our company and approximately $24 million is being
held in trust with respect to these projects, until certain operational milestones imposed
by the Colombian government are met. In December 2008, after lengthy negotiations with the
Ministry of Communication in Colombia, we signed an addendum relating to the Compartel
projects, modifying the operational milestones. The new terms of the agreements include
the removal of thousands of telephony sites which were determined to no longer be needed
or used by the rural population in Colombia, the upgrade of technology, primarily in
existing sites, entailing additional capital expenditure, the modification of the terms of
the agreements and a release by each of the parties from all prior claims under the
previous agreements.

In
order to guarantee our performance under the Compartel projects, we secured insurance from
a local insurance company in Colombia. We have provided the insurance company with various
corporate guarantees guaranteeing our performance and our employee salary and benefit cost
for approximately of $27 million and $5 million respectively.

During
2008 and 2007 we deferred revenues related to the Compartel projects in the amount of
approximately $14.8 and $6.4 million respectively, in order to ensure that accumulated
revenues recognized from the Compartel Projects did not exceed the accumulated amounts
already released from the trust. In general, we recognize revenues for these projects on a
straight line basis, relative to the beginning of operation and for the period that
service is required to be provided. The deferred revenues relate to periods for which we
have already provided service but, due to not meeting the operational milestones, these
amounts were not released from restricted cash.

In
accordance with the guidelines of FASB 144, Accounting for the impairment or
disposal of long lived assets, we recorded an impairment of long lived assets and
other charges with respect to its projects in Colombia in amount of $5.0 million and $12.2
million in 2008 and 2007 respectively.

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Legal
and Other Contingencies. We are currently involved in certain legal and other
proceedings and are also aware of certain tax and other legal exposures relating to our
business. We are required to assess the likelihood of any adverse judgments or outcomes of
these proceedings or contingencies as well as potential ranges of probable losses. A
determination of the amount of accruals required, if any, for these contingencies is made
after careful analysis. The accounting treatment related to income taxes exposure/
contingencies have been assessed and provided in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS 109) and FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48). Liabilities related to legal proceedings, demands and claims are recorded in
accordance with the Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies, or SFAS No. 5. SFAS No. 5 defines a
contingency as an existing condition, situation, or set of circumstances involving
uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved
when one or more future events occur or fail to occur. In accordance with SFAS
No. 5, accruals for exposures or contingencies are being provided when the expected
outcome is probable and when the amount of loss can be reasonably estimated. It is
possible, however, that future results of operations for any particular quarter or annual
period could be materially affected by changes in our assumptions, the actual outcome of
such proceedings or as a result of the effectiveness of our strategies related to these
proceedings.

Accounting
for Stock-Based Compensation. On January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standard (SFAS) No. 123(R),
Share-Based Payment, which requires us to measure all employee stock-based
compensation awards using a fair value method and recognize such expense in our
consolidated financial statements. We adopted SFAS 123(R) using the modified
prospective transition method, which requires the application of the accounting standard
starting from January 1, 2006. We estimate the fair value of stock options granted
using the Black-Scholes option pricing model. Prior to the adoption of SFAS 123(R),
we accounted for equity-based awards to employees and directors using the intrinsic value
method in accordance with APB No. 25, Accounting for Stock Issued to
Employees (APB 25) as allowed under SFAS 123. Non-cash share-based
compensation of $0.7 million was recorded in 2008. As of December 31, 2008, we had
$4.7 million of total unrecognized compensation costs related to non-vested share-based
awards granted under our stock option plans. That cost is expected to be recognized over a
weighted average period of 2.1 years.

# Year Ended December 31,
2008 Compared to Year Ended December 31, 2007

Revenues.           Revenues
for the year ended December 31, 2008 and 2007 for our three business           segments
were as follows:

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

35

---

---



Revenues
in 2008 decreased by 5.3% compared to 2007. Revenues in 2008 were derived 56.2% from
equipment and 43.8% from services. In 2007, our revenues were derived 56.0% from equipment
and 44.0% from services. The decrease in the service portion of our business in 2008 is
attributable to the $14.8 million reduction in revenues recognized by SRC, relating to the
delay in the release of restricted cash from the Compartel projects in Colombia, while in
2007 we recognized revenues of approximately $8.5 million with respect to these projects. In
addition the decline in revenues is also attributable to longer sales cycles in the
emerging markets and more conservative spending in the telecom sector, which we attribute
primarily to the economic recession affecting markets worldwide. The decrease in our
revenues was partially offset by Spacenets activities including the continued
roll-outs of large-scale gaming networks in the U.S. Results for revenues in the year 2009
will be affected by the Companys ability to overcome the economic recession and
generate sales in a more difficult economic environment as well as upon the Companys
ability to perform under the new agreements in Colombia and collect the restricted cash
associated therewith.

Gross
profit. The gross profit of our three business segments for the years ended December
31, 2008 and 2007 was as follows:

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

36

---

---



Our
gross profit margin decreased to approximately 32.1% in 2008, from 36.0% in the year ended
2007. The decrease is partially attributable to the projects in Colombia in which we
continued to record all related expenses but did not recognize the related revenues. In
addition, GNS gross margin decreased from 49.6% in 2007 to 41.3% in 2008, also
contributing to the overall decrease in our gross margin. The decrease in GNS gross
margin is attributable to an increase in transactions in 2008 in regions carrying lower
margins such as Asia and Latin America versus higher gross margin transactions in 2007
from Eastern Europe. In addition, during 2008 we wrote off approximately $1.5 million of
excess inventory relating mainly to legacy equipment, compared to a write off of $0.5
million in 2007. The decrease in our gross profit was partially offset by an increase in
Spacenets gross profits due a higher level of revenues in 2008.

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

# Research and Development
Expenses:

|                  | Year Ended
December 31, |  | Year Ended
December 31,
|----------------- | ----------------------- |  | -----------------------
|
|
|
|
|GNS               |                         |  |                        
|Expenses incurred |                         |  | $                      
|Less - grants     |                         |  |                        
|                  |                         |  |                        
|Total GNS         |                         |  | $                      
|                  |                         |  |                        

Net research and development expenses increased
by approximately $1.9 million in the year ended December 31, 2008 compared to the
year ended December 31, 2007. The increase was mainly due to increased salaries and
related expenses caused by the devaluation of the US Dollar against the NIS during 2008
and severance packages of approximately $0.5 million for employees leaving our company. In
addition, during 2008, we received approximately $0.5 million less in grants due to the
completion of a project with the European Union.

Selling
and marketing expenses. The selling and marketing expenses of our three business
segments for the years ended December 31, 2008 and 2007 were as follows:

|         | Year Ended
December 31, |  | Year Ended
December 31,
|-------- | ----------------------- |  | -----------------------
|
|
|
|
|GNS      |                         |  | $                      
|Spacenet |                         |  |                        
|SRC      |                         |  |                        
|         |                         |  |                        
|Total    |                         |  | $                      
|         |                         |  |                        

Selling
and marketing expenses decreased by approximately $2.6 million in the year ended
December 31, 2008, compared to the year ended December 31, 2007. This decrease is
primarily  attributable to a decrease of approximately $2.3 million in sales commissions and agent
commissions, when compared to the year prior.

37

---

---



General
and administrative expenses. The general and administrative expenses of our three
business segments for the year ended December 31, 2008 and 2007 were as follows:

|         | Year Ended
December 31, |  | Year Ended
December 31,
|-------- | ----------------------- |  | -----------------------
|
|
|
|
|GNS      |                         |  | $                      
|Spacenet |                         |  |                        
|SRC      |                         |  |                        
|         |                         |  |                        
|Total    |                         |  | $                      
|         |                         |  |                        

General
and administrative expenses decreased by approximately $1.2 million in 2008, compared to
2007. The decrease in Spacenet is attributable primarily to a reduction of approximately
$0.9 million in sales and use tax provision made in 2007 due to a settlement with the tax
authorities in 2008. In addition, during 2008 Spacenets doubtful debt expenses
decreased by approximately $0.8 million. The decrease in Spacenets general and
administrative expenses was offset by increased expenses in GNS as a result of the
devaluation of the US Dollar against the NIS during 2008 and additional expenses of
approximately $1.0 million in professional consulting fees relating to the implementation
of a new ERP system.

Financial
income (expenses), net. In the year ended December 31, 2008, we had financial income
of approximately $1.3 million, compared to financial income of approximately $6
million in 2007. The decrease in our financial income is mainly attributed to the
significant decrease in interest income from held-to-maturity marketable securities of
which approximately $4.2 million due to the decrease in interest rates on our reduced cash
balance and approximately $0.7 million due to the devaluation of the Companys
pension funds of approximately $0.7 million which were affected by the sharp decline in
the capital markets.

Expenses
related to aborted merger transaction. During the year of 2008, we recorded expenses of
approximately $ 2.3 million of external costs related to the aborted merger transaction.

Other
Income. During the year 2008, we received a dividend from a company in which we had
invested in an amount of approximately $1.2 million, which investment had previously been written off. A substanial portion of this investment was
subsequently sold in the fourth quarter of 2008. The total income from this
transaction amounted to approximately $1.8 million.

Taxes
on income. Taxes on income are dependent upon where our revenues are generated .Taxes
on income in 2008 were approximately $1.4 million compared to approximately
$1.0 million in 2007. The slight increase in taxes during 2008 was not driven by any
particular change in policy or event.

38

---

---



# Year Ended December 31,
2007 Compared to Year Ended December 31, 2006

Revenues.          Revenues
for the year ended December 31, 2007 and 2006 for our three business           segments
were as follows:

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

Revenues
in 2007 increased by 13.6% compared to 2006. The increase in revenues is primarily
attributable to increased revenues in GNS reaching $171.4 million in 2007, up
approximately 26% from $136.0 million in 2006. This growth derives mainly from projects in
Eastern Europe, Africa and India which include turnkey projects to governments and
operators fulfilling universal service obligations. Revenues in 2007 were derived 55.5%
from equipment and 44.5% from services. In 2006, our revenues were derived 50.7% from
equipment and 49.3% from services. The decrease in the service portion of our business is
attributable to the $6.4 million reduction of revenues recognized by SRC, relating to the
delay in the release of restricted cash from the Compartel projects in Colombia. This was
done in order to ensure that accumulated revenues recognized from the projects will not
exceed the accumulated amounts released from the trust. This decrease was offset by an
increase in service revenues generated by GNS in connection with value added services sold
to our customers.

39

---

---



Gross
profit. The gross profit of our three business segments for the years ended December
31, 2007 and 2006 was as follows:

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

Our
gross profit margin remained at approximately 36% for the years ended December 31,
2007 and 2006. Gross profit increased by approximately $11.5 million as a result of
the increase in our revenues. GNS gross margin increased from 47.0% in 2006 to 49.6%
in 2007, mainly as a result of high margin equipment transactions, approximately $0.5
million of inventory write offs during 2007 compared to approximately $1.2 million in 2006
and increased service revenues which carry higher margins in GNS. The increase in
GNS gross margin was offset by a decrease in SRCs gross margins caused by a
deferral of revenues in the Compartel Projects in Colombia for which expenses continued to
be recorded.

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

# Research and Development
Expenses:

|                  | Year Ended
December 31, |  | Year Ended
December 31,
|----------------- | ----------------------- |  | -----------------------
|
|
|
|
|GNS               |                         |  |                        
|Expenses incurred |                         |  | $                      
|Less - grants     |                         |  |                        
|                  |                         |  |                        
|Total GNS         |                         |  | $                      
|                  |                         |  |                        

Net research and development costs
increased by approximately $1.4 million in the year ended December 31, 2007 compared
to 2006. The increase was mainly due to increased salary and related expenses caused
mainly by the devaluation of the US Dollar against the NIS during 2007 and increased
headcount.

40

---

---



Selling
and marketing expenses. The selling and marketing expenses of our three business
segments for the years ended December 31, 2007 and 2006 were as follows:

|         | Year Ended
December 31, |  | Year Ended
December 31,
|-------- | ----------------------- |  | -----------------------
|
|
|
|
|GNS      |                         |  | $                      
|Spacenet |                         |  |                        
|SRC      |                         |  |                        
|         |                         |  |                        
|Total    |                         |  | $                      
|         |                         |  |                        

Selling
and marketing expenses increased by approximately $1.7 million in the year ended
December 31, 2007, compared to 2006. This increase is attributable mainly to increased
expenses in GNS associated with our increased revenues in 2007.

General
and administrative expenses. The general and administrative expenses of our three
business segments for the year ended December 31, 2007 and 2006 were as follows:

|         | Year Ended
December 31, |  | Year Ended
December 31,
|-------- | ----------------------- |  | -----------------------
|
|
|
|
|GNS      |                         |  | $                      
|Spacenet |                         |  |                        
|SRC      |                         |  |                        
|         |                         |  |                        
|Total    |                         |  | $                      
|         |                         |  |                        

General
and administrative expenses increased by approximately $4.3 million in 2007, compared to
2006. This increase is attributable primarily to an increase in general and administrative
expenses in Spacenet relating to a $1.2 million provision for sales and use tax, an
increase in rent expenses of approximately $0.7 million resulting from vacant sublet space
for a short period during 2007, increased professional consulting fees of approximately
$0.6 million relating to Sarbanes Oxley and tax consultants, $0.5 million relating to
franchise and communication taxes and an increase of approximately $0.2 million relating
to legal fees. The increased general and administrative expenses in GNS are attributable
mainly to the increase in the level of our operations.

Financial
income (expenses), net. In the year ended December 31, 2007, we had financial income
of approximately $6.0 million, compared to financial expenses of approximately
$0.7 million in 2006. The increase in our financial income is mainly attributable to
a $3.7 million decrease in interest expenses on long-term loans due to the conversion of
the convertible loan from York at the end of September 2006 and an increase of
$2.9 million in interest income from bank deposits and held to maturities marketable
securities, increased cash balances and an increase in Libor rates.

Taxes
on income. Taxes on income in 2007 were approximately $1.0 million compared to
approximately $2.4 million in 2006. Taxes on income are dependent upon where our
revenues are generated and the reduction in taxes in 2007 is not driven by any particular
change in policy or event.

# 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), sale prices, and production costs, as well as entering into new service
contracts, the termination of existing service contracts, or different profitability
levels between different service contracts. Sales of our products to a customer typically
consist of numerous remote terminals and related hub equipment, which carry varying sales
prices and margins.

41

---

---



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

Our
business historically has not been affected by seasonal variations.

# Liquidity and Capital
Resources

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

In
July 2005, Bank Hapoalim assigned an outstanding Company loan in the amount of
$71.4 million held by it to York Capital Management LP. In December 2005, we revised
the terms of the loan that was assigned by Bank Hapoalim to York. Under the amendment,
York agreed to defer certain principal payments due and established a new payment
schedule. In consideration, we agreed to reduce the exercise price of the warrant issuable
to York (assigned by Bank Hapoalim) to $ 6.75 per share for the period ending September
30, 2006. On September 27, 2006, York exercised its right to have us issue it
warrants in the amount of the loan and accrued interest and immediately exercised its
option to convert the warrants into shares at $6.75 per share. This resulted in our
issuance of approximately 10.6 million ordinary shares to York. As a result of the
conversion, our liabilities were reduced by approximately $68.1 million, including
approximately $1.0 million of accrued interest and net of the approximately
$3.3 million of the unamortized balance representing the fair value of change in
conversion feature. Our shareholders equity increased by the same amount. No profit
or loss was recorded as a result of the conversion.

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

As
of December 31, 2008, we had cash and cash equivalents of $73.9 million, held to
maturity marketable securities of $63 million, short-term and long-term restricted
cash of $14.3 million, short-term restricted cash held in trustees accounts of
$24.2 million and short-term bank credits of $6.5 million. As of
December 31, 2007, we had cash and cash equivalents of $122.8 million,
short-term bank deposits and held to maturity marketable securities of $45.6 million,
short-term and long-term restricted cash of $13.4 million, short-term and long-term
restricted cash held in trustees accounts of $24.0 million and short-term bank
credits of $5.8 million.

42

---

---



As
of December 31, 2008, our accumulated debt was approximately $34.6 million, comprised
of long-term loans of $18.3 million and convertible subordinates notes of
approximately $16.3 million.

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

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

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

Our
cash and cash equivalents decreased by approximately $49 million during the year ended
December 31, 2008 as a result of the following:

Operating
activities. Cash used in operating activities was approximately $19.6 million
mainly due to an increase in trade receivables, in a net amount of approximately $16
million and a decrease in other accounts payable and other long-term liabilities, mainly
deferred revenue in amount of approximately $16.6 million. The above was offset by an
increase in accrued expenses of approximately $3.6 million and positive cash provided by
other operating activity in amount of $9.4 million.

Investing
activities. Cash used in investing activities was approximately $25.5 million,
mainly from net investments in held to maturity marketable securities in the amount of
approximately $15.7 million, purchase of property and equipment in the amount of
approximately $13.8 million, net investment in restricted cash (including long term) in
the amount of approximately $0.9 million, net of proceeds from loans to employees of
approximately $2.8 million, proceeds from sale of investments, net in amount of $1.6
million and proceed from the sale of property and equipment in amount of $0.5 million.

Financing
activities. Cash used in financing activities was approximately $2.2 million,
primarily from the repayment of our long term loan in amount of $5.4 million, net of
proceeds of approximately $2.5 million from the exercise of options and approximately $0.7
million from short term bank credit.

Our cash and cash equivalents
decreased by $26.7 million during the year ended December 31, 2007 as a result of the
following:

Operating
activities. Cash provided by operating activities was approximately $22.7 million
mainly due to a decrease in other assets (including short-term, long-term and deferred
charges) in the amount of $28.5 million and growth in our positive net cash flow
provided by other operating activities in the amount of $32.4 million. The above was
offset in part by an increase in trade receivables of approximately $14.0 million and
a decrease in other accounts payables and other long term liabilities of approximately
$24.2 million.

43

---

---



Investing
activities. Cash used in investing activities was approximately $53.8 million,
mainly from net investment in held to maturity marketable securities in the amount of
approximately $43.5 million, purchase of property and equipment in the amount of
approximately $9.3 million, net investment in restricted cash (including long term) in the
amount of approximately $1.9 million net of proceeds from loans to employees of
approximately $0.9 million.

Financing
activities. Cash provided by financing activities was approximately $3.3 million,
primarily from proceeds of approximately $4.6 million from the exercise of options, net
proceeds of approximately $4.6 million of short term bank credit, net of repayment of long
term loans of approximately $5.6 and net of approximately $0.3 million of
issuance expenses in respect of a public offering completed in December 2006.

# Contractual Obligations

As
of December 31, 2008, our short and long term obligations were as follows:

|Contractual Obligations                  | Payments due by period (in thousands)
|---------------------------------------- | -------------------------------------
|
|
|
|
|Long-term loans *                        |                                      
|Convertible subordinated notes           |                                      
|Accrued interest related to restructured |                                      
|debt (including $653 as short term       |                                      
|accrued expenses)                        |                                      
|Capital lease obligations                |                                      
|Operating lease                          |                                      
|Other long-term debt                     |                                      
|Total contractual cash obligations       |                                      

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

# Off Balance Sheet
Arrangements

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

As
of December 31, 2008, the aggregate amount of bank guarantees outstanding in order to
secure our various performance obligations was approximately $14.7 million, comprised
of performance guarantees provided on behalf of our subsidiaries, including an aggregate
of approximately $6.3 million on behalf of our subsidiary in Peru. We have restricted cash
as collateral for these guarantees in an amount of approximately $1.9 million.

In
addition, in connection with the agreements with the Ministry of Communications in
Colombia, we have provided back to back corporate guarantees for performance guarantees
and employee salary and benefit guarantees issued on our behalf by local Colombian
insurance companies in an aggregate amount of $32 million.

We
have also provided bank guarantees mainly for certain leases for our offices worldwide,
which are secured by restricted cash in the amount of approximately $5.8 million.

44

---

---



# 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
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 2008, there was inflation in Israel of 3.8% and the U.S Dollar
depreciated in relation to the NIS at a rate of 1.1%, from NIS 3.846 per $1 on
December 31, 2007 to NIS 3.802 per $1 on December 31, 2008. In the period ending in
December 31, 2007 inflation in Israel was 3.4% while the U.S. dollar depreciated in
relation to the NIS at a rate of 9.0%. If future inflation in Israel exceeds the
devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags
behind increases in inflation in Israel, our results of operations may be materially
adversely affected. In 2008 and 2009, in order to limit these risks, we entered into
hedging agreements to cover certain of our NIS to US Dollar exchange rate exposures.

Regarding
the changes in the value of other foreign currencies in relation to the U.S. dollar, our
monetary balances that are not linked to the U.S. dollar impacted our financial expenses
during 2008 and 2007. This is due to heavy fluctuations in currencies in certain regions
of Latin America in which we do business. There can be no assurance that in the future our
results of operations may not be materially adversely affected by other currency
fluctuations.

# Effective Corporate Tax
Rate

On
January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the
tax reform, resident companies are subject to Israeli tax on income accrued or derived in
Israel or abroad. In addition, the concept of a controlled foreign corporation
was introduced, according to which an Israeli company may become subject to Israeli taxes
on certain income of a non-Israeli subsidiary if the subsidiarys primary source of
income is passive income (such as interest, dividends, royalties, rental income or capital
gains). The tax reform also substantially changed the system of taxation of capital gains.
Following the reform, the capital gains tax rate applicable to us was decreased from 36%
to 25%, while the allocation of the gain between the two periods is proportional to the
holding periods until December 31, 2002, and after December 31, 2002. In 2007
and in 2008, this tax reform did not have any material effect on our liquidity, financial
condition or results of operations.

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

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

According
to the Amendment, tax-exempt income generated under the provisions of the Amendment will
be subject to taxes upon distribution or liquidation and we may be required in the future
to record deferred tax liabilities with respect to such tax-exempt income. As of December
31, 2008, we did not generate income under the provisions of the Amendment.

45

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Currently,
we have nine Approved Enterprise programs under the alternative route of the Investment
Law. The period of benefits for all of these programs has expired. See ITEM 10:
Additional Information  Israeli Taxation. In addition, our company chose 2005
as the year of election for a new Benefited Enterprise under the amendment.

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

We
anticipate that we will not have to pay taxes relating to the 2009 tax year for most of
our major entities due to current or carry forward tax losses. Cash outlays for income
taxes in the future might be different from tax expenses, mainly due to cash tax payments
for previous years that might be triggered by tax audits in the various tax jurisdictions,
deferred tax expenses (income) and payments usually made in arrears for annual taxes in
profitable years.

# Research and Development

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

We
devoted significant research and development resources in 2008, 2007 and 2006 to the
development of our SkyEdge family of products. We develop our own network software and
software for our VSATs. We generally license our software to customers as an incidental
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 technology or obtain
information that we regard as a trade secret in violation of our legal rights.

Third-Party
Funding

In
accordance with an agreement entered in 2001 with the Chief Scientist we are eligible 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.

46

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

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

# Trend Information

We
estimate that the current worldwide recession will have an adverse affect on our sales in
2009. Specifically, we are experiencing longer sales cycles in the emerging markets and we
see more conservative spending in the telecom sector.

In
the past few years the satellite communications market has experienced increasing
competition both from within its sector and from competing satellite communication
technologies. Specifically, the expansion of cellular coverage in rural areas worldwide,
increased terrestrial infrastructures as well as the advancement of wireless technologies,
increases the options for our potential and existing customers. In addition, the number of
satellite communications providers in the market has increased and prices of technologies
continue to decline. Another development in our industry is the increasing demand for
complete solutions which encompass far more than a single platform of a communications
solution.

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

# Impact of Recently
Issued Accounting Pronouncements

In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2), to delay the
effective date of FASB Statement 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, excluding those that are recognized or disclosed in financial
statements at fair value on a recurring basis (that is, at least annually).  For
purposes of applying the FSP 157-2, nonfinancial assets and nonfinancial liabilities
include all assets and liabilities other than those meeting the definition of a financial
asset or a financial liability in FASB Statement 159.   FSP 157-2 defers the
effective date of Statement 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years for items within the scope of this FSP 157-2. We
do not expect the adoption of FSP 157-2 will have a material impact on our financial
position, results of operations or cash flows.

In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) an amendment to FASB No.
133.  This statement changes the disclosure requirements for derivative
instruments and hedging activities.  Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related hedged items
affect an entitys financial position, financial performance, and cash
flows.  This statement is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008.    We do
not expect the adoption of SFAS 161 will have a material impact on our financial position,
results of operations or cash flows.

47

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In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 amends ARB 51,
Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling interest. It
also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The impact of SFAS 160 on our consolidated
financial statements will depend on the nature and size of acquisitions, if any,
subsequent to the effective date.

In
December 2007, the FASB issued SFAS 141(R), Business Combinations
(SFAS 141(R)). This Statement replaces SFAS No. 141, Business
Combinations, and requires an acquirer to recognize the assets acquired, the
liabilities assumed, including those arising from contractual contingencies, any
contingent consideration and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited exceptions
specified in the statement. SFAS 141(R) also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to recognize
the identifiable assets and liabilities, as well as the noncontrolling interest in the
acquiree, at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141(R)). In addition, SFAS 141(R)s requirement to measure the
noncontrolling interest in the acquiree at fair value will result in recognizing the
goodwill attributable to the noncontrolling interest in addition to that attributable to
the acquirer. SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The impact of SFAS 141R on our
consolidated results of operations and financial condition will depend on the nature and
size of acquisitions, if any, subsequent to the effective date.

In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. We are currently evaluating the potential impact, if any, of the adoption of
FAS 142-3 on our consolidated financial statements.

EITF
Issue No. 08-7, Defensive Intangible Assets (EITF 08-7),
requires an acquiring entity to account for defensive intangible assets as a separate unit
of accounting. Defensive intangible assets should not be included as part of the cost of
the acquirers existing intangible assets because the defensive intangible assets are
separately identifiable. Defensive intangible assets must be recognized at fair value in
accordance with SFAS 141(R) and SFAS 157. EITF 08-7 will be effective for the reporting
period beginning after December 15, 2008. The impact of EITF 08-7 on our companys
consolidated financial statements will depend on the nature and size of acquisitions, if
any, subsequent to the effective date

In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. It is effective 60 days following the
SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. We do not expect SFAS No. 162 to have a material effect on
our financial statements.

48

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In
October 29, 2008, the FASB issued FSP No.132 (R)-a, Employers Disclosures
about Pensions and Other Postretirement Benefits, to require that an employer
disclose the following information about the fair value of plan assets: 1) the level
within the fair value hierarchy in which fair value measurements of plan assets fall; 2)
information about the inputs and valuation techniques used to measure the fair value of
plan assets; and 3) a reconciliation of beginning and ending balances for fair value
measurements of plan assets using significant unobservable inputs.  The FSP will
be effective for fiscal years ending after December 15, 2009, with early application
permitted. Application of the FSP would not be required for earlier periods that are
presented for comparative purposes. We are currently evaluating the potential impact
of adopting this FSP on the disclosures in our financial statements.

In
June 2008, the FASB issued FSP EITF No. 03-6-1 Determining
Whether Instruments Granted in Stock-based Payment Transactions Are Participating
Securities. Under the FSP, unvested stock-based payment awards that contain rights
to receive non-forfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim periods
within those years. We are currently evaluating the impact of EITF 03-6-1 on our financial
statements.

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

# Directors

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

|Name                 | Age | Position(s)                                                   
|-------------------- | --- | --------------------------------------------------------------
|
|
|
|
|Amiram Levinberg     | 53  | Chairman of the Board of Directors and Chief Executive Officer
|Haim Benjamini(1)(2) | 69  | External Director                                             
|Jeremy Blank         | 30  | Director                                                      
|Ehud Ganani          | 56  | Director                                                      
|Leora Meridor(1)(2)  | 61  | External Director                                             
|Karen Sarid(1)(2)    | 58  | Director                                                      
|Izhak Tamir(1)(2)    | 56  | Director                                                      

---

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

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

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

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

49

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Jeremy
Blank has served on our board since July 2005.. Mr. Blank is a managing
director of York Capital Management. Previously, Mr. Blank served as a Vice President
within York. York is a private investment fund headquartered in New York with
approximately $10 billion in assets under management. From 1999 to 2004, Mr. Blank worked
at Morgan Stanley as a vice president within Morgan Stanleys fixed income department
and earlier, in Morgan Stanleys mergers and acquisitions department. Mr. Blank
graduated from Yeshiva University in New York City with a Bachelors degree in
Finance.

Dr. Ehud
Ganani has served on our board since July 2005. Dr. Ganani
currently serves as Chairman of the boards of directors of TraceGuard Technologies Inc..
TraceGuard is involved in Explosive Detection equipment for airports and other security
facilities. Mr. Ganani served as the chief executive officer of the company between
2006-2008. Dr. Ganani is also the chief executive officer and president of Rabintex
Industries Ltd.. Rabintex deals with personal protection gear and army vehicles
modifications. Dr. Ganani is the chairman of the board of Bird Aerosystems Ltd., a private
company that develops and supplies anti missiles protection systems for helicopters and
fixed wing military and civilian aircrafts. He is the chairman of the public committee for
Aerospace & Defense & HLS in the Israeli Export Institute..Dr. Ganani served as
the Chief Executive Officer of Israel Military Industries from 2002-2005. Prior to that he
served in various senior positions in Rafael Armament Development Authority, the last of
which was as Vice President of Marketing and Business Development from 1997-2002. Dr.
Ganani headed the rocket motors development group in Rafael between 1986 to 2001. He also
served as a visiting professor of Chemical Engineering at UC Davis, CA (1984-1985). Dr.
Ganani holds a Doctorate of Science in chemical engineering from Washington University,
St. Louis, MO (1984) and a Bachelor of Science in Chemical Engineering from the
Technion.

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

Karen
Sarid has served on our board since July 2005. Ms. Sarid currently
serves as the chief operating officer and chief financial officer of Galil Medical Ltd.
and as the general manager of Galil Israel. Galil Medical is a medical device company that
develops a cryotherapy platform. Ms. Sarid has served as a General Manager of Orex
Computed Radiography Ltd., a Carestream company focusing on advanced radiography
systems for the digital x-ray market since September 2000 until March 2007. From
September 1999 until September 2000, Ms. Sarid served as Chief Financial
Officer and a member of the board of directors of Forsoft Ltd., a software solutions
provider and a subsidiary of the Formula Group. From 1996 until August 1999,
Ms. Sarid was Chief Financial Officer and a member of the board of directors of ESC
Medical Systems Ltd., a medical laser manufacturer that is traded on the NASDAQ Stock
Market. Ms. Sarid was Chief Financial Officer of EZchip Semiconductors Ltd. (previously
LanOptics Ltd.) from 1993 through 1996. Ms. Sarid currently serves on the board of
directors of EZchip. Ms Sarid also serves on the board of directors of
Oridion Ltd. Ms. Sarid received a B.A. in Economics and Accounting from Haifa
University, and was awarded the CFO of the Year award in 1998 by the Association of Chief
Financial Officers in Israel.

Izhak
Tamir has served on our board since July 2005. Mr. Tamir, a
co-founder of Orckit Communications Ltd., has been President and a Director of Orckit
since its founding in 1990and currently serves as Chairman of the Board of such company.
Orckit traded on the NASDAQ Global, is a leading provider of advanced telecom equipment
targeting high capacity packetized broadband services. Mr. Tamir served on the board
of directors of Scopus Video Networks from 2005 until 2007. From 1987 until 1989,
Mr. Tamir was employed by Comstream Inc., in San Diego, California. From 1985
until 1987, he was Vice President of A.T. Communication Channels Ltd., a subsidiary
of Bezeq. From 1978 to 1985, he was a senior engineer in the Israeli government.
Mr. Tamir holds an engineering degree from the Technion, and an M.B.A. from Tel Aviv
University. Mr. Tamir has served as Chairman of the board of directors of Tikcro
Technologies Ltd. since January 2000 and as its Chief Executive Officer from
August 2003 until December 2007.

50

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# Senior Management

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

|Name                | Age | Position(s)                                                                                  
|------------------- | --- | ---------------------------------------------------------------------------------------------
|
|
|
|
|Amiram Levinberg(1) | 53  | Chief Executive Officer and Chairman of the Board of Directors                               
|Erez Antebi         | 49  | Chief Executive Officer, Gilat Networks Systems, and President, Spacenet Rural Communications
|Andreas Georghiou   | 59  | Chief Executive Officer, Spacenet Inc.                                                       
|                   
|Joshua Levinberg    | 55  | Executive Vice President, Corporate Business Development & Strategy                          
|Ari Krashin         | 36  | Chief Financial Officer                                                                      

---

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

Erez
Antebi was appointed as Chief Executive Officer of Gilat Networks Systems
on June 1, 2005, and as CEO of Spacenet Rural Communications on February 1, 2008.
Mr. Antebi served as our Chief Operating Officer from October 2002 until
September 2003, when he left to serve as Chief Executive Officer of Clariton
Networks Ltd. From the beginning of 1998 until being appointed our Chief Operating
Officer, Mr. Antebi served as our Vice President, General Manager for Asia, Africa
and Pacific Rim. From September 1994 until the beginning of 1998, he served as Vice
President and General Manager of Gilat Inc. Mr. Antebi joined our company in
May 1991 as product manager for the Skystar Advantage VSAT product. From
August 1993 until August 1994, he served as Vice President of Engineering and
Program Management of Gilat Inc. Prior to joining us, Mr. Antebi worked for a
private importing business from 1989 to 1991, after having served from 1987 to 1989 as
marketing manager for high frequency radio communications for Tadiran Limited, a defense
electronics and telecommunications company, and as a radar systems development engineer at
Rafael, the research and development and manufacturing arm of the Israel Defense Forces,
from 1981 to 1987. Mr. Antebi holds a B.Sc. and an M.Sc. Electrical Engineering from
the Technion.

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

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

51

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Ari
Krashin was appointed our Chief Financial Officer in June2008. Mr.
Krashin joined our company in April 2000 and served in various positions in our company
since then. From 2005 to June 2008 Mr. Krashin served as our Financial Director. Before
joining us, Mr. Krashin served as a CPA for Kesselman & Kesselman,
PriceWaterhouseCoopers Israel office. Mr. Krashin is a CPA and holds a BA in
Business Administration and Accounting from the College of Management.

# 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, 2008:

|                                                   | Salaries, Fees, Directors'
Fees,
Commissions and
Bonuses(1) | Pension, Retirement and
Similar Benefits
|-------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------
|
|
|
|
|All directors and officers as a group (19 persons) |                                                             |                                         

---

|(1) | Also
includes bonuses and stock option compensation accrued in 2008.
|--- | --------------------------------------------------------------------

# Management Agreements

Mr.
          Amiram Levinberg, our Chairman and Chief Executive Officer has an employment
          agreement with us which was extended by the shareholders in a general meeting
          held in May, 2008, for an additional one year period, and will terminate July
          2009. Under Mr. Levinbergs employment agreement which was extended in May
          2008, Mr. Levinberg was granted (i) options to purchase 915,000 ordinary shares
          at an exercise price of $5.77 per share and is entitled to (ii) a salary of
          100,000 NIS per month; (iii) a transaction bonus equal to 0.82% of
          the market value of our company in a transaction or series of related
          transactions following which a company, person or a group of persons or
          companies acting together will purchase from our companys shareholders,
in           a bona fide, arms length transaction, 50% or more of our then outstanding
share           capital subject to Mr. Levinberg complying with certain prior conditions;
and           (iv) entitlement to participate in our companys annual bonus plan,
subject           to the specific approval of the shareholders. In addition, at our
shareholders           meeting held on December 30, 2008 Mr. Levinberg was granted the
right to           purchase 300,000 ordinary shares of our company at a purchase price of
$4.00 per           share, which vest ratably, each quarter over a three year period.

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

As
of December 31, 2008, Mr. Yoav Leibovitch, formerly the Executive Vice President of
Corporate Development, is no longer an officer of the Company.

52

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---



# Board Compensation

By
resolutions adopted by our shareholders, directors who are not employees (excluding the
current chairman of the board of directors) are entitled to receive annual compensation of
NIS 80,000 and an additional NIS 1,600 for each board or committee meeting attended,
provided that the board member is a member of such committee. In addition, board members
are compensated for telephone participation in board and committee meetings in an amount
of 60% of what would be received for physical attendance. All the above amounts are
subject to adjustment for changes in the Israeli consumer price index after December 2007
and changes in the amounts payable pursuant to Israeli law from time to time. Each of our
current directors was granted options to purchase 20,000 ordinary shares upon commencement
of his or her terms as director and at an exercise price equal to the fair market value of
the shares on the date of the grant. In addition, in our December 30, 2008 annual general
meeting of the shareholders, our shareholders approved a one-time grant to purchase 50,000
shares, which options vest ratably, each quarter, over a three-year period. The exercise
price of the options is $4.00 per share.

# Board Composition and
Practices

Our
Articles of Association as adopted at a shareholders meeting on April 15, 2003and amended
at our shareholders meeting on December 30, 2008, 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 14% 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 14%
or more of our ordinary shares.

Pursuant
to our Articles of Association, each beneficial owner of 14% 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 14% 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 14% 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 14% 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.

53

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# Alternate Directors

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

# External Directors

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

External
directors serve for a three-year term, which may be renewed for only one 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. External Directors are required to have professional ability or
financial and accounting expertise, as long as at least one of the External Directors is a
financial and accounting expert.

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

54

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We
currently have two external directors: Dr. Leora Meridor, who was elected at the Special
General Meeting held on August 30, 2005 and reelected at our Annual General Meeting held
on December 30, 2008 for an additional three year period; and Mr. Haim Benjamini who was
elected at the Special General Meeting held in February 2005and reelected for an
additional three year period at our companys Special General Meeting held on May 28,
2008.

# 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.

In
addition, the NASDAQ Marketplace Rules require us to establish an audit committee
comprised of at least three members, all of whom must be independent directors, each of
whom is financially literate and satisfies the respective independence
requirements of the Securities and Exchange Commission and NASDAQ and one of whom has
accounting or related financial management expertise at senior levels within a company.

Our
audit committee assists our Board of Directors in overseeing the accounting and financial
reporting processes of our company and audits of our financial statements, including the
integrity of our financial statements, compliance with legal and regulatory requirements,
our independent registered public accountants qualifications and independence, the
performance of our internal audit function and independent registered public accountants,
finding any defects in the business management of our company and proposing to our Board
of Directors ways to correct such defects, approving related-party transactions as
required by Israeli law, and such other duties as may be directed by our Board of
Directors. The audit committee may consult from time to time with our independent auditors
and internal auditor with respect to matters involving financial reporting and internal
accounting controls.

Our
audit committee consists of four members of our Board of Directors who satisfy the
respective independence requirements of the Securities and Exchange
Commission, NASDAQ and Israeli law for audit committee members. Our audit committee
consists of Mr. Benjamini, Dr. Meridor, Dr. Sarid and Mr. Tamir. Our board of directors
has determined that Dr. Meridor qualifies to serve as the audit committees financial
expert, as required by the SEC and NASDAQ. The audit committee meets at least once each
quarter.

Our
board of directors adopted an audit committee charter setting forth the responsibilities
of the audit committee consistent with the rules of the Securities and Exchange Commission
and the NASDAQ Marketplace Rules which include:

| |  | Oversight
of the companys independent registered public accounting firm, and recommending the
engagement, compensation or termination of the companys independent registered
public accounting firm to the board of directors, subject to shareholder ratification in
accordance with Israeli law;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Recommending
the terms of audit and non-audit services provided by the independent registered public
accounting firm for pre-approval by the board of directors;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Recommending
the engagement or termination of office of the company's internal auditor; and
| | - | -------------------------------------------------------------------------------------------

| |  | Approval
of transactions with office holders, controlling shareholders and other related-party
transactions, as described below.
| | - | --------------------------------------------------------------------------------------------------------------------------------

55

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Under
the Israeli Companies Law, the approval of the audit committee is required for specified
actions and transactions with office holders and controlling shareholders. For such
purpose, the term controlling shareholder is a shareholder who has the power to direct the
companys operations, other than by virtue of being a director or other office holder
of the company and includes a shareholder that holds 50% or more of the voting rights in a
public company, or a shareholder who has the power to direct the conduct of the company,
if the company has no shareholder that owns more than 50% of its voting rights, then the
term also includes any shareholder that holds 25% or more of the voting rights of the
company (two or more persons who have a personal interest in the approval of the
transaction are deemed to be joint holders). The audit committee may not approve an action
or a transaction with a controlling shareholder or with an office holder unless at the
time of approval the two outside directors are serving as members of the audit committee
and at least one of them was present at the meeting at which the approval was granted.

Additionally,
under the Israeli Companies Law, the role of the audit committee is to identify faults in
the business practices of the company, among other things, by consulting with the
companys independent registered public accounting firm and internal auditor, and to
make recommendations to the board for remedying such faults.

# Independent Directors

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

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

56

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# Employees

As of December 31, 2008, we had
approximately 966 full-time employees, including 163 employees in engineering, research
and development, 426 employees in manufacturing, operations and technical support, 137
employees in marketing and sales, 140 employees in administration and finance and 100 in
other departments. Of these employees, 397 employees were based in our facilities in
Israel, 233 were employed in the United States, 288 were employed in Latin America and 48
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. 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. The amount and frequency of these
adjustments are modified from time to time.

As
of December 31, 2007, we had approximately 970 full-time employees, including 156
employees in engineering, research and development, 412 employees in manufacturing,
operations and technical support, 147 employees in marketing and sales, 146 employees in
administration and finance and 105 in other departments. Of these employees, 392 employees
were based in our facilities in Israel, 228 were employed in the United States, 288 were
employed in Latin America and 58 in Asia, the Far East and other parts of the world. We
also utilize temporary employees, as necessary, to supplement our manufacturing and other
capabilities. We believe that our relations with our employees are satisfactory.

As
of December 31, 2006, we had approximately 950 full-time employees, including 160
employees in engineering, research and development, 400 employees in manufacturing,
operations and technical support, 130 employees in marketing and sales, 140 employees in
administration and finance and 120 in other departments. Of these employees, 400 employees
were based in our facilities in Israel, 235 were employed in the United States, 250 were
employed in Latin America and 65 in Asia, the Far East and other parts of the world.

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 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.

During
April and May 2008 we amended the contracts of most of our Israeli employees so that
starting on the date of the amended agreement, such employees are subject to Section 14 of
the Severance Pay Law  1963 for severance pay accumulated in periods of employment
subsequent to date of the amendment. In accordance with this Section 14, upon termination,
the release of the contributed amounts from the fund to the employee shall relieve us of
any further severance liability, and no additional payments shall be due to the employee.

We
have a number of savings plans in the United States that qualify under Section 401(k) of
the U.S. Internal Revenue Code. We contribute one dollar for each dollar a participant
contributes in this plan, in an amount of up to 3% of a participants earnings and in
addition, we contribute fifty cents for each dollar a participant voluntarily contributes
in this plan, up to an additional 3% of a participants earnings. Matching
contributions in 2008, 2007 and 2006 for all the plans were approximately $ 0.7 million
per year. Matching contributions are invested in proportion to each participants
voluntary contributions in the investment options provided under the plan.

57

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# Share Ownership

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

# Stock Option Plans

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

As
of December 31, 2008, we had granted options to purchase a total of 101,580 ordinary
shares under the 1995 Plans and options to purchase 59,467 ordinary shares remain
outstanding. The exercise prices for such options vary from $9.2 to $2,730 and all such
options expire at various times from January 2009 to September 2012. As of December 31,
2008, a total of 42,113 options have been exercised under the 1995 Plan.

In
September 2003, we adopted the 2003 Stock Option Plan (Incentive and Restricted Stock
Options), or the 2003 ISO/RSO Plan and the Section 102 Stock Option Plan 2003, or the 2003
Section 102 Plan and collectively, the 2003 Plans. In February 2005, our
shareholders increased the pool for the 2003 Plans by 1,135,000 shares and in December
2005, our shareholders further increased the pool by 3,500,000 shares, such that the 2003
Plans provide for the granting of options of up to an aggregate of 6,135,000 ordinary
shares to our officers, directors, employees or service providers or any of the employees
or service providers of our subsidiaries. As of December 31, 2008, options to purchase a
total of 3,584,157 ordinary shares under the 2003 Plans were outstanding, and options to
purchase 1,852,080 ordinary shares have been exercised. The exercise prices for such
options vary from $5.00 to $10.73 and such options expire at various times from August
2013 to November 2017.

In
December 2005, our shareholders adopted the 2005 Stock Incentive Plan with a pool of 1.5
million shares. This plan is designed to enable the board of directors to determine
various forms of incentives for all forms of service providers and, when necessary, adopt
a Sub-plan in order to grant specific incentives. In October 2008, the compensation/stock
option committee of the Board of Directors adopted a sub-plan so as to enable qualified
optionees certain tax benefits under the Israeli Income Tax Ordinance. Among the
incentives that may be adopted are share options, performance share awards, performance
share unit awards, restricted shares, restricted share unit awards and other share based
awards. Also, in October 2008 the compensation/stock option committee adopted a new plan,
the 2008 Stock Incentive Plan, with a pool of 1 million shares and a sub-plan to enable
qualified optionees certain tax benefits under the Israeli Income Tax Ordinance. In
November 2008, the compensation/stock option committee of the Board of Directors
authorized the grant of restricted stock units under the 2005 and 2008 Plans to certain
key employees. The entitlement to these shares vest quarterly over a four-year period
(15%, 25%, 30%, 30% each year, respectively) so long as the employee remains with our
company. In December 2008, our shareholders authorized the grant of 600,000 options to the
members of our board of directors. Those options vest quarterly over three years. To date,
we have granted 650,000 options and an additional 1,505,000 restricted share units under
the 2005 and 2008 Plans, 55,064 of which have already been issued.

As
of March 1, 2008, the 11 directors and executive officers listed above, as a group,
held options to purchase 2,805,225 of our ordinary shares at a weighted average exercise
price of $5.49 per share. Out of such options, 225 options expirein 2011, 130,000
options expire in 2013, 600,000 options expire in 2014 and 2,075,000 options expire in
2015. As of March 1, 2008, the 11 and executive officers listed above, as a group, held
346,500 RSUs and 11,700 shares received through vested RSUs.

58

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The
purpose of the 2003, 2005 and 2008 plans (together the Plans) is to enable us
to attract and retain qualified persons as employees, officers, directors, consultants and
advisors and to motivate such persons by providing them with an equity participation in
our company. The Section 102 Plans are designed to afford qualified optionees certain tax
benefits under the Israel Income Tax Ordinance.

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

Stock
options issued as incentive stock options pursuant to the Plans will only be granted to
the employees (including directors and officers) of our company or its subsidiaries. The
exercise price of incentive stock options issued pursuant to the 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).

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.

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

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

The
following table sets forth certain information with respect to the beneficial ownership of
our ordinary shares as ofMarch 31,2009 (including options exercisable and
RSUs vested within 60 days of March 31, 2009) with respect to: (i) each person who
is believed by us to be the beneficial owner of more than 5% of the ordinary shares; (ii)
each director or officer who holds more than 1% of the ordinary shares, and (iii) all
directors and officers as a group. Except where otherwise indicated, we believe, based on
information furnished by the owners, that the beneficial owners of the ordinary shares
listed below have sole investment and voting power with respect to such shares, subject to
any applicable community property laws. The shareholders listed below do not have any
different voting rights from any other shareholders of our company, except to the extent
that they hold more than 14% and as such, they will have a right to appoint a director,
subject to certain conditions in our Articles of Association. None of the directors,
officers or key executives listed in the Directors and Senior Management table appearing
in Item 6 above, owns 1% or more of our outstanding share capital.

The
information in this table is based on 40,103,662ordinary shares outstanding as of March
31, 2009. 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.

59

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|Name and Address                              | Number of
Ordinary
Shares
Beneficially
Owned | Percent of
Ordinary
Shares
Outstanding
|--------------------------------------------- | -------------------------------------------- | --------------------------------------
|
|
|
|
|York Capital Management (1)                   |                                              |                                       
|Mivtach Shamir Finance Ltd. (2)               |                                              |                                       
|Renaissance Technologies LLC (3)              |                                              |                                       
|Migdal Insurance & Financial Holdings Ltd.(4) |                                              |                                       
|All officers and directors as a group         |                                              |                                       
|(11 persons)(5)                               |                                              |                                       

---

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

|(2) | Based
on a Schedule 13D filed on July 28, 2005. Mr. Meir Shamir
               and Ashtrom Industries Ltd. share voting and dispositive power with
respect                to the shares held by Mivtach Shamir Holdings Ltd. The
address of Mivtach                Shamir Holdings Ltd. is Beit Sharvat, 4 Kaufman
St., Tel Aviv 68012,                Israel.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based
on a Schedule 13G filed on February 13, 2009, Renaissance Technologies LLC
               and Mr. James H. Simons share ownership with respect to the shares held by
               Renaissance Technologies LLC because of Dr. Simons position as control
person of                Renaissance Technologies LLC. The address of Renaissance
Technologies LLC is 800                Third Avenue, New York, New York.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Based
on a Schedule 13G filed on February 9, 2009, The 2,003,812 shares reported
               in the Schedule as beneficially owned by the Migdal Insurance & Financial
               Holdings Ltd. are held for members of the public through, among others,
               provident funds, mutual funds, pension funds and insurance policies, which
are                managed by subsidiaries of Reporting Person, according to the
following                segmentation: 1,028,327 shares are held by Profit participating
life assurance                accounts; 895,868 Ordinary Shares are held by Provident
funds and companies that                manage provident funds and 79,617 shares are held
by companies for the                management of funds for joint investments in
trusteeship, each of which                subsidiaries operates under independent
management and makes independent voting                and investment decisions. The
address of Migdal Insurance & Financial                Holdings Ltd is 4 Efal Street;
P.O. Box 3063; Petach Tikva, 49512, Israel.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes
options that are currently exercisable or are exercisable within 60                days
that are held by our directors and executive officers.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

60

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# Significant Changes in
the Ownership of Major Shareholders

As
of December 31, 2006, our major shareholders were York, holding 8,070,563 shares
(approximately 20% ownership), Bank Hapoalim, holding 2,052,428 shares (approximately 5%
ownership) and Mivtach Shamir Finance Ltd., holding 2,216,945 shares (approximately 6 %
ownership). As of December 31, 2007, our major shareholders were York, holding 8,070,563
shares (approximately 20% ownership), Citadel Investment Group, L.L.C., holding 2,140,424
shares approximately 5 % ownership) and Mivtach Shamir Finance Ltd., holding 2,216,945
shares (approximately 5 % ownership). As of December 31, 2008, our major shareholders were
York, holding 8,070,563 shares (approximately 20% ownership), and Mivtach Shamir Finance
Ltd., holding 2,216,945 shares (approximately 5 % ownership).

# Major Shareholders
Voting Rights

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

# Record Holders

Based
on a review of the information provided to us by our transfer agent, as of April 1,2009, there were 83 holders of record of our ordinary shares, of which 65 record
holders holding approximately 95.5% of our ordinary shares had registered addresses in the
United States and 11 record holders holding approximately 4.5% of our ordinary shares had
registered addresses in Israel. These numbers are not representative of the number of
beneficial holders of our shares nor is it representative of where such beneficial holders
reside since many of these ordinary shares were held of record by brokers or other
nominees, including CEDE & Co., the nominee for the Depositary Company (the central
depositary for the U.S. brokerage community), which held approximately 75% of our
outstanding ordinary shares as of said date.

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

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

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

Not
applicable.

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

# Consolidated Statements

See
the consolidated financial statements, including the notes thereto, and the exhibits
listed in Item 18 hereof and incorporated herein by this reference.

61

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# Export Sales

We
outsource a majority of our manufacturing, some from Israel and some from outside of
Israel. For information on our revenues breakdown for the past three years, see Item 5:
Operating and Financial Review and Prospects.

# Legal Proceedings

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

On
March 31, 2008 we announced the signing of a Merger Agreement pursuant to which we would
be acquired for an aggregate value of $ 475 million in an all cash transaction by a
consortium of private equity investors. On August 5, 2008 we informed the consortium that
all conditions precedent to closing has been met. On August 29, 2008 we notified the
consortium we were terminating the Merger Agreement citing the consortium members
intentional breach of the Merger Agreement and their failure to close the merger
transaction within the extended period established to complete the transaction. In
November 2008, we filed lawsuits against each of the parties that had guaranteed the
payment of a termination fee under the Merger Agreement. The lawsuits were filed in the
Tel Aviv District Court against each of Mivtach Shamir Holdings Ltd., LR Group Ltd., Gores
Capital Partners II, L.P, and DGB Investments, Inc. for their pro rata commitment to
guarantee the termination fee due to the Company. The Merger Agreement provides for a
termination fee in the amount of $47.5 million, payable to us, in the event of an
intentional breach of the agreement by the Buyer.

In
October 2008, a lawsuit and a motion for its approval as a class action proceeding was
filed in the District Court of Jerusalem by eight individuals and Israeli companies
against us, all of our directors and our 20% shareholder, York Capital Management. The
plaintiffs claim damages based on the amounts they would have been paid had the merger
with the consortium closed. We and our outside legal counsel believe the claims are
completely without merit, and that the lawsuit is without basis. We intend to use all
legal means necessary to protect and defend our company and its directors.

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

The
Brazilian tax authority has filed a claim against a subsidiary of Spacenet Inc. in Brazil,
for alleged taxes due of approximately $4 million. In January 2004, the subsidiary
received notice of an administrative ruling reducing the amount of the claim, and the
subsidiary filed an appeal of such ruling. In December 2005, this appeal was denied and at
present, the subsidiary faces a tax liability of approximately $6.7 million (the amount
has increased due to interest and exchange rate differences). The subsidiary denies such
claims and has filed a petition known as a Ação
Anulatória in the State Courts of the State of São Paulo, Brazil.

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

62

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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.

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 9 and 12 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

Except
as otherwise disclosed in this annual report, no significant change has occurred since
December 31, 2008.

63

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

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

# Annual Stock Information

The
following table sets forth, for the periods indicated, the range of high and low closing
sale price for the ordinary shares, as reported by NASDAQ.

|                              | Price | Average Daily Trading Volume
|----------------------------- | ----- | ----------------------------
|
|
|
|
|Year Ended December 31, 2004: |       |                             
|                              |       |                             
|Year Ended December 31, 2005: |       |                             
|                              |       |                             
|Year Ended December 31, 2006: |       |                             
|First Quarter                 |       |                             
|Second Quarter                |       |                             
|Third Quarter                 |       |                             
|Fourth Quarter                |       |                             
|                              |       |                             
|Year Ended December 31, 2007: |       |                             
|First Quarter                 |       |                             
|Second Quarter                |       |                             
|Third Quarter                 |       |                             
|Fourth Quarter                |       |                             
|                              |       |                             
|Year Ended December 31, 2008: |       |                             
|First Quarter                 |       |                             
|Second Quarter                |       |                             
|Third Quarter                 |       |                             
|Fourth Quarter                |       |                             
|                              |       |                             
|Most Recent Six Months:       |       |                             
|                              |       |                             
|October 2008                  |       |                             
|November 2008                 |       |                             
|December 2008                 |       |                             
|January 2009                  |       |                             
|February 2009                 |       |                             
|March 2009                    |       |                             
|April 2009 (through April 6)  |       |                             

64

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

Not
applicable.

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

Our
ordinary shares are quoted on the NASDAQ Global Market under the symbol GILT
and are listed on the Tel Aviv Stock Exchange.

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

Not
applicable.

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

Not
applicable.

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

Not
applicable.

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

|A. | Share
Capital
|-- | -------------

Not
applicable.

|B. | Memorandum
and Articles of Association
|-- | --------------------------------------

Set
out below is a description of certain provisions of our Articles of Association and of the
Israeli Companies Law related to such provisions. This description is only a summary and
does not purport to be complete and is qualified by reference to the full text of the
Articles of Association, which are incorporated by reference as exhibits to this annual
report, and to Israeli law.

# Registration and Purposes

We
are an Israeli company registered with the Israel companies register, registration No.
52-003893-6.

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

65

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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 our
company, may amend their memorandum of association to authorize future amendments to the
memorandum of association by any required voting. On November 9, 2000, our shareholders
approved an amendment to our Memorandum of Association, by adding a provision that
authorizes our company to amend its Memorandum of Association by the affirmative vote of a
majority of the ordinary shares present and voting at the meeting.

# Record Date for Notices
of General Meeting and Other Action

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

# Notice of General
Meetings; Omission to Give Notice

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

# Annual General Meetings
and Special General Meetings

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

66

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# Quorum at General
Meetings

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

# Adoption of Resolutions
at General Meetings

Article
28(b) of our Articles of Association provides for voting by a written ballot only. In
addition, Article 28(c), in accordance with the Companies Law, provides that the
declaration of the Chairman of the Meeting as to the results of a vote is not considered
to be conclusive, but rather prima facie evidence of the fact. Under our Articles of
Association, any resolution of the shareholders, except a resolution for a voluntary
liquidation of the company and, in certain circumstances, a resolution to amend our
Articles of Association, shall be deemed adopted if approved by the vote of the holders of
a majority of the voting power represented at such meeting in person or by proxy.

# Voting Power

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

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

# Election and Removal of
Directors

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

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 fourteen 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 fourteen percent or more of our issued and outstanding ordinary shares as set
forth below.

Our
Articles further provide that each beneficial owner of fourteen 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.

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

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

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

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

# External Directors

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

# Qualification of
Directors

Article
40 of our Articles of Association provides that no person shall be disqualified to serve
as a director by reason of him not holding shares in our company or by reason of him
having served as director in the past. Our directors are not subject under the Companies
Law or our Articles of Association to an age limit requirement. Under the Companies Law, a
person cannot serve as a director if he has 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 us to borrow or secure the payment of any sum or sums of money, and may
secure or provide for the repayment of such sum or sums in such manner, at such times and
upon such terms and conditions as it deems fit.

69

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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 our Chief
Executive Officer flexibility in hiring officers (other than directors), Article 50(b) of
our Articles of Association authorizes our Chief Executive Officer to appoint our officers
and employees (other than directors) and to determine their remuneration as long as the
board of directors did not do so, and provides further that the remuneration of the four
highest salaried personnel of our company shall be approved by either the board of
directors, the Audit Committee or the Compensation Committee.

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

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

# Transfer of Shares

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

# Acquisition of Shares
over Certain Thresholds

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

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

# Repurchase of Shares

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

# Foreign Ownership

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

70

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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:

| |  | a
director's terms of service and employment, including, among other things, grant of
              exemptions, insurance and indemnification;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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# Exemption,
Indemnification and Insurance of Directors and Officers

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

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

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

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

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.

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

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

|C. | Material
Contracts
|-- | ------------------

While
we have numerous contracts with customers and distributors we do not deem any such
individual contract to be material.

|D. | Exchange
Controls
|-- | -----------------

The
Israeli Currency Control Law, 5738-1978 provides that transactions in foreign currencies,
and transactions with foreign residents, require a permit. Since 1998, when a new
general permit was issued under the law, there have been no Israeli currency
control restrictions on payments of dividends or other distributions with respect to our
ordinary shares or the proceeds from the sale of the shares, except for the obligation of
Israeli residents to file reports with the Bank of Israel regarding certain transactions.

|E. | Taxation
|-- | --------

The
following is a discussion of Israeli and United States tax consequences material to our
shareholders. To the extent that the discussion is based on new tax legislation which has
not been subject to judicial or administrative interpretation, the views expressed in the
discussion might not be accepted by the tax authorities in question. The discussion is not
intended, and should not be construed, as legal or professional tax advice and does not
exhaust all possible tax considerations.

# ISRAELI TAXATION

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

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

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Generally,
Israeli companies are subject to Corporate Tax on their taxable income. On
July 25, 2005, the Knesset, Israels Parliament, approved the Law of the Amendment of
the Income Tax Ordinance (Amendment No. 147), 2005, effective commencing
January 1, 2006, which prescribes, among others, a gradual decrease in the corporate tax
rate in Israel to the following tax rates: in 2005  34%, in 2006  31%, in 2007
 29%, in 2008  27%, in 2009  26% and in 2010 and thereafter  25%.
However, the effective tax rate payable by a company which derives income from an approved
enterprise (as further discussed below) may be considerably less.

Following
an additional amendment to the Tax Ordinance, which came into effect on January 1, 2009,
an Israeli corporation may elect a 5% rate of corporate tax (instead of 25%) for income
from dividend distributions received from a foreign subsidiary which is used in Israel in
2009, or within one year after actual receipt of the dividend, whichever is later. The 5%
tax rate is subject to various conditions, which include conditions with regard to the
identity of the corporation that distributes the dividends, the source of the dividend,
the nature of the use of the dividend income, and the period during which the dividend
income will be used in Israel.

# Tax Consequences to
Nonresidents of Israel

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

Capital
Gains

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

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

Dividends

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

Under
the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary
shares who is a U.S. resident will be 25%. However, the maximum tax rate on dividends not
generated by an approved enterprise paid to a US corporation holding at least 10% of our
voting power is 12.5%. For residents of other countries, unless a different rate is
provided in a treaty between Israel and the shareholders country of residence, the
maximum tax on dividends paid that we are required to withhold is 20%. As long as our
shares are listed on a stock exchange, the maximum withholding tax rate will be 20%.

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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 we are required to withhold is 17.5%. For residents of
other countries who are not substantial shareholders, unless a different rate is provided
in a treaty between Israel and the country of residence of such holder of our convertible
notes, the maximum tax that we are required to withhold is 25% on all distributions of
interest. Substantial shareholders may be subject to an increased withholding tax rate, up
to the marginal tax rate.

# Filing of Tax Returns in
Israel

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

# Tax Consequences to
Residents of Israel

Capital
Gains

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

Dividends

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

Interest

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

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

Tax
benefits prior to the amendment of 2005

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

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

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

Taxable
income of a company derived from an approved enterprise is subject to corporate tax at the
maximum rate of 25%, rather than the regular corporate tax rate, for the benefit period.
This period is ordinarily seven years commencing with the year in which the approved
enterprise first generates taxable income after the commencement of production, and is
limited to 12 years from commencement of production or 14 years from the date of
approval, whichever is earlier (the years limitation).

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

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

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

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

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A
company that has an approved enterprise program is eligible for further tax benefits if it
qualifies as a foreign investors company. A foreign investors company is a company which,
among others, more than 25% of its share capital, including shareholders loans, is
owned by non-Israeli residents. A company that qualifies as a foreign investors company
and has an approved enterprise program is eligible for tax benefits for a 10 year
benefit period.

Tax
benefits under the 2005 Amendment

On
April 1, 2005, a comprehensive amendment to the investment law came into effect, (the
Amendment). The Amendment includes revisions to the criteria for investments
qualified to receive tax benefits as an Approved Enterprise. The Amendment applies to new
investment programs and investment programs commencing after 2004, and does not apply to
investment programs approved prior to December 31, 2004.

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

As
a result of the Amendment, it is no longer necessary for a company to acquire approved
enterprise status in order to receive the tax benefits previously available under the
alternative route, and therefore such companies do not need to apply to the Investment
Center for this purpose. Rather, a company wishing to receive the tax benefits afforded to
a Benefited Enterprise is required to select the tax year from which the period of
benefits under the Investment Law are to commence by notifying the Israeli Tax Authority
within 12 months of the end of that year, provided that its facilities meet the
criteria for tax benefits set out by the Amendment, or a Benefited Enterprise. Companies
are also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding
their eligibility for benefits under the Amendment. The Amendment includes provisions
attempting to ensure that a company will not enjoy both Government grants and tax benefits
for the same investment program

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

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

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

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

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

| |  | Similar
to the alternative route, exemption from corporate tax on undistributed income for a
period of two to ten years, depending on the geographic location of the Benefited
Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the
remainder of the benefits period, depending on the level of foreign investment in each
year. Benefits may be granted for a term of seven or ten years, depending on the level of
foreign investment in the company. If the company pays a dividend out of income derived
from the Benefited Enterprise during the tax exemption period, such income will be
subject to corporate tax at the applicable rate (10%-25%) in respect of the grossed up
amount of the dividend that we may distribute. The company is required to withhold tax at
a rate of 15% from any dividends distributed from income derived from the Benefited
Enterprise; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

Generally,
a company that is Abundant in Foreign Investment (as defined in the
Investments Law) is entitled to an extension of the benefits period by an additional five
years, depending on the rate of its income that is derived in foreign currency.

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

The
Amendment will apply to approved enterprise programs in which the year of election under
the Investments Law is 2004 or later, unless such programs received approval from the
Investment Center on or prior to December 31, 2004, in which case the Amendment
provides that the terms and benefits included in any certificate of approval already
granted will remain subject to the provisions of the law as they were on the date of such
approval.

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

Israeli
Transfer Pricing Regulations

On
November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006,
promulgated under Section 85A of the Tax Ordinance, came into effect (the TP
Regs). Section 85A of the Tax Ordinance and the TP Regs generally requires that all
cross-border transactions carried out between related parties be conducted on an
arms length principle basis and will be taxed accordingly. The TP Regs are not
expected to have a material effect on our company.

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# U.S. TAXATION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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| |  | 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 be treated
as a U.S. person.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Dividends Paid on
Ordinary Shares

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

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

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

81

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# Sale or Disposition of
Ordinary Shares

Subject
to the discussion of PFIC 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.

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

# Passive Foreign
Investment Company

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

Based
on our current and projected income, assets and activities, we believe that we were not a
PFIC in the year 2008. However, because the determination of whether we are a PFIC is
based upon the composition of our income and assets from time to time, there can be no
assurances that we will not become a PFIC for any future taxable year.

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

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

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

82

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

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

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

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

# 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.

|F. | Dividend
and Paying Agents
|-- | --------------------------

Not applicable.

|G. | Statement
by Experts
|-- | --------------------

Not applicable.

83

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|H. | DOCUMENTS
ON DISPLAY
|-- | --------------------

We
are subject to certain of the reporting requirements of the Securities and Exchange Act of
1934, as amended, or the Exchange Act, as applicable to foreign private
issuers as defined in Rule 3b-4 under the Exchange Act. 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, and transactions in our equity securities by our officers and
directors are exempt from reporting and the short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not required
under the Exchange Act to file periodic reports and financial statements as frequently or
as promptly as U.S. companies whose securities are registered under the Exchange Act.
However, we file with the Securities and Exchange Commission an annual report on Form 20-F
containing financial statements audited by an independent accounting firm. We also submit
to the Securities and Exchange Commission reports on Form 6-K containing (among other
things) press release and unaudited financial information. We post our annual report on
Form 20-F on our website (http://www.gilat.com) promptly following the filing of
our annual report with the Securities and Exchange Commission. The information on our
website is not incorporated by reference into this annual report.

This
annual report and the exhibits thereto and any other document we 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 100 F Street, N.E., Room 1580,
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. The Exchange Act file number for our
Securities and Exchange Commission filings is 000-21218.

The
Securities and Exchange Commission maintains a website at www.sec.gov that contains
reports, proxy and information statements, and other information regarding registrants
that make electronic filings with the Securities and Exchange Commission using its EDGAR
(Electronic Data Gathering, Analysis, and Retrieval) system.

The
documents concerning our company that are referred to in this annual report may also be
inspected at our offices located atGilat House, 21 Yegia Kapayim Street, Kiryat
Arye, Petah Tikva, 49130 Israel.

|I. | Subsidiary
Information
|-- | ----------------------

Not applicable

84

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

The
table below details our 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:                      |                        
|                                  |                        
|Long-term loans  (including       |                        
|current maturities)               |                        
|In U.S. dollars:                  |                        
|Weighted interest rate            |                        
|In other currency:                |                        
|Weighted interest rate            |                        
|                                  |                        
|Converted subordinated notes - in |                        
|U.S. dollars:                     |                        
|Weighted interest rate            |                        

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

Not
applicable.

# PART II

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

None

85

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

Not
applicable.

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

# Disclosure Controls and
Procedures

Our
principal executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended) as of December 31, 2008, have
concluded that, as of such date, our disclosure controls and procedures were effective and
ensured that information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act is accumulated and communicated to our management,
including our principal executive officer and chief financial officer, to allow timely
decisions regarding required disclosure and is recorded, processed, summarized and
reported within the time periods specified by the rules of the Securities and Exchange
Commission.

# Managements Annual
Report on Internal Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal control over
our financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the companys principal executive and
principal financial officers and effected by the companys board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles and includes those policies
and procedures that:

| |  | Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the
              transaction and dispositions of the assets of the company;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use of disposition of the companys assets that could have a material
effect on the financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. 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.

Our
management assessed the effectiveness of our internal control over financial reporting, as
of December 31, 2008. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.

Based
on that assessment, our management concluded that as of December 31, 2008,  our
internal control over financial reporting is effective.

86

---

---



Our
independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, have issued an audit report on the effectiveness of our internal control over
financial reporting. The report is included in page F-3 of this Annual Report on Form
20-F.

# Changes in Internal
Control over Financial Reporting

During
the period covered by this Annual Report on Form 20-F, no changes in our internal control
over financial reporting have occurred that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

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

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

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

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

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

|ITEM 16C: |  | PRINCIPAL ACCOUNTANT 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 fees (1) |                        
|Tax fees (2)   |                        
|               |                        
|Total          |                        

|(1) | Audit
fees are fees for audit services for each of the years shown in this
               table, including fees associated with the annual audit, services provided
in                connection with audit of our internal control over financial reporting
and audit                services provided in connection with other statutory or
regulatory filings.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Tax
fees are fees for professional services rendered by our auditors for tax
               compliance, tax planning and tax advice on actual or contemplated
transactions.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

87

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# Policies and Procedures

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

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

Not
applicable.

|ITEM 16E: |  | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|--------- |  | ---------------------------------------------------------------------

# Issuer Purchase of
Equity Securities

In
the year ended December 31, 2008, we did not engage in the purchase of any of our own
shares.

|ITEM 16F: |  | CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
|--------- |  | ---------------------------------------------

Not
applicable.

|ITEM 16G. |  | CORPORATE GOVERNANCE
|--------- |  | --------------------

Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our company,
are permitted to follow certain home country corporate governance practices instead of
certain provisions of Rule 4350. A foreign private issuer that elects to follow a home
country practice instead of any of such provisions of Rule 4350, must submit to NASDAQ, in
advance, a written statement from an independent counsel in such issuers home
country certifying that the issuers practices are not prohibited by the home
countrys laws.

On
October 23, 2007, we provided NASDAQ with a notice of non-compliance with respect to the
requirement to obtain shareholder approval for the establishment or material amendment of
certain equity based compensation plans and arrangements, under which shares may be
acquired by officers, directors, employees or consultants. Under Israeli law and practice,
the approval of the board of directors is required for the establishment or material
amendment of such equity based compensation plans and arrangements. However, any equity
based compensation arrangement with a director or the material amendment of such an
arrangement must be approved by our audit committee, board of directors and shareholders,
in that order. We follow Israeli law and practice in accordance with which our board of
directors is authorized to recommend to our shareholders director nominees for election,
and our shareholders may nominate candidates for election as directors by the general
meeting of shareholders. See Item 6C. Directors, Senior Management and Employees
 Board Practices  Election of Directors.

# PART III

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

Not
applicable.

88

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

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

| |                                                                          |     
| | ------------------------------------------------------------------------ | ----
|
|
|
|
| | Index to Consolidated Financial Statements                               | PAGE
| | Management's Report on Internal Control over         Financial Reporting | F-2 
| | Reports of Independent Registered Public Accounting Firm                 | F-3 
| | Consolidated Balance Sheets                                              | F-5 
| | Consolidated Statements of Operations                                    | F-7 
| | Consolidated Statements of Changes in Shareholders' Equity               | F-8 
| | Consolidated Statements of Cash Flows                                    | F-9 
| | Notes to Consolidated Financial Statements                               | F-11

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

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

|1.2 | Articles
of Association, as amended and restated.
|--- | -------------------------------------------------

|2.1 | Form
of 4.00% Convertible Subordinated Note due 2012.  Previously filed as Exhibit T3C to our
         Registration Statement on Form F-3 (No.333-38667) which Exhibit is incorporated
herein by reference
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1. | Sublease
and Master Deed of Lease dated as of March 28, 2001 by and among BP III
               Leasco, LLC as Sublessor, BP Tysons, LLC as Landlord and Spacenet Real
Estate                Holdings, LLC as Sublessee and Master Tenant. Previously filed as
Exhibit 4.7 to                our Annual Report on Form 20-F for the fiscal year ending
December 31, 2000,                which Exhibit is incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 | List
of subsidiaries. Previously filed as Exhibit 8.1 to our Annual Report on Form 20-F for
the fiscal year ending December 31, 2006, which Exhibit is incorporated herein by
reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|12.1 | Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934, as amended.
|---- | --------------------------------------------------------------------------------------------------------------------------

|12.2 | Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1924, as amended.
|---- | --------------------------------------------------------------------------------------------------------------------------

|13 | Certification
by Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
|-- | -------------------------------------------------------------------------------------------------------------------------------

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

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

Date:
   April 7, 2009

89

---

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# GILAT SATELLITE
NETWORKS LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2008

# IN U.S. DOLLARS

# INDEX

|                                                                 | Page      
|---------------------------------------------------------------- | ----------
|
|
|
|
|Management's Report on Internal Control Over Financial Reporting | F-2       
|                                                                
|Reports of Independent Registered Public Accounting Firm         | F-3 - F-4 
|                                                                
|Consolidated Balance Sheets                                      | F-5- F-6  
|                                                                
|Consolidated Statements of Operations                            | F-7       
|                                                                
|Statements of Changes in Shareholders' Equity                    | F-8       
|                                                                
|Consolidated Statements of Cash Flows                            | F-9 - F-10
|                                                                
|Notes to Consolidated Financial Statements                       | F-11- F-53



---

---

# MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Gilats
management is responsible for establishing and maintaining adequate internal control over
financial reporting for Gilat. Gilats internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S
generally accepted accounting principles. Gilats internal control over financial
reporting includes those policies and procedures that:

| | pertain
to the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect        the transactions and dispositions of Gilat's assets,
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of Gilat are being made only in accordance with
authorizations of management and directors of Gilat, and
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Gilats assets that could have a material effect
on the financial statements.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projection 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.

Gilats
management assessed the effectiveness of its internal control over financial reporting as
of December 31, 2008. In conducting its assessment of internal control over financial
reporting, management based its evaluation on the framework in Internal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Gilats management has concluded based on its
assessment, that its internal control over financial reporting was effective as of
December 31, 2008 based on these criteria.

The
effectiveness of Gilats internal control over financial reporting as of December 31,
2008, has been audited by Kost, Forer, Gabbay & Kasierer (A Member of Ernst &
Young Global), an independent registered public accounting firm.

F - 2

---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of

# GILAT SATELLITE NETWORKS
LTD.

We
have audited Gilat Satellite Networks Ltd.s (Gilat) internal control
over financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Gilats management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.

We
conducted our audit 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 effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A
companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.

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

In
our opinion, Gilat maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Gilat and its
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2008, and our report dated April 7, 2009,
expressed an unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 7, 2009    | A Member of Ernst & Young Global

F - 3

---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and 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, 2008 and 2007, and the
related consolidated statements of operations, changes in shareholders equity and
cash flows for each of the three years in the period ended December 31, 2008. These
consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our
audits.

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

In
our opinion, based on our audits, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2008 and 2007, and the consolidated
results of their operations and cash flows, for each of the three years in the period
ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As
discussed in Note 2t to the consolidated financial statements, in 2007, the Company
adopted Interpretation No.48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109".

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control
over financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued bythe Committee of Sponsoring
Organizations of the Treadway Commission and our report dated April 7, 2009, expressed an
unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 7, 2009    | A Member of Ernst & Young Global

F - 4

---

---

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

|                                                                                | December 31,
|------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                          |             
|                                                                                |             
|CURRENT ASSETS:                                                                 |             
|Cash and cash equivalents                                                       |             
|Short- term bank deposits and held-to-maturity marketable securities            |             
|Short-term restricted cash                                                      |             
|Restricted cash held by trustees                                                |             
|Trade receivables, net                                                          |             
|Inventories                                                                     |             
|Other current assets                                                            |             
|                                                                                |             
|                                                                                |             
|Total current assets                                                            |             
|                                                                                |             
|                                                                                |             
|LONG-TERM INVESTMENTS AND RECEIVABLES:                                          |             
|Severance pay funds                                                             |             
|Long-term restricted cash                                                       |             
|Long-term restricted cash held by trustees                                      |             
|Long-term trade receivables, receivables in respect of capital leases and other |             
|receivables                                                                     |             
|                                                                                |             
|                                                                                |             
|Total long-term investments and receivables                                     |             
|                                                                                |             
|                                                                                |             
|PROPERTY AND EQUIPMENT, NET                                                     |             
|                                                                                |             
|                                                                                |             
|INTANGIBLE ASSETS AND DEFERRED CHARGES, NET                                     |             
|                                                                                |             
|                                                                                |             
|Total assets                                                                    |             
|                                                                                |             

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

F - 5

---

---

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

|                                                                           | December 31,
|-------------------------------------------------------------------------- | ------------
|
|
|
|
|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 current liabilities                                                  |             
|                                                                           |             
|                                                                           |             
|Total current liabilities                                                  |             
|                                                                           |             
|                                                                           |             
|LONG-TERM LIABILITIES:                                                     |             
|Long-term loans, net                                                       |             
|Long-term advances from customer, held by trustees                         |             
|Accrued severance pay                                                      |             
|Accrued interest related to restructured debt                              |             
|Convertible subordinated notes                                             |             
|Other long-term liabilities                                                |             
|                                                                           |             
|                                                                           |             
|Total long-term liabilities                                                |             
|                                                                           |             
|                                                                           |             
|COMMITMENTS AND CONTINGENCIES                                              |             
|                                                                           |             
|SHAREHOLDERS' EQUITY:                                                      |             
|Share capital -                                                            |             
|Ordinary shares of NIS 0.2 par value: Authorized - 60,000,000 shares as of |             
|December 31, 2008 and 2007; Issued and outstanding - 40,048,591 and        |             
|39,611,873 shares as of December 31, 2008 and 2007, respectively           |             
|Additional paid-in capital                                                 |             
|Accumulated other comprehensive income                                     |             
|Accumulated deficit                                                        |             
|                                                                           |             
|                                                                           |             
|Total shareholders' equity                                                 |             
|                                                                           |             
|                                                                           |             
|Total liabilities and shareholders' equity                                 |             
|                                                                           |             

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

F - 6

---

---

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

|                                                                        | Year ended December 31,
|----------------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenue:                                                                |                        
|Products                                                                |                        
|Services                                                                |                        
|                                                                        |                        
|                                                                        |                        
|Total revenue                                                           |                        
|                                                                        |                        
|                                                                        |                        
|Cost of revenue:                                                        |                        
|Products                                                                |                        
|Services                                                                |                        
|                                                                        |                        
|                                                                        |                        
|Total cost of revenue                                                   |                        
|                                                                        |                        
|                                                                        |                        
|Gross profit                                                            |                        
|Operating expenses:                                                     |                        
|Research and development costs, net                                     |                        
|Selling and marketing expenses                                          |                        
|General and administrative expenses                                     |                        
|Impairment of long-lived assets and other charges                       |                        
|                                                                        |                        
|                                                                        |                        
|Operating income (loss)                                                 |                        
|                                                                        |                        
|Financial income (expenses), net                                        |                        
|Expenses related to aborted merger transaction                          |                        
|Other income (loss)                                                     |                        
|                                                                        |                        
|                                                                        |                        
|Income before taxes on income                                           |                        
|Taxes on income                                                         |                        
|                                                                        |                        
|                                                                        |                        
|Net income (loss)                                                       |                        
|                                                                        |                        
|                                                                        |                        
|Net earnings (loss) per share:                                          |                        
|Basic                                                                   |                        
|                                                                        |                        
|Diluted                                                                 |                        
|                                                                        |                        
|                                                                        |                        
|Weighted average number of shares used in computing net earnings (loss) |                        
|per share:                                                              |                        
|Basic                                                                   |                        
|                                                                        |                        
|Diluted                                                                 |                        
|                                                                        |                        

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

F - 7

---

---

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

|                                                              | Number of
Ordinary
shares
(in
thousands) | Sharecapital | Additionalpaid-incapital | Accumulatedothercomprehensiveincome (loss)**) | Accumulateddeficit | Totalcomprehensiveincome (loss) | Totalshareholders'equity
|------------------------------------------------------------- | ---------------------------------------- | ------------ | ------------------------ | --------------------------------------------- | ------------------ | ------------------------------- | ------------------------
|
|
|
|
|Balance as of December 31  2005                               |                                          |              |                          | 22,556                                        |                    | $                               | 995                     
|                                                              |                                          |             
|Exercise of stock options                                     |                                          |              |                          | 669                                           |                    |                                 | 30                      
|Stock-based compensation related to employees stock options   |                                          |              |                          | -                                             |                    |                                 | -                       
|Conversion of long-term convertible loan from a related party |                                          |              |                          | 10,578                                        |                    |                                 | 492                     
|Issuance of shares in a public offering, net of $ 2,755       |                                          |             
|issuance expenses                                             |                                          |              |                          | 5,017                                         |                    |                                 | 240                     
|Comprehensive income:                                         |                                          |             
|Foreign currency translation adjustments                      |                                          |              |                          | -                                             |                    |                                 | -                       
|Net income                                                    |                                          |              |                          | -                                             |                    |                                 | -                       
|                                                              |                                          |              |                          |                                               |                    |                                 |                         
|Total comprehensive income                                    |                                          |              |                          |                                               |                    |                                 |                         
|                                                              |                                          |              |                          |                                               |                    |                                 |                         
|Balance as of December 31, 2006                               |                                          |              |                          | 38,820                                        |                    |                                 | 1,757                   
|                                                              |                                          |             
|Exercise of stock options                                     |                                          |              |                          | 791                                           |                    |                                 | 39                      
|Stock-based compensation related to employees stock options   |                                          |              |                          | -                                             |                    |                                 | -                       
|Conversion of convertible subordinated notes                  |                                          |              |                          | 1                                             |                    |                                 | *) -                    
|Accumulated affect of adjustment upon adoption of FASB        |                                          |             
|Interpretation No. 48                                         |                                          |              |                          |                                               |                    |                                 | -                       
|Comprehensive income:                                         |                                          |             
|Foreign currency translation adjustments                      |                                          |              |                          | -                                             |                    |                                 | -                       
|Net income                                                    |                                          |              |                          | -                                             |                    |                                 | -                       
|                                                              |                                          |              |                          |                                               |                    |                                 |                         
|Total comprehensive income                                    |                                          |              |                          |                                               |                    |                                 |                         
|                                                              |                                          |              |                          |                                               |                    |                                 |                         
|Balance as of December 31, 2007                               |                                          |              |                          | 39,612                                        |                    |                                 | 1,796                   
|                                                              |                                          |             
|Exercise of stock options                                     |                                          |              |                          | 437                                           |                    |                                 | 25                      
|Stock-based compensation related to employees stock options   |                                          |              |                          | -                                             |                    |                                 | -                       
|Comprehensive loss:                                           |                                          |             
|Foreign currency translation adjustments                      |                                          |              |                          | -                                             |                    |                                 | -                       
|Unrealized gain on forward contracts, net                     |                                          |              |                          | -                                             |                    |                                 | -                       
|Net loss                                                      |                                          |              |                          | -                                             |                    |                                 | -                       
|                                                              |                                          |              |                          |                                               |                    |                                 |                         
|Total comprehensive loss                                      |                                          |              |                          |                                               |                    |                                 |                         
|                                                              |                                          |              |                          |                                               |                    |                                 |                         
|Balance as of December 31, 2008                               |                                          |              |                          | 40,049                                        |                    | $                               | 1,821                   
|                                                              |                                          |              |                          |                                               |                    |                                 |                         

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

*)
          represents an amount of less the one thousand dollars.**)
          represents adjustments in respect of foreign currency translation and unrealized
          gain on forward contracts, net. Balance of accumulated
other comprehensive income (loss) as of December 31, 2008, 2007 and 2006 included foreign
currency translation adjustments in the amount of $ 1,010, $ 1,776 and $ 702,
respectively, and unrealized gain on forward contracts, net, in the amount of $ 1,096,
$ 0, $ 0, respectively.

F - 8

---

---

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

|                                                                     | Year ended December 31,
|-------------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                                |                        
|Net income (loss)                                                    |                        
|Adjustments required to reconcile net income (loss) to net cash      |                        
|provided by (used in) operating activities:                          |                        
|Depreciation and amortization                                        |                        
|Impairment of long-lived assets and other charges                    |                        
|Gain from disposal of a subsidiary consolidated in previous years    |                        
|Stock based compensation related to employees stock options          |                        
|Accretion of discount related to the York loan                       |                        
|Accrued severance pay, net                                           |                        
|Accrued interest on short and long-term restricted cash              |                        
|Accrued interest on held-to-maturity marketable securities           |                        
|Exchange rate differences on long-term loans                         |                        
|Exchange rate differences on loans to employees                      |                        
|Capital loss from disposal of property and equipment                 |                        
|Deferred income taxes                                                |                        
|Decrease (increase) in trade receivables, net                        |                        
|Decrease (increase) in other assets (including short-term, long-term |                        
|and deferred charges)                                                |                        
|Decrease (increase) in inventories                                   |                        
|Increase (decrease) in trade payables                                |                        
|Increase (decrease) in accrued expenses                              |                        
|Increase (decrease) in advances from customer, held by trustees, net |                        
|Increase (decrease) in other accounts payable and other long-term    |                        
|liabilities, mainly deferred revenue                                 |                        
|                                                                     |                        
|                                                                     |                        
|Net cash provided by (used in) operating activities                  |                        
|                                                                     |                        
|                                                                     |                        
|Cash flows from investing activities:                                |                        
|Purchase of property and equipment                                   |                        
|Other investments                                                    |                        
|Purchase of held-to-maturity marketable securities                   |                        
|Proceeds from held-to-maturity marketable securities                 |                        
|Proceeds from sale of an investment accounted for at cost            |                        
|Disposal of a subsidiary consolidated in previous periods            |                        
|Proceeds from short-term bank deposits                               |                        
|Proceeds from sale of property and equipment                         |                        
|Loans to employees, net                                              |                        
|Investment in restricted cash (including long-term)                  |                        
|Proceeds from restricted cash (including long-term)                  |                        
|Investment in restricted cash held by trustees                       |                        
|Proceeds from restricted cash held by trustees                       |                        
|                                                                     |                        
|                                                                     |                        
|Net cash provided by (used in) investing activities                  |                        
|                                                                     |                        

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

F - 9

---

---

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

|                                                              | Year ended December 31,
|------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from financing activities:                         |                        
|Exercise of stock options                                     |                        
|Issuance of shares, net of issuance expenses                  |                        
|Short-term bank credit, net                                   |                        
|Proceeds from long-term loans                                 |                        
|Repayments of long-term loans                                 |                        
|                                                              |                        
|                                                              |                        
|Net cash provided by (used in) financing activities           |                        
|                                                              |                        
|                                                              |                        
|Effect of exchange rate changes on cash and cash equivalents  |                        
|                                                              |                        
|                                                              |                        
|Increase (decrease) in cash and cash equivalents              |                        
|Cash and cash equivalents at the beginning of the year        |                        
|                                                              |                        
|                                                              |                        
|Cash and cash equivalents at the end of the year              |                        
|                                                              |                        
|                                                              |                        
|Supplementary cash flow activities:                           |                        
|                                                              |                        
|(1)      Cash paid during the year for:                       |                        
|Interest                                                      |                        
|                                                              |                        
|                                                              |                        
|Income taxes                                                  |                        
|                                                              |                        
|                                                              |                        
|(2)      Non-cash transactions:                               |                        
|                                                              |                        
|Conversion of long-term convertible loan from a related party |                        
|                                                              |                        
|                                                              |                        
|Classification between property and equipment and             |                        
|inventories - net                                             |                        
|                                                              |                        
|                                                              |                        
|Purchase of property and equipment by assumption of loan      |                        
|                                                              |                        
|                                                              |                        
|Issuance expenses payable                                     |                        
|                                                              |                        

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

F - 10

---

---

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

|NOTE 1: |  | GENERAL
|------- |  | -------

| | a. | Organization:
| | -- | -------------

| | Gilat
Satellite Networks Ltd. (the Company or Gilat) and its
subsidiaries (the Group) is a global provider of Internet Protocol, or IP,
based digital satellite communication and networking products and services. The Company
designs, produces and markets VSATs, or very small aperture terminals, and related VSAT
network equipment. VSATs are earth based terminals that transmit and receive broadband,
Internet, voice, data and video via satellite. VSAT networks combine a large central
earth station, called a hub, with multiple remote sites (ranging from tens to thousands
of sites), which communicate via satellite.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company currently operates three complementary, vertically integrated operational
segments:
| | -----------------------------------------------------------------------------------------------

| |  | Gilat
Network Systems (GNS) provides VSAT-based networks and associated
professional services, including turnkey and management services, to telecom operators
worldwide.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Spacenet
Inc. (Spacenet) provides satellite network services to enterprises, small
office/home office (SOHOs) and residential customers in the U.S.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Spacenet
Rural Communications (SRC) provides telephony, Internet and data services
primarily for rural communities in emerging markets in Latin America under projects that
are subsidized by government entities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gilat
was incorporated in Israel in 1987 and launched its first generation VSAT in 1989. For a
description of principal markets and customers, see note 15.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Impairment
of long-lived assets and other charges:
| | -- | --------------------------------------------------

| | In
2008 and 2007, the Group recorded losses for the impairment of its long lived assets and
other charges with respect to its Colombian activity, included in SRC segment, in the
amounts of $ 5,020 and $ 12,218, respectively, see also note 11.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Agreement
and Plan of Merger (the Agreement and Plan of Merger):
| | -- | ------------------------------------------------------------------

| | On
March 31, 2008 the Company announced the signing of an Agreement and Plan of Merger to be
acquired for an aggregate value of $ 475,000 in an all cash transaction by a consortium
of private equity investors. The closing of the transaction was subject to shareholdersapproval,
certain regulatory approvals and other customary closing conditions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 5, 2008 the Company informed the consortium that all conditions precedent to
closing had been met.
| | ------------------------------------------------------------------------------------------------------------

| | On
August 29, 2008 the Company notified the consortium that it was terminating the Agreement
and Plan of Merger citing the consortiums intentional breach of the merger
agreement and failure to close the merger transaction within the extended time period
established to complete the transaction.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
definitive agreement provides for a termination fee in the amount of approximately
$47,500 payable to the Company, and the Company has sued the consortium members for this
amount. See also note 7e.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

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

|NOTE 1: |  | GENERAL (Cont.)
|------- |  | ---------------

| | d. | York
Capital Management LP (York):
| | -- | ------------------------------------

| | In
July 2005, Bank Hapoalim, an Israeli bank, assigned its loan to the Company to York. The
loan included the right to convert the aggregate amount of the loan plus accrued interest
into the Companys ordinary shares. At that time, Bank Hapoalim also provided York
with an option to purchase 1,000,809 of the Companys shares held by it at $ 6.30
per share for a period of two years. In addition, York was given a proxy to vote all
2,052,428 ordinary shares of the Company owned by Bank Hapoalim and an additional
1,250,000 ordinary shares of the Company owned by Mivtach Shamir Finance Ltd. until July
18, 2007. Following the above, York became a related party of the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005, the Company revised the terms of the loan that was assigned by Bank
Hapoalim to York. Under the amendment, York agreed to defer $ 19,350 of principal
payments due and established a new payment schedule. In consideration, the Company agreed
to reduce the exercise price of the warrant issuable to York (assigned by Bank Hapoalim)
to $ 6.75 per share for the period ending September 30, 2006. In addition, during that
period, the Company was granted the right to require the conversion of the outstanding
loan from York at $ 6.75 per share under certain circumstances. Beginning October 1,
2006, the exercise price of the warrant was to revert to the original terms (see also
Note 10).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
September 27, 2006, York converted its entire loan and accrued interest into warrants and
immediately exercised its option to convert the warrants into shares at $ 6.75 per share.
This resulted in the issuance of 10,578,474 ordinary shares of the Company to York.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on Interpretation 1 of Opinion 26 and EITF No. 85-17, Accrued Interest upon
Conversion of Convertible Debt, the net carrying amount of the convertible debt and
accrued interest unpaid, including the unamortized discount, in the total amount of $
68,111 was credited to shareholders equity upon conversion.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Issuance
of ordinary shares
| | -- | ---------------------------

| | In
December, 2006, the Company consummated a public offering of 8,050,000 of its ordinary
shares at a price of $8.50 per share. Of such shares, 5,016,667 ordinary shares were sold
by the Company and the remaining shares were sold by York. See also Note 9.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 12

---

---

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

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

| | b. | Functional
Currency:
| | -- | --------------------

| | The
majority of the revenues of the Company and certain of its subsidiaries are generated in
U.S. dollars (dollar) or linked to the dollar. In addition, a substantial
portion of the Companys and certain of its subsidiaries costs are incurred in
dollars. The Companys management believes that the dollar is the primary currency
of the economic environment in which the Company and certain of its subsidiaries operate.
Thus, the functional and reporting currency of the Company and certain of its
subsidiaries is the dollar.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with SFAS No. 52 Foreign Currency Translation. All
transaction gains and losses of the remeasurement of monetary balance sheet items are
reflected in the consolidated statements of operations as financial income or expenses,
as appropriate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements of foreign subsidiaries, whose functional currency has been
determined to be their local currency, have been translated into dollars. Assets and
liabilities have been translated using the exchange rates in effect at the balance sheet
date. Statements of operations amounts have been translated using average rates, which
approximates the prevailing exchange rate for each transaction. 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 subsidiaries. Intercompany balances and transactions, including profits from
intercompany sales not yet realized outside the Group, have been eliminated upon
consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Cash
equivalents:
| | -- | -----------------

| | Cash
equivalents are short-term highly liquid investments that are not restricted as to
withdrawals or use with maturities of three months or less at the date acquired.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Marketable
securities:
| | -- | ----------------------

| | The
Company accounts for investments in marketable debt securities in accordance with
Statement of Financial Accounting Standard No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115). Management
determines the appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such determinations at each balance
sheet date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 and 2007, the Company classified all of its debt securities as
held-to-maturity. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity and are stated at
amortized cost. The cost of held-to-maturity securities is adjusted for amortization of
accretion of discounts to maturity. Interest is included in financial income (expenses),
net.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

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

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

| | In
accordance with the Companys policy and FASB Staff Position (FSP) Nos. SFAS 115-1
(FSP 115-1) and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, the Company recognizes an impairment charge
when a decline in the fair value of its investments below the cost basis is judged to be
other-than- temporary. The Company considers various factors in determining whether to
recognize an impairment charge, including the Companys intent and ability to hold
the investment for a period of time sufficient to allow for any anticipated recovery in
market value, the length of time and extent to which the fair value has been less than
the cost basis, the credit ratings of the securities and the financial condition and
near-term prospects of the issuers. During the years 2008 and 2007, the Company did not
record any other-than-temporary impairment losses with respect to its holdings of
marketable debt securities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Short-term
and long-term restricted cash:
| | -- | -----------------------------------------

| | Short-term
restricted cash is primarily invested in certificates of deposit, which mature within one
year. As of December 31, 2008, the vast majority of this amount was linked to the dollar.
It is used as collateral for the lease of the Groups offices, performance
guarantees to customers and loans, and bears a weighted average interest of 3.01% and
5.43% in 2008 and 2007, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Long-term
restricted cash is primarily invested in certificates of deposit, which mature in more
than one year. As of December 31, 2008, the vast majority of the amount is linked to the
dollar. It bears an annual weighted average interest rate of 0.64% and 4.46% as of
December 31, 2008 and 2007, respectively. 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Restricted
cash held by trustees:
| | -- | ---------------------------------

| | Short-term
and long term restricted cash held by trustees is primarily invested in certificates of
deposits and US government securities. As of December 31, 2008, 80% of the total amount
is linked to the dollar and 20% of the total amount is linked to the Colombian Peso. The
amounts held by trustees bear interest at rates of 2% and 10%, respectively, and are
released based upon performance milestones as stipulated in the Groups agreements
with the government of Colombia. The Group signed revised agreements with the government
of Colombia effective December 26, 2008. See also note 11.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Inventories:
| | -- | ------------

| | Inventories
are stated at the lower of cost or market value. Inventory write-offs are provided to
cover risks arising from slow-moving items, excess inventories, discontinued products,
new products introduction and for market prices lower than cost. Any write-off is
recognized in the consolidated statement of operations as cost of revenue.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
is determined as follows:
| | ------------------------------

| | Raw
materials, parts and supplies  with the addition of allocable indirect
manufacturing costs using the average cost method.
| | ------------------------------------------------------------------------------------------------------------------------------

| | Work-in-progress
 represents the cost of manufacturing with the addition of allocable indirect
manufacturing costs, using the average cost method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

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

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

| | Finished
products  calculated on the basis of direct manufacturing costs with the addition
of allocable indirect manufacturing costs, using the average cost method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Investment
in other companies:
| | -- | ------------------------------

| | The
investment in these companies is stated at cost since the Group does not have the ability
to exercise significant influence over operating and financial policies of the
investments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Groups investments in other companies are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an investment may not be
recoverable in accordance with APB 18. Any impairment loss is recognized in the
consolidated statements of operations. As of December 31, 2008, 2007 and 2006, the
investment in these companies was nil.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Long-term
trade receivables:
| | -- | ----------------------------

| | Long-term
trade receivables from long-term payment agreements are initially recognized at estimated
present values determined based on current rates of interest and reported at the net
amounts in the accompanying consolidated financial statements. Imputed interest is
recognized, using the effective interest method, as a component of financial income
(expenses) in the statements of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | 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, software and electronic equipment | 3 - 5                                    
| | Office furniture and equipment               | 5 - 17                                   
| | Vehicles                                     | 5 - 7                                    
| | Leasehold improvements                       | Over the term of the lease or the useful 
| |                                              | life of the improvements, the shorter of.

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

| | l. | Intangible
assets and deferred charges:
| | -- | ---------------------------------------

| | Intangible
assets with definite useful life are subject to amortization and are carried at cost less
accumulated amortization.
| | ------------------------------------------------------------------------------------------------------------------------------

| | The
assets are amortized using the straight-line method over their estimated useful lives,
which are five to fifteen years, in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

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

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

| | Deferred
charges represent costs related to the deferred revenue. Such costs are recognized when
the related revenues are recognized and are presented on the balance sheet under other
current assets for deferred charges that will be recognized within a year after the
balance sheet date and under intangible assets and deferred charges, for deferred charges
that will be recognized in more than one year after the balance sheet date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | Impairment
of long-lived assets and long-lived assets to be disposed of:
| | -- | ------------------------------------------------------------------------

| | The
Groups long-lived assets are reviewed for impairment in accordance with SFAS 144
Accounting for the Impairment or Disposal of Long-Lived Assets, whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to the future undiscounted cash flows expected to be
generated by the assets. Such measurement includes significant estimates. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets. However,
the carrying amount of a group of assets is not to be reduced below its fair value.
Assets to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2008 and 2007, the Group recorded impairment losses in respect of long lived assets
related to its SRC operational segment in Colombia. See also Note 11.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Revenue
recognition:
| | -- | --------------------

| | The
Group generates revenue mainly from the sale of products and services for satellite-based
communications networks. Sale of products includes mainly the sale of VSATs and hubs.
Service revenue include access to and communication via satellites (space segment),
installation of network equipment, telephone services, internet services, consulting,
on-line network monitoring, network maintenance and repair services. The Group sells its
products primarily through its direct sales force and indirectly through resellers. Sales
consummated by the Groups sales force and sales to resellers are considered sales
to end-users.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 16

---

---

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

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

| | Revenue
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
delivery, in cases where the customer obtains its own or others installation
services. The net investments in sales-type-leases are discounted at the interest rates
implicit in the leases. The present values of payments due under sales-type-lease
contracts are recorded as revenue 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenue represent amounts received by the Company when the criteria for revenue
recognition as described above are not met and are included in other current
liabilities and other long term liabilities. In general, when deferred
revenue are recognized as revenue, the associated deferred costs are also recognized as
cost of sales.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Shipping
and advertising expenses:
| | -- | ----------------------------------

| | Selling
and marketing expenses include shipping expenses in the amounts of $ 2,102, $ 2,450, and $ 3,800
for the years ended December 31, 2008, 2007 and 2006, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advertising
costs are expensed as incurred. Advertising expenses for the years ended December 31,
2008, 2007 and 2006 amounted to $ 878, $ 897 and $ 562, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Warranty
costs:
| | -- | ---------------

| | Generally,
the Company provides product warranties for periods between twelve to eighteen months at
no extra charge. A provision is recorded for estimated warranty costs based on the Companys
experience. Warranty expenses for the years ended December 31, 2008, 2007 and 2006 were
immaterial.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Research
and development expenses:
| | -- | ----------------------------------

| | Research
and development expenses, net of grants received, are charged to expenses as incurred.
| | -----------------------------------------------------------------------------------------------

| | r. | Grants:
| | -- | -------

| | The
Company received non-royalty-bearing grants from the Government of Israel, the Advanced
Satellite Network Technologies (ASNT), SES Global S.A Satellite Networks Next
Generation Technologies and from other funding sources, for approved research and
development projects. These grants are recognized at the time the Company is entitled to
such grants on the basis of the costs incurred or milestones achieved as provided by the
relevant agreement and included as a deduction from research and development expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research
and development grants deducted from research and development expenses amounted to $
1,760, $ 2,240 and $ 2,045 in 2008, 2007 and 2006, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

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

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

| | s. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | The
Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised
2004), Stock-Based Payment (SFAS No. 123(R)). SFAS No. 123(R)
requires companies to estimate the fair value of equity-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite service
periods in the Companys consolidated statement of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards, which vested and
were granted prior to January 1, 2006, based on the accelerated attribution method and
for awards granted subsequent to January 1, 2006, based on the straight line method over
the requisite service period of each of the awards, net of estimated forfeitures. SFAS
No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company selected the Black-Scholes-Merton option pricing model as the most appropriate
fair value method for its stock-options awards and values restricted stock based on the
market value of the underlying shares at the date of grant. The option-pricing model
requires a number of assumptions, of which the most significant are the expected stock
price volatility and the expected option term. Expected volatility was calculated based
upon actual historical stock price movements. The expected term of options granted is
based upon historical experience and represents the period of time that options granted
are expected to be outstanding. Prior to December 31, 2007 expected term of options was
determined based on simplified method permitted by SAB No. 107 as the average of the
vesting period and the contractual term. Starting January 1, 2008 expected term of
options granted is based upon historical experience complying with SAB 110. The risk-free
interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The
Company has historically not paid dividends and has no foreseeable plans to pay dividends.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value based on an option-pricing model,
pursuant to the guidance in EITF 96-18 Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services. The fair value of the options granted is revalued over the related
service periods and recognized over the vesting period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
Note 9 for a further discussion on stock-based compensation.
| | ----------------------------------------------------------------

| | 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, if it is more likely than not that a
portion or all of the deferred tax assets will not be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

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

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

| | In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition
(step one) occurs when an enterprise concludes that a tax position, based solely on its
technical merits, is more-likely-than-not to be sustained upon examination. Measurement
(step two) is only addressed if step one has been satisfied (i.e., the position is
more-likely-than-not to be sustained) otherwise a full liability in respect of a tax
position not meeting the more-than-likely-than-not criteria is recognized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
step two, the tax benefit is measured as the largest amount of benefit, determined on a
cumulative probability basis, that is more-likely-than-not to be realized upon ultimate
settlement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 applies to all tax positions related to income taxes subject to FAS 109. This includes
tax positions considered to be routine as well as those with a high degree of
uncertainty. FIN 48 has expanded disclosure requirements, which include a tabular roll
forward of the beginning and ending aggregate unrecognized tax benefits as well as
specific detail related to tax uncertainties for which it is reasonably possible the
amount of unrecognized tax benefit will significantly increase or decrease within twelve
months (See also Note 12).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect
of applying FIN 48 is reported as an adjustment to the opening balance of accumulated
deficit. The adoption of FIN 48 resulted in an increase of the tax provision in the
amount of $ 1,309 which adjusted the balance of the accumulated deficit, as of January 1,
2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 bank deposits and held-to-maturity
marketable securities, short-term and long-term restricted cash, short-term and long-term
restricted cash held by trustees, trade receivables, short-term and long-term receivables
relating to capital leases and long-term trade receivables.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of the Groups cash and cash equivalents, short-term bank deposits, and
short-term and long-term restricted cash are invested in U.S 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. Generally, these cash
equivalents may be redeemed upon demand and, therefore management believes that they bear
lower risk.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Most
of the Companys marketable securities include investments in U.S. government
debentures. The Companys investment policy, limits the amount the Company may
invest in any one type of investment, thereby reducing credit risk concentration. See
also Note 3.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group also has restricted cash held by trustees, which is invested in U.S. dollar
deposits, US government securities and in Colombian Peso deposits with major banks in
Colombia and in the U.S. As of December 31, 2008, restricted cash held by the
trustees amounted to $ 24,169. The Company is entitled to receive the restricted
cash held by the trustee in stages based upon operational milestones. The cash held in
trusts is reflected in the Companys balance sheet as Restricted cash held by
trustees. If the Company will not meet certain milestones, as determined in the
re-negotiated agreements effective on December 26, 2008 with the Colombian
government, the Company may be unable to receive this restricted cash. See also Note 11.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

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

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

| | Trade
receivables, short-term and long-term receivables relating to capital leases and
long-term trade receivables of the Group are mainly derived from sales to major customers
located in the U.S., Europe, Asia, South America and Africa. 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
specific debts that the Group has determined to be doubtful of collection.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
significant portion of the Groups restricted cash held by trustees, trade
receivables and long-term trade receivables is from two countries in Latin America  Colombia
and Peru. Any instability in the political or economic situation or otherwise in those
countries, could have a significant adverse impact on the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2008 the Company entered into hedging agreements, with major banks in Israel, in order to
hedge portions of its anticipated NIS payroll payments. These contracts are designated as
cash flow hedges. Those contracts mature at the time in which the related salary payments
are paid. See also note 2(y) and note 8.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Employee
related benefits:
| | -- | --------------------------

| | Severance
Pay
| | -------------

| | The
Companys liability for severance pay 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 for 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
April and May 2008 (thetransition date), the Company amended the contracts of
most of its Israeli employees so that starting on the transition date, such employees are
subject to Section 14 of the Severance Pay Law  1963 (Section 14) for
severance pay accumulated in periods of employment subsequent to the transition date. In
accordance with section 14, upon termination, the release of the contributed amounts from
the fund to the employee shall relieve the Company from any further severance liability
and no additional payments shall be made by the Company to the employee. As a result, the
related obligation and amounts deposited on behalf of such obligation are not stated on
the balance sheet, as the Company is legally released from severance obligation to
employees once the amounts have been deposited, and the Company has no further legal
ownership of the amounts deposited.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying value for the deposited funds for the Companys employees severance
pay for employment periods prior to April and May 2008 include profits and losses
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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

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

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

| | Severance
pay expenses for the years ended December 31, 2008, 2007 and 2006, amounted to
approximately $ 3,265 $ 2,505 and $ 2,421, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 401K
profit sharing plans
| | -------------------------

| | The
Company has a number of savings plans in the United States that qualify under Section
401(k) of the Internal Revenue Code. U.S employees may contribute up to 100% of their
pretax salary, but not more than statutory limits. The Company contributes one dollar for
each dollar a participant contributes in this plan, in an amount of up to 3% and in
addition, it contributes fifty cents for each dollar a participant contributes in this
plan, for an additional 3%. Matching contributions in 2008, 2007 and 2006 for all the
plans were approximately $ 700 per year. Matching contributions are invested in
proportion to each participants voluntary contributions in the investment options
provided under the plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 or investing arrangements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the convertible subordinated notes was determined based on management
estimates that incorporate the estimated market participant expectations of future cash
flow and market value (on the over the counter market). As of December 31, 2008 and 2007,
the Companys convertible subordinated notes fair value was $13,317 and $13,215,
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 period. Diluted net earnings (loss) per share are
computed based on the weighted average number of ordinary shares outstanding during each
period, plus dilutive potential ordinary shares considered outstanding during the period,
in accordance with SFAS No. 128, Earnings per Share. The total weighted
average number of shares related to the outstanding options and warrants excluded from
the calculations of diluted net earnings (loss) per share, as they would have been
anti-dilutive, was 1,145,918, 272,803 and 9,276,286 for the years ended December 31,
2008, 2007 and 2006, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

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

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

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

| | 1. | Numerator:
| | -- | ----------

| |                                              | Year ended December 31,
| | -------------------------------------------- | -----------------------
|
|
|
|
| | Numerator for basic and diluted net earnings |                        
| | (loss) per share -                           |                        
| | Net income (loss) available to holders of    |                        
| | Ordinary Shares                              |                        
| |                                              |                        

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

| |                                                       | Year ended December 31,
| | ----------------------------------------------------- | -----------------------
|
|
|
|
| | Denominator for basic net earnings (loss) per share - |                        
| | Weighted average number of shares                     |                        
| | Add-employee stock options and                        |                        
| | convertible notes                                     |                        
| |                                                       |                        
| | Denominator for diluted net earnings (loss) per       |                        
| | share - adjusted weighted average shares              |                        
| | assuming exercise of options                          |                        
| |                                                       |                        

| | *Anti-dilutive
| | --------------

| | y. | Derivatives
and hedging activities:
| | -- | -----------------------------------

| | Financial
Accounting Standard Board Statement No. 133 Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133), as amended, requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivatives change in
fair value is immediately recognized in earnings. The Company uses derivatives to hedge
certain cash flow foreign currency exposures in order to further reduce the Companys
exposure to foreign currency risks.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

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

| | z. | Impact
of recently issued accounting pronouncements:
| | -- | ----------------------------------------------------

| | In
 February  2008,  the FASB  issued  FASB Staff  Position  ("FSP")  FAS No.  157-2,
                     "Effective  Date of FASB  Statement  No. 157" ("FSP  157-2"),  to
delay the effective                      date of FASB  Statement  157  for  one  year
 for  certain  nonfinancial  assets  and                      nonfinancial  liabilities,
 excluding  those  that are  recognized  or  disclosed  in                      financial
 statements  at  fair  value  on a  recurring  basis  (that  is,  at  least
                     annually).  For  purposes  of  applying  the  FSP  157-2,
  nonfinancial  assets  and                      nonfinancial  liabilities  include  all
 assets  and  liabilities  other  than  those                      meeting  the
 definition  of a  financial  asset  or a  financial  liability  in FASB
                     Statement  159.   FSP 157-2  defers the  effective  date of
 Statement  157 to fiscal                      years  beginning  after  November 15,
2008,  and interim  periods within those fiscal                      years for items
 within the scope of this FSP 157-2.  The Company does not expect the
                     adoption of FSP 157-2 to have a material  impact on its financial
 position,  results                      of operations or cash flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
 March  2008,  the  FASB  issued  Statement  161  "Disclosures   about  Derivative
                     Instruments  and  Hedging   Activities"   ("SFAS  161")  an
 amendment  to  FASB  No.                      133.  This statement changes the
disclosure  requirements for derivative  instruments                      and  hedging
 activities.  Entities  are  required  to provide  enhanced  disclosures
                     about (a) how and why and entity  uses  derivative  instruments,
 (b) how  derivative                      instruments  and related  hedged items are
accounted for under  Statement 133 and its                      related  interpretations,
 and (c) how  derivative  instruments  and  related  hedged                      items
 affect  an  entity's  financial  position,  financial  performance,  and  cash
                     flows.  This  statement is effective for financial statements issued
for fiscal years                      and  interim  periods  beginning  after  November
 15,  2008.  Early  application  is                      encouraged.  The  Company  does
 not  expect  the  adoption  of  SFAS  161 to  have a                      material
impact on its financial position, results of operations or cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
 December 2007,   the  FASB  issued  SFAS  160,    "Noncontrolling   Interests  in
                     Consolidated   Financial  Statements"   ( "SFAS  160 ").  SFAS  160
 amends  ARB  51,                       "Consolidated   Financial  Statements ",   to
 establish  accounting  and  reporting                      standards   for  the
  noncontrolling   interest   in  a   subsidiary   and  for  the
                     deconsolidation  of a subsidiary.  It also clarifies that a
 noncontrolling  interest                      in a subsidiary is an ownership  interest
in the  consolidated  entity that should be                      reported as equity in
the consolidated  financial  statements.  SFAS 160 also changes                      the
way the  consolidated  income  statement is  presented by requiring  consolidated
                     net income to be reported at amounts  that include the amounts
 attributable  to both                      the parent and the  noncontrolling  interest.
 It also  requires  disclosure,  on the                      face of the  consolidated
 statement of income,  of the amounts of  consolidated  net                      income
 attributable  to the  parent  and to the  noncontrolling  interest.  SFAS 160
                     requires  that a parent  recognize a gain or loss in net income when
a subsidiary  is                      deconsolidated  and  requires  expanded
 disclosures  in the  consolidated  financial                      statements  that
 clearly  identify  and  distinguish  between the  interests  of the
                     parent owners and the interests of the non-controlling  owners of a
subsidiary.  SFAS                      160 is effective for fiscal  periods,  and interim
periods within those fiscal years,                      beginning  on or after  December
15, 2008.  The impact of SFAS 160  on the  Company's                      consolidated
  financial   statements   will   depend  on  the  nature  and  size  of
                     acquisitions, if any, subsequent to the effective date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

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

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

| | In
 December 2007,  the FASB issued SFAS 141(R),   "Business  Combinations"   ( "SFAS
                     141(R) ").  This  Statement  replaces SFAS No. 141,   "Business
 Combinations ",  and                      requires an acquirer to  recognize  the assets
 acquired,  the  liabilities  assumed,                      including   those   arising
  from   contractual   contingencies,    any   contingent
                     consideration  and any  non-controlling  interest in the acquiree at
the  acquisition                      date,  measured  at their  fair  values  as of that
 date,  with  limited  exceptions                      specified  in the  statement.
 SFAS 141(R)  also  requires the acquirer in a business                      combination
 achieved  in stages  (sometimes  referred to as a step  acquisition)  to
                     recognize the  identifiable  assets and liabilities,  as well as the
 non-controlling                      interest  in the  acquiree,  at the full  amounts
 of their  fair  values  (or  other                      amounts  determined  in
 accordance  with SFAS  141(R)).  In addition,  SFAS 141(R)'s
                     requirement  to measure the  non-controlling  interest in the
 acquiree at fair value                      will  result  in  recognizing  the  goodwill
  attributable  to  the  non-controlling                      interest  in addition  to
that  attributable  to the  acquirer.  SFAS 141(R)  applies
                     prospectively  to  business  combinations  for  which the
 acquisition  date is on or                      after the  beginning  of the first
 annual  reporting  period  beginning  on or after                      December 15,
2008.  The impact of SFAS 141R on the Company's  consolidated results of
                     operations   and  financial   condition  will  depend  on  the
 nature  and  size  of                      acquisitions, if any, subsequent to the
effective date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April  2008,  the FASB  issued FSP  142-3,  "Determination  of the Useful  Life of
                     Intangible  Assets"  (FSP  142-3).  FSP  142-3  amends  the  factors
 that  should be                      considered  in  developing  renewal or extension
 assumptions  used to determine  the                      useful  life of a  recognized
 intangible  asset under SFAS No.  142,  "Goodwill  and                      Other
 Intangible  Assets".  FSP 142-3 is effective for fiscal years  beginning after
                     December 15, 2008.  The Company is currently  evaluating  the
 potential  impact,  if                      any, of the adoption of FAS 142-3 on its
consolidated financial statement
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EITF
Issue  No. 08-7,  "Defensive  Intangible  Assets"  ("EITF  08-7"),  requires  an
                     acquiring  entity to account for  defensive  intangible  assets as a
separate unit of                      accounting.  Defensive  intangible  assets should
not be included as part of the cost                      of the  acquirer's  existing
 intangible  assets  because  the  defensive  intangible                      assets are
separately  identifiable.  Defensive  intangible assets must be recognized
                     at fair  value in  accordance  with  SFAS  141(R)  and SFAS  157.
 EITF  08-7 will be                      effective for the reporting  period  beginning
after December 15, 2008. The impact of                      EITF 08-7 on the  Company's
 consolidated  financial  statements  will  depend on the                      nature and
size of acquisitions, if any, subsequent to the effective date
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2008,  the FASB issued SFAS No. 162,  "The  Hierarchy  of  Generally  Accepted
                     Accounting  Principles".  SFAS 162  identifies  the sources of
accounting  principles                      and the  framework for selecting  the
 principles  to be used in the  preparation  of                      financial
 statements  of  nongovernmental  entities that are presented in conformity
                     with generally accepted  accounting  principles in the United
States. It is effective                      60 days  following  the SEC's  approval of
the Public  Company  Accounting  Oversight                      Board  amendments  to AU
Section 411,  "The Meaning of Present  Fairly in  Conformity                      With
 Generally  Accepted  Accounting  Principles".  The Company does not expect SFAS
                     No. 162 to have a material effect on its financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October  29,  2008,  the FASB  issued FSP No.132  (R)-a,  "Employers'  Disclosures
                     about  Pensions  and Other  Postretirement  Benefits,"  to require
 that an  employer                      disclose  the  following  information  about the
fair  value of plan  assets:  1) the                      level  within the fair value
 hierarchy  in which  fair  value  measurements  of plan                      assets
 fall;  2)  information  about the inputs  and  valuation  techniques  used to
                     measure the fair value of plan  assets;  and 3) a  reconciliation
 of  beginning  and                      ending  balances  for  fair  value  measurements
 of plan  assets  using  significant                      unobservable  inputs.  The  FSP
will be  effective  for  fiscal  years  ending  after                      December 15,
2009, with early application
 permitted.  Application  of the FSP would not be  required  for  earlier
                     periods  that are  presented  for  comparative  purposes. The
 Company  is  currently                      evaluating  the  potential  impact of
 adopting  this FSP on the  disclosures  in its                      financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

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

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

| | In
June 2008,  the FASB issued FSP EITF No. 03-6-1  "Determining  Whether Instruments
                     Granted in Stock-based  Payment  Transactions Are  Participating
 Securities".  Under                      the  FSP,  unvested  stock-based  payment
 awards  that  contain  rights  to  receive                      non-forfeitable
 dividends  (whether  paid or unpaid) are  participating  securities,
                     and  should  be  included  in the  two-class  method  of  computing
 EPS.  The FSP is                      effective for fiscal years  beginning  after
 December 15,  2008, and interim periods                      within those years.  The
Company is  currently  evaluating  the impact of EITF 03-6-1                      on its
financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | aa. | Reclassification:
| | --- | -----------------

| | Certain
 2007  figures have been  reclassified  to conform to the 2008  presentation.
                     The  reclassification  had no  effect  on  previously  reported  net
 income  (loss),                      shareholders' equity or cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 3: |  | MARKETABLE SECURITIES
|------- |  | ---------------------

| | The
  Company   invests  in   marketable   debt   securities,   which  are   classified   as
              held-to-maturity   investments  and  included  as  part  of  short-term
 bank  deposits  and               held-to-maturity   marketable  securities  balance.
 The  following  is  a  summary  of  the               Company's marketable debt
securities:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                               | December 31,
| | ----------------------------- | ------------
|
|
|
|
| | Held-to-maturity:             |             
| |                               |             
| | Israeli Government debentures |             
| | U.S. Government debentures    |             
| |                               |             
| |                               |             
| |                               |             
| |                               |             

| | *) | Israeli
and U.S Government debentures include accrued interest to be received,
               disclosed as part of other current assets, in the amount of
               approximately $ 2 and $ 239 respectively as of December 31, 2008 and $ 64
and $                1,302 respectively, as of December 31, 2007. There are no unrealized
losses with                respect to these debentures as of December 31, 2008.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

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

|NOTE 4: |  | INVENTORIES
|------- |  | -----------

| | a. | Inventories
are comprised of the following:
| | -- | -------------------------------------------

| |                                   | December 31,
| | --------------------------------- | ------------
|
|
|
|
| | Raw materials, parts and supplies |             
| | Work in progress                  |             
| | Finished products                 |             
| |                                   |             
| |                                   |             
| |                                   |             
| |                                   |             

| | b. | Inventory
write-offs totaled $ 1,556, $ 500 and $ 1,210 in 2008, 2007 and           2006, respectively.
| | -- | -------------------------------------------------------------------------------------------------------

|NOTE 5: |  | PROPERTY AND EQUIPMENT, NET
|------- |  | ---------------------------

| | a. | Composition
of property and equipment, grouped by major classifications, is as
               follows:
| | -- | ------------------------------------------------------------------------------------------------------

| |                                                          | December 31,
| | -------------------------------------------------------- | ------------
|
|
|
|
| | Cost:                                                    |             
| | Buildings and land                                       |             
| | Computers and electronic equipment                       |             
| | Equipment leased to others                               |             
| | Office furniture and equipment                           |             
| | Vehicles                                                 |             
| | Leasehold improvements                                   |             
| |                                                          |             
| |                                                          |             
| |                                                          |             
| | Accumulated depreciation and provision for impairment *) |             
| |                                                          |             
| |                                                          |             
| | Depreciated cost                                         |             
| |                                                          |             

| | *) | The
accumulated depreciation of equipment leased to others as of December 31,           2008
and 2007 is $ 89,944 and $ 85,518, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Depreciation
expenses totaled $ 12,502, $ 16,848 and $ 19,769 in 2008, 2007           and 2006, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------

| | c. | In
2008 and 2007, the Group recorded impairment losses in respect of its long
               lived assets in Colombia, see also Note 11.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------

| | d. | As
for pledges and securities, see also Note 13f.
| | -- | -------------------------------------------------

F - 26

---

---

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

|NOTE 6: |  | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
|------- |  | -------------------------------------------

| | a. | Composition
of intangible assets and deferred charges, grouped by major
               classifications, is as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------

| |                                               | Weightedaverageamortization | December 31,
| | --------------------------------------------- | --------------------------- | ------------
|
|
|
|
| | Cost:                                         |                             |             
| | Identifiable intangible assets resulting from |                             |             
| | acquisitions of a subsidiary                  |                             |             
| | Customer acquisition costs                    |                             |             
| | Other                                         |                             |             
| |                                               |                             |             
| |                                               |                             |             
| |                                               |                             |             
| | Accumulated amortization                      |                             |             
| |                                               |                             |             
| | Amortized cost                                |                             |             
| |                                               |                             |             
| |                                               |                             |             
| | Deferred charges                              |                             |             
| |                                               |                             |             
| |                                               |                             |             
| |                                               |                             |             
| |                                               |                             |             

| | b. | Amortization
expenses amounted to $ 630, $ 867 and $ 959 for the years                ended
December 31, 2008, 2007 and 2006, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Estimated
amortization expenses for the following years is as follows:
| | -- | ----------------------------------------------------------------------

| | Year ending December 31, | 
| | ------------------------ | 
|
|
|
|
| | 2009                     | 
| | 2010                     | 
| | 2011                     | 
| | 2012                     | 
| | 2013 and thereafter      | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES
|------- |  | -----------------------------

| | a. | On
March 29, 2001, Spacenet completed a transaction for the sale and leaseback
               of its corporate headquarters building. The sale price of the property was
               approximately $ 31,500 net of certain fees and commissions.
Concurrently                with the sale, Spacenet entered into an operating leaseback
contract for a                period of fifteen years at an initial annual rent of
approximately $ 3,500                plus escalation. The capital gain resulting
from the sale and leaseback                amounting to $ 5,600 was deferred and is
being amortized over the fifteen                year term of the lease. In accordance
with the lease terms, Spacenet made a                security deposit consisting of a $ 5,800
fully cash collateralized letter                of credit for the benefit of the lessor.
The lease is accounted for as an                operating lease in accordance with
Statement of Financial Accounting Standards                No. 13, Accounting for
Leases (SFAS No. 13).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Lease
commitments:
| | -- | ------------------

| | Minimum
lease commitments of certain subsidiaries under non-cancelable operating lease agreements
with respect to premises occupied by them, at rates in effect subsequent to December 31,
2008, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- |  | -------------------------------------

| | Year ending December 31, | Gross
commitments | Receivables
from subleases | Net
commitments
| | ------------------------ | ----------------- | -------------------------- | ---------------
|
|
|
|
| | 2009                     |                   |                            | $              
| | 2010                     |                   |                            |                
| | 2011                     |                   |                            |                
| | 2012                     |                   |                            |                
| | 2013                     |                   |                            |                
| | 2014 and therafter       |                   |                            |                
| |                          |                   |                            |                
| |                          |                   |                           
| |                          |                   |                            | $              
| |                          |                   |                            |                

| | Gross
rent expenses and income from subleases were $ 7,016 and $ 1,508, respectively in 2008, $
6,493 and $ 1,169, respectively in 2007, $ 6,642 and $ 1,416, respectively in
2006,
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Out
of the above commitment, $ 2,152 is included as restructuring accrual in other
accounts payable and other long-term liabilities as of December 31, 2008. Some of the
Groups lease agreements do not include renewal options.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Commitments
with respect to space segment services:
| | -- | ---------------------------------------------------

| | Future
minimum payments due for space segment services subsequent to December 31, 2008, are as
follows:
| | -------------------------------------------------------------------------------------------------------

| | Year ending December 31, | 
| | ------------------------ | 
|
|
|
|
| | 2009                     | 
| | 2010                     | 
| | 2011                     | 
| | 2012                     | 
| | 2013 and thereafter      | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 

| | Space
segment services expenses totaled $ 26,628, $ 23,970 and $ 23,698 in 2008, 2007
and 2006, respectively.
| | -------------------------------------------------------------------------------------------------------------

| | d. | In
2008 and 2007, the Companys primary material purchase commitments           derived
from inventorys suppliers. The Companys material inventory           purchase
commitments are based on purchase orders, or on outstanding agreements           with
some of the Companys suppliers of inventory. As of December 31, 2008           and
2007, the Company major outstanding inventory purchase commitments amounted           to $ 18,963
and $ 18,400, respectively, all of which were orders placed or           commitments made
in the ordinary course of its business. As of December 31, 2008           and 2007, $ 10,482
and $ 13,000, respectively, of these orders and           commitments, were from
suppliers which can be considered sole or limited in           number.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- |  | -------------------------------------

| | e. | Legal
and tax contingencies:
| | -- | ----------------------------

| | 1. | In
September 2003, Nova Mobilcom S.A., or Mobilcom, filed a lawsuit against           Gilat
do Brail for specific performance of a Memorandum of Understanding which
          provided for the sale of Gilat do Brasil, and specifically the GESAC project, a
          government education project awarded to Gilat do Brazil, to Mobilcom for an
          unspecified amount. Gilat do Brasil does not believe that this claim has any
          merit and is vigorously defending itself against the claims presented therein.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
2003, the Brazilian tax authority has filed a claim against a subsidiary of
          Spacenet in Brazil, for alleged taxes due of approximately $4,000. In January
          2004, the subsidiary received notice of an administrative ruling reducing the
          amount of the claim, and the subsidiary filed an appeal of such ruling. In
          December 2005, this appeal was denied and as of December 31, 2008, the
          subsidiary faces a tax liability of approximately $ 6,700 (the amount has
          increased due to interest and exchange rate differences). The subsidiary denies
          such claims and has filed a petition known as a Ação
          Anulatória in the State Courts of the State of São Paulo,
          Brazil.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
March 31, 2008 the Company announced the signing of a Merger Agreement to be
          acquired for an aggregate value of $ 475,000 in an all cash transaction by a
          consortium of private equity investors. On August 5, 2008 the Company informed
          the consortium that all conditions precedent to closing has been met. On August
          29, 2008 the Company notified the consortium that it was terminating the Merger
          Agreement citing the consortium members intentional breach of the Merger
          Agreement and failure to close the merger transaction within the extended time
          period established to complete the transaction. In November 2008, the Company
          filed lawsuits against each of the parties that had guaranteed the payment of a
          termination fee under the Merger Agreement. The lawsuits were filed in the Tel
          Aviv District Court against Mivtach Shamir Holdings Ltd., LR Group Ltd., Gores
          Capital Partners II, L.P, and DGB Investments, Inc. for their pro rata
          commitment to guarantee the termination fee due to the Company. The Merger
          Agreement provides for a termination fee in the amount of $47,500, payable to
          the Company, in the event of an intentional breach of the agreement by the
          consortium. See also (4) below.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | In
October 2008 a lawsuit and a motion for its approval as a class action
          proceeding was filed in the District Court of Jerusalem by eight individuals
and           Israeli companies against the Company, all of its directors and its 20%
          shareholder, York Capital Management. The plaintiffs claim damages based on the
          amounts they would have been paid had the merger with the consortium closed.
The           Company and its independent legal counsel believe the claims are completely
          without merit, and that the lawsuit is without basis. The Company intends to
use           all legal means necessary to protect and defend the Company and its
directors.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The
Company has certain tax exposures in some of the jurisdictions in which it
          conducts business. Specifically, in certain jurisdictions in the United States
          and in Latin America the Company is in the midst of different stages of audits
          and has received certain tax assessments. The tax authorities in these and in
          other jurisdictions in which the Company operates as well as the Israeli Tax
          Authorities may raise additional claims, which might result in increased
          exposures and ultimately, payment of additional taxes.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- |  | -------------------------------------

| | 6. | The
Company has accrued, $ 15,291 and $ 15,076 as of December 31, 2008 and           2007,
respectively, for the expected implications of such legal and tax
          contingencies. These accruals are comprised of $ 14,295 and $ 13,779 of
tax           related accruals as of December 31, 2008 and 2007, respectively, and $ 996
          and $ 1,297 of legal and other accruals as of December 31, 2008 and 2007,
          respectively. The accruals related to tax contingencies have been assessed by
          the Companys management based on the advice of outside legal and tax
          advisers. The total estimated exposure for the aforementioned tax related
          accruals is $ 23,284 and $ 24,519 as of December 31, 2008 and 2007,
          respectively. The estimated exposure for legal and other related accruals is
          $ 1,599 and $ 1,438 as of December 31, 2008 and 2007, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax accruals include various tax matters such as taxes on income, property taxes, sales
and use tax and value added tax, that are in different stages of audits, for which tax
assessments have been received, or various tax exposures in which the Company has
assessed the exposure and determined that an accrual is necessary. The accruals related
to legal contingencies have been assessed by the Companys management based on the
advice of independent legal advisers and are comprised of matters for which legal
proceedings have been initiated against the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
exposures and provisions related to income taxes have been assessed and provided for in
accordance with FIN 48. Liabilities related to legal proceedings, demands and claims and
other taxes are recorded in accordance with SFAS 5, when it is probable that a liability
has been incurred and the associated amount can be reasonably estimated. The Companys
management, based on its legal counsel opinion, believes that it had provided an adequate
accrual to cover the costs to resolve the aforementioned legal proceedings, demands and
claims.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Pledges
and securities  see Note 10a and 13f.
| | -- | ----------------------------------------------

| | g. | Guarantees:
| | -- | -----------

| | The
Group guarantees its performance to certain customers (generally to government entities)
through bank guarantees and corporate guarantees. Guarantees are often required for the
Groups performance during the installation and operational periods of long-term
rural telephony projects such as in Latin America, and for the performance of other
projects (government and corporate) throughout the rest of the world. The guarantees
typically expire when certain operational milestones are met.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the aggregate amount of bank guarantees outstanding in order to
secure the Groups various performance obligations was approximately $14,700,
including an aggregate of approximately $6,300 on behalf of the subsidiary in Peru. The
Group has restricted cash as collateral for these guarantees in an amount of
approximately $1,900.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
order to guarantee the Companys performance obligations for its Colombian
activities, the Company secured insurance from a local insurance company in Colombia. The
Company has provided the insurance company with various corporate guarantees,
guaranteeing the Companys performance and its employee salary and benefit costs for
in excess of $27,000 and $5,000 respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- |  | -------------------------------------

| | In
addition, the Group has provided bank guarantees for certain leases throughout the world
for an aggregate amount of approximately $ 5,846. The Group has restricted cash as
collateral for these guarantees in an amount of approximately $ 5,846. The Group also
provided other guarantees of approximately $ 1,903 as of December 31, 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with FIN 45, paragraph 4, as the guarantees above are performance guarantees
for the Companys own performance, such guarantees are excluded from the scope of
FIN 45. The Company has not recorded any liability for such amounts, since the Company
expects that its performance will be acceptable. To date, no guarantees have ever been
exercised against the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 8: |  | HEDGING INSTRUMENTS
|------- |  | -------------------

| | To
protect against changes in value of forecasted foreign currency cash flows resulting from
salaries and other payments that are denominated in NIS, the Company has entered into
foreign currency forward contracts and put option contracts. These contracts are
designated as cash flows hedges, as defined by SFAS No. 133, as amended, and are
considered highly effective as hedges of these expenses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2008 and 2007, the Company recognized a net income of $ 667
and $ 792, respectively, related to the effective portion of its hedging instruments. The
effective portion of the hedged instruments has been included as an offset of payroll
expenses and other operating expenses in the statement of operations. The ineffective
portion of the hedged instrument amounted to $ 186 and $ 138 during the years ended
December 31, 2008 and 2007, respectively and has been recorded as a financial income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the hedging instruments as of December 31, 2008 constituted an asset of
approximately $ 1,096. As of December 31, 2007 the Company had no outstanding hedging
instruments. The term of all of these instruments as of December 31, 2008 are less than
one year.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2008, the Company expects to reclassify $ 1,096 of net gain on derivative
instruments from accumulated other comprehensive income to earnings during the next
twelve months.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 9: |  | SHAREHOLDERS EQUITY
|------- |  | --------------------

| | a. | Share
capital:
| | -- | --------------

| | 1. | Ordinary
shares confer upon their holders voting rights, the right to receive           cash
dividends and the right to share in excess assets upon liquidation of the
          Company.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
September 2006, the Company issued 10,578,474 ordinary shares to York upon           the
conversion of its long-term convertible note. See also Note 1d and 10e.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

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

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

| | 3. | In
December, 2006, the Company consummated a public offering of 8,050,000           ordinary
shares at a price of $8.50 per share. Of such shares, 5,016,667           ordinary shares
were issued by the Company and the remaining shares were sold by           a selling
shareholder (York). Through this offering the Company raised gross           proceeds of
$ 42,641. Issuance expenses amounted to approximately $ 2,755.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | During
the years ended December 31, 2008, 2007 and 2006, 436,718, 790,563 and           668,913
options, were exercised for ordinary shares and the same number of the           ordinary
shares were issued, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Stock
Option Plans:
| | -- | -------------------

| | The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting from January 1, 2006, the
first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in the years ended December 31, 2008, 2007 and 2006,
includes: (a) compensation cost for all stock-based payments granted prior to, but not
yet vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of Statement 123, and (b) compensation cost for
all stock-based payments granted subsequent to January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of Statement 123(R). Results for
prior periods have not been restated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards, which have graded
vesting, granted prior to January 1, 2006, based on the accelerated attribution method
and for awards granted subsequent to January 1, 2006, based on the straight line method
over the requisite service period of each of the awards.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Description
of Plans
| | --------------------

| | The
Company has four stock option plans, the 1995 and the 2003 Stock Option and Incentive
Plans and the 2005 and 2008 Stock Incentive Plans (the Plans). The 1995 Plan
was amended in 1997, 1998 and 1999, and expired although there are still options
outstanding under this plan. Under the 2003 Plan, options may be granted to employees,
officers, directors and consultants of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, the Companys shareholders approved two increases in the number of options
available for grant under the 2003 Plan from an aggregate of 4,635,000 shares to a total
of 6,135,000 shares available for future grants. As of December 31, 2008, an aggregate of
698,763 shares of the Company are still available for future grants under the 2003 Plan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
exercise price per share under the 1995 Plan was not less than the market price of an
ordinary share at the date of grant. The exercise price per share under the 2003 Plan is
the higher of (i) $ 5.00 per share; and (ii) the market value of the shares as of
the date of the option grant, unless otherwise provided in the stock option agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

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

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

| | In
December 2005, the Companys shareholders approved the adoption of a new plan, the
2005 Plan with 1,500,000 shares or stock options available for grant. This Plan is
designed to enable the Companys Board of Directors to determine various forms of
incentives for all forms of service providers and, when necessary, adopt a sub-plan in
order to grant specific incentives. Among the incentives that may be adopted are share
options, performance share awards, performance share unit awards, restricted shares,
restricted share unit awards and other stock-based awards. As of December 31, 2008, the
Company granted 50,000 performance based options under the 2005 Plan, based on attaining
sales target conditions, which are outstanding as of December 31, 2008 and 2007. As of
December 31, 2008 the Company did not record any expenses relating to these options since
achievement of the sales target is not expected. As of December 31, 2008, an aggregate of
10,000 shares of the Company are still available for future grants from the 2005 Plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 2008, the compensation/ stock option committee of the Companys board of
directors approved the adoption of a new plan, the 2008 Plan with 1,000,000 shares or
stock options available for grant and a sub-plan to enable qualified optionees certain
tax benefits under the Israeli Income Tax Ordinance. Among the incentives that may be
adopted are share options, performance share awards, performance share unit awards,
restricted shares, restricted share unit awards and other stock-based awards. As of
December 31, 2008, an aggregate of 365,000 shares of the Company are still available for
future grants under the 2008 Plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
granted under the plans above generally vest quarterly over two to four years. The
options expire six, seven or ten years from the date of grant. Any options, which are
forfeited or canceled before expiration, become available for future grants.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Valuation
Assumptions
| | ---------------------

| | The
Company estimates the fair value of stock options granted using the Black-Scholes-Merton
option-pricing model. The option-pricing model requires a number of assumptions, of which
the most significant are expected stock price volatility and the expected option term.
Expected volatility was calculated based upon actual historical stock price movements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
expected option term represents the period that the Companys stock options are
expected to be outstanding and based on historical incidence of exercise of options.
Prior to December 31, 2007, the expected term of options was determined based on the
simplified method permitted by SAB No. 107 as the average of the vesting period and the
contractual term. Starting January 1, 2008, the expected term of options granted is based
upon historical experience complying with SAB 110. The risk-free interest rate is based
on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company
has historically not paid dividends and has no foreseeable plans to pay dividends.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

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

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

| | Options
granted to employees
| | ----------------------------

| | The
fair value of the Companys stock options granted to employees and directors for the
years ended December 31, 2008, 2007 and 2006 was estimated using the following weighted
average assumptions:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | Year ended
December 31,
| | ------------------------ | -----------------------
|
|
|
|
| | Risk free interest       |                        
| | Dividend yields          |                        
| | Volatility               |                        
| | Expected term (in years) |                        

| | A
summary of employee option activity under the Companys Stock Option Plans as of
December 31, 2008 and changes during the year ended December 31, 2008 are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Number of
options | Weighted-average
exercise
price | Weighted-
average
remaining
contractual
term
(in years) | Aggregate
intrinsic
value (in
thousands)
| | -------------------------------- | ----------------- | ------------------------------- | ------------------------------------------------------- | ----------------------------------------
|
|
|
|
| | Outstanding at December 31, 2007 |                   |                                 |                                                         | 4,097,030                               
| | Granted                          |                   |                                 |                                                         | 630,000                                 
| | Exercised                        |                   |                                 |                                                         | (336,718                                
| | Expired                          |                   |                                 |                                                         | (3,846                                  
| | Forfeited                        |                   |                                 |                                                         | (92,842                                 
| |                                  |                   |                                
| | Outstanding at December 31, 2008 |                   |                                 |                                                         | 4,293,624                               
| |                                  |                   |                                
| | Exercisable at December 31, 2008 |                   |                                 |                                                         | 3,541,578                               
| |                                  |                   |                                
| | Vested and expected to vest at   |                   |                                
| | December 31, 2008                |                   |                                 |                                                         | 4,215,082                               

| | A
summary of employee option activity under the Companys Stock Option Plans as of
December 31, 2007 and 2006 and changes during the years ended on those dates are as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Year ended December 31,
| | -------------------------------- | -----------------------
|
|
|
|
| | Options outstanding at the       |                        
| | beginning of the year            |                        
| | Changes during the year:         |                        
| | Granted                          |                        
| | Exercised                        |                        
| | Expired                          |                        
| | Forfeited                        |                        
| | Options  outstanding  at the end |                        
| | of the year (*)                  |                        
| |                                  |                        
| | Options  exercisable  at the end |                        
| | of the year                      |                        
| |                                  |                        

F - 34

---

---

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

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

| | The
weighted-average grant-date fair value of options granted during the years ended December 31,
2008, 2007 and 2006 was $ 0.55 ,$ 4.3 and $ 3.55, respectively. The aggregate intrinsic
value in the table above represents the total intrinsic value (the difference between the
Companys closing stock price on the last trading day of the year 2008 and the
exercise price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on December 31,
2008. This amount changes, based on the fair market value of the Companys stock.
Total intrinsic value of options exercised for the years ended December 31, 2008, 2007
and 2006 was approximately $ 2,127, $ 3,190 and $ 1,574, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
grant-date fair value of options that vested during the years ended December 31, 2008,
2007 and 2006 was approximately $ 14,429, $ 15,564 and $17, 645, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding under the Companys Stock Option Plans as of December 31, 2008,
have been separated into ranges of exercise price as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | Ranges ofexerciseprice | Optionsoutstandingas ofDecember 31,2008 | Weightedaverageremainingcontractuallife(years) | Weightedaverageexerciseprice | Optionsexercisableas ofDecember 31,2008 | Weighted
average
exercise
price of
exercisable
options
| | ---------------------- | --------------------------------------- | ---------------------------------------------- | ---------------------------- | --------------------------------------- | ------------------------------------------------------
|
|
|
|
| | $ 4.0 - 6.0            |                                         |                                                |                              | 3,597,758                               |                                                       
| | $ 6.0 - 8.9            |                                         |                                                |                              | 595,399                                 |                                                       
| | $ 9.2 - 10.8           |                                         |                                                |                              | 41,175                                  |                                                       
| | $ 42.4 - 79.0          |                                         |                                                |                              | 55,572                                  |                                                       
| | $ 240.4 - 2,730.0      |                                         |                                                |                              | 3,720                                   |                                                       
| |                        |                                         |                                                |                              |                                         |                                                       
| |                        |                                         |                                               
| |                        |                                         |                                                |                              | 4,293,624                               |                                                       
| |                        |                                         |                                                |                              |                                         |                                                       

| | Restricted
Share Units (RSUs) granted to employees and non-employees
| | --------------------------------------------------------------------

| | The
fair value of RSUs is estimated based on the market value of the Companys stock on
the date of the award.
| | --------------------------------------------------------------------------------------------------------------

| | In
November 2008, the Company granted 1,455,000 RSUs. The entitlement to these RSUs vest
over a four-year period (20%, 20%, 30%, 30% each year, respectively) in quarterly
batches, The following table summarizes information regarding the number of RSUs issued
and outstanding as of December 31, 2008:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Employees:
| | ----------

| |                                      | Year ended December 31,
2008
| | ------------------------------------ | ----------------------------
|
|
|
|
| | RSUs outstanding at the beginning    |                             
| | of the year                          |                             
| | Changes during the year:             |                             
| | Granted                              |                             
| | Vested                               |                             
| | Forfeited                            |                             
| | RSUs  outstanding  at the end of the |                             
| | year                                 |                             
| |                                      |                             

F - 35

---

---

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

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

| | Non-employees:
| | --------------

| |                                            | Year ended December 31,
2008
| | ------------------------------------------ | ----------------------------
|
|
|
|
| | RSUs outstanding at the beginning of       |                             
| | the year                                   |                             
| | Changes during the year:                   |                             
| | Granted                                    |                             
| | Vested                                     |                             
| | Forfeited                                  |                             
| | RSUs  outstanding  at the  end of the year |                             
| |                                            |                             

| | Additional
stock-based compensation data
| | ----------------------------------------

| | As
of December 31, 2008, there was approximately $ 4,691 of total unrecognized compensation
costs related to non-vested stock-based compensation arrangements granted under the
Plans. That cost is expected to be recognized over a weighted-average period of 2.12
years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
December 2008, the Company granted 600,000 stock options to its Chairman of
               the Board of Directors and CEO and the other members of the board of
directors                at an exercise price of $4.00 per share. These options vest
ratably, each                quarter, over a three-year period. The fair value of these
options was estimated                at $ 234, using a Black-Scholes option-pricing
valuation model which is expected                to be recognized over a weighted-average
period of 3.58 years. These grants are                detailed in the above table.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | 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. The Company does not expect to pay cash dividends           in
the foreseeable future.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Pursuant
to the terms of a credit line from a bank (see also Note 13), the           Company is
restricted from paying cash dividends to its shareholders without           initial
approval from the bank.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

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

|NOTE 10: |  | RESTRUCTURING OF DEBTS
|-------- |  | ----------------------

| | a. | In
2003, the Company issued the 4.00% Convertible Subordinated Note due 2012.
               The Company pays interest on its 4.00% Convertible Subordinated Note
               semi-annually in arrears on April 1 and October 1 of each year, beginning
on                April 1, 2005. The Company is committed to pay $ 426 of the principal
amount of                the notes on each of April 1 and October 1, in both 2010 and
2011, and the                remaining principal amount at maturity. The 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
before close of business on October 1, 2012,                unless the notes have been
converted pursuant to a mandatory conversion clause                as defined in the
4.00% Convertible Subordinated Note. 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 notes is a second priority security interest consisting of a floating
               charge on all of the Companys assets and a pledge of all on the
shares of                Spacenet, a wholly owned subsidiary of the Company.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
interest of the holders of the notes in the collateral is subordinated to the security
interest granted for the benefit of lending banks. As of December 31, 2008 and 2007, the
outstanding amount of the notes is $ 16,315.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance of the notes results from debt restructurings that occurred in 2003. The debt
restructurings were accounted for as troubled debt restructuring 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 No. 15 Accounting by Debtors and
Creditors for Troubled Debt Restructurings (SFAS 15), Emerging Issues
Task Force No. 02-4 Determining Whether a Debtors Modification or Exchange of
Debt Instruments Is within the Scope of FASB Statement No. 15 (EITF 02-4)
and SFAS No. 145, Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13,
and Technical Corrections. Accordingly, the Company recognized a gain in 2003. As
part of the accounting for the troubled debt restructurings, the Company accrued to the
balance of the notes the remaining future interest payable until maturity, presented as a
separate line item in the balance sheet. Therefore, at each reporting date the
liabilities include both principal and all future remaining interest payments.
Consequently, though the Company pays periodical interest payments, the statement of
operations does not reflect the costs of such interest payments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
April 2004, the Company further revised the terms of its loan from Bank
               Hapoalim, to which it owed a principal debt amount of $ 71,400. The
new                loan terms reduced the principal installments due on July 1, 2005 and
January 1,                2006 from $ 4,463 to $ 1,000 and $ 1,500,
respectively, with the                remainder due for payment in 2012. Other principal
payments of $ 4,463 due                semi-annually thereafter remained unchanged
and the last installment of                $ 15,300 is due on July 2, 2012. In
addition, the interest rate on the loan                was also revised.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for the Bank Hapoalim agreement to amend the interest rates, defer
principal payments and modify certain covenants, the bank was entitled to convert the
loan owed by the Company to Bank Hapoalim into Ordinary shares of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
modification of the loan terms was accounted for as debt extinguishment due to the
addition of a conversion option to the debt instrument which was considered substantial.
The fair value of the amended loan was recorded, and the book value of the old loan was
removed from the Companys financial statements. Since Bank Hapoalim was a related
party, the extinguishment gain of approximately $ 15,500 was recorded as an equity
contribution in the year ended December 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

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

|NOTE 10: |  | RESTRUCTURING OF DEBTS (Cont.)
|-------- |  | ------------------------------

| | c. | In
July 2005, Bank Hapoalim assigned its loan to the Company to York. Following
               the assignment, York is considered a related party. At that time of the
               assignment, certain board members of the Company resigned and were
replaced by                new board members. In addition, the Companys CEO and
Chairman of the Board                of Directors resigned and a co-founder of the
Company rejoined the Company as                President and Chief Executive Officer.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
December 2005, the Company and York further revised the terms of the loan.
               The new loan terms deferred $ 19,350 in principal payments due in
               installments from January 5, 2006 through January 1, 2008. The new payment
               schedule provided that: (i) no principal payments be due in 2006, 2007 or
               January 2008 (with those payments being deferred until July 2012) (ii)
               approximately $ 4,500 was to be paid on July 1, 2008; (iii)
approximately                $ 9,000 was to be paid in semi-annual installments on
January 1 and July 1                of 2009, 2010 and 2011; (iv) approximately $ 4,500
was to be paid on                January 1, 2012; and (v) approximately $ 34,500 was
to be paid on July 1,                2012. In addition, the amendment modified the terms
of the conversion option                until September 30, 2006. The amendment lowered
and set the conversion price to                $ 6.75 per share until September 30,
2006. In addition, during this period,                the Company was granted the right
to require the conversion of the outstanding                loan from York at the same
exercise price in the event that the closing share                price of the Companys
Ordinary shares as published by NASDAQ over twenty                consecutive trading
days will exceed $ 9, provided that the aggregate                trading volume
during this period is a minimum of 1,700,000 Ordinary shares.                Beginning
October 1, 2006, the conversion price reverts to the original price.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
modification of the loan was not considered substantial based on the measurement method
prescribed by EITF 96-19, Debtors Accounting for a Modification or Exchange
of Debt Instruments. In accordance with EITF 05-7, Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related Issues which
was early adopted by the Company, the change in the fair value of the conversation option
immediately before and after the modification in the amount of $ 3,800 was recorded
as a discount on the loan and increase to shareholders equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In
September 2006, York converted the loan into the Companys Ordinary
               shares. Based on Interpretation 1 of Opinion 26 and EITF No. 85-17,
               Accrued Interest upon Conversion of Convertible Debt, the net
               carrying amount of the convertible debt and accrued interest unpaid,
including                the unamortized discount, in the total amount of $ 68,100 was
credited to                shareholders equity upon conversion. See also Note 1d.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---

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

|NOTE 11: |  | IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER CHARGES
|-------- |  | -------------------------------------------------

| | Most
of the activity of SRC in Colombia consists of operating subsidized projects for the
government (the Compartel Projects) were awarded to Gilats Colombian
subsidiaries in 1999 and 2002. In accordance with these projects, the Colombian
government has transferred approximately $70,000 to trust accounts. The amount is
released from the trusts based on a schedule of payments and meeting certain operational
milestones. As of December 31, 2008 and 2007, short-term and long-term restricted cash
held by trustees accounts amounted to approximately $24,000 not yet being released
from the trusts as certain operational milestones imposed had not been fully met. The
Colombian government and the Company agreed to renegotiate certain terms of the
contracts, including the operational milestones going forward, so that they better
reflect the current telecom and business environment in Colombia. Such amended agreements
were signed on December 30, 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the guidelines of Statements of Financial Accounting Standards No. 144,
Accounting for the impairment or disposal of long lived assets (SFAS 144),
in 2007, the Company compared the carrying amount of its long lived network assets group
to the future undiscounted cash flows expected to be generated by those assets. Since the
undiscounted cash flow expected to be generated by those assets were less than the long
lived networks assets group carrying amount, the Company determined the fair value of its
long lived networks assets group and concluded that the carrying amount of its long lived
network assets group in Colombia exceeded their fair value and recorded an impairment of
long lived assets and other charges in an amount of $12,218.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
mentioned above, in December 2008 the Company signed amendments to the agreements for the
provision of services under the Compartel Projects. The Company performed a cash flow
analysis based on the guidance provided in SFAS 144, for these projects based on the
revised terms. Based on such analysis, the Company recorded a loss representing an
impairment of long lived assets and other charges in an amount of $ 5,020.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the Companys performance guarantees, see Note 7(g).
| | ----------------------------------------------------------

| | The
Company ensured that the accumulated revenue recognized from the Compartel Projects will
not exceed the accumulated amounts previously released from the trust.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded losses of $ 5,020 and $ 12,218, as of December 31, 2008 and 2007,
respectively, as follows:
| | ----------------------------------------------------------------------------------------------------------------

| |                                     | Year ended
December 31,
2008 | Year ended
December 31,
2007
| | ----------------------------------- | ---------------------------- | ----------------------------
|
|
|
|
| | Property and equipment impairment   |                              |                             
| | Other assets impairment and charges |                              |                             
| |                                     |                              |                             
| |                                     |                              |                             
| |                                     |                              |                             
| |                                     |                              |                             

F - 39

---

---

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

|NOTE 12: |  | TAXES ON INCOME
|-------- |  | ---------------

| | a. | The
Company adopted the provisions of FIN 48 as of January 1, 2007. As a result
               of the implementation of FIN 48, the Company recognized a $ 1,309 increase
in                liability for unrecognized tax positions which was accounted with a
               corresponding increase to the January 1, 2007 balance of accumulated
deficit. As                of January 1, 2007, liabilities for unrecognized tax positions
in accordance                with FIN 48 amounted to $ 5,634.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
associated with uncertain tax position is classified as financial expenses in the
financial statements and penalties as general and administrative expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
reconciliation of the beginning and ending amount of unrecognized tax positions is as
follows:
| | ------------------------------------------------------------------------------------------------

| |                                                              | Year ended December 31,
| | ------------------------------------------------------------ | -----------------------
|
|
|
|
| | Balance at beginning of year                                 |                        
| | Increases related to current year tax positions              |                        
| | Increase (decrease) related to prior year tax positions, net |                        
| |                                                              |                        
| |                                                              |                        
| | Balance at the end of year                                   |                        
| |                                                              |                        

| | The
unrecognized tax benefits include accrued penalties and interest in the amount of $ 3,218
and $ 2,980 at December 31, 2008 and 2007, respectively. During the years ended December
31, 2008 and 2007 the Company recorded $ 238 and $ 1,040, respectively, for penalties and
interest. The unrecognized tax benefits as of December 31, 2008 and 2007, would, if
recognized, reduce the annual effective tax rate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company expects that unrecognized tax benefits in the amount of $ 2,569 may reverse over
the next 12 months.
| | ----------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries file income tax returns in Israel and in other jurisdictions
of its subsidiaries. As of December 31, 2008, the tax returns of the Company and its main
subsidiaries are open to examination by the Israeli and other tax authorities for the tax
years 2003 through 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- |  | -----------------------

| | b. | The
Company:
| | -- | ------------

| | 1. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959:
| | -- | ------------------------------------------------------------------------------

| | The
Company has been granted an Approved Enterprise status, under the Law, for
nine investment programs in the alternative program, by the Israeli Government . In
addition, the Company has elected 2005 as the Year of Election for a new Beneficiary
Enterprise
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the Company is a foreign investors company, as defined by the
above-mentioned law, it is entitled to a ten-year period of benefits, for enterprises
approved after April 1993. The main tax benefits from the said status are a tax exemption
for two to four years and a reduced tax rate (based on the percentage of foreign
shareholding in each tax year) on income from all of its Approved Enterprisesand
Beneficiary Enterprise, for the remainder of the benefit period. These tax
benefits are subject to a limitation of the earlier of 12 years from commencement of
operations, or 14 years from receipt of approval. The period of benefits for the nine
eight programs has expired.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is entitled to claim accelerated depreciation with respect to equipment used by
Approved Enterprises and Beneficiary Enterprise during the first five tax
years of the operations of these assets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above mentioned benefits are contingent upon the compliance with the
conditions under the Law, regulations published there under and the conditions set out in
certificates of approval (for an Approved Enterprises). Should the Company fail to meet
such requirements, income attributable to its Approved Enterprise programs could be
subject to the statutory Israeli corporate tax rate and the Company could be required to
refund a portion of the tax benefits already received, with respect to such programs, in
whole or in part, with the addition of linkage differences to the Israeli Consumer Price
Index (CPI) and interest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Law came into effect (the Amendment) and
has significantly changed the provisions of the Law. The Amendment limits the scope of
enterprises which may be approved by the Investment Center by setting criteria for the
approval of a facility as an Approved Enterprise, such as provisions
generally requiring that at least 25% of the Approved Enterprise, income will
be derived from export. Additionally, the Amendment enacted major changes in the manner
in which tax benefits are awarded under the Law so that companies no longer require
Investment Center approval in order to qualify for tax benefits. Rather, a company may
claim the tax benefits offered by the Investment Law directly in its tax returns,
provided that its facilities meet the criteria for tax benefits set out by the Amendment.
A company is also granted a right to approach the Israeli Tax Authorities for a
pre-ruling regarding their eligibility for benefits under the Amendment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- |  | -----------------------

| | Tax
benefits are available under the Amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of the Companys
business income from export. In order to receive the tax benefits, the Amendment states
that a company must make an investment in the Beneficiary Enterprise exceeding a minimum
amount specified in the law. Such investment may be made over a period of no more than
three years ending at the end of the year in which the company requested to have the tax
benefits apply to the Beneficiary Enterprise (the Year of Election). Where a
company requests to have the tax benefits apply to an expansion of existing facilities,
then only the expansion will be considered a Beneficiary Enterprise, and the companys
effective tax rate will be the result of a weighted combination of the applicable rates.
In this case, the minimum investment required in order to qualify as a Beneficiary
Enterprise is required to exceed a certain percentage of the companys production
assets before the expansion. The duration of tax benefits is subject to a limitation of
the earlier of 7-10 years from the Commencement Year, or 12 years from the first day of
the Year of Election. The period of benefits of the Beneficiary Enterprise will expire in
2017.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | However,
the Law provides that terms and benefits included in any certificate of approval already
granted will remain subject to the provisions of the Law as they were on the date of such
approval. Therefore, the Companys existing Approved Enterprises programs
will generally not be subject to the provisions of the Amendment. As a result of the
Amendment, tax-exempt income generated under the provisions of the new law, will subject
the Company to taxes upon distribution or liquidation and the Company may be required in
the future to record deferred tax liability with respect to such tax-exempt income. As of
December 31, 2008, the Company did not generate income under the provisions of the new
law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not expect to pay any cash dividend. In the event of distribution of
dividends from the above mentioned tax exempt income, the amount distributed would be
taxed at the corporate tax rate applicable to such profits as if the Company had not
elected the alternative program of benefits (depending on the level of foreign investment
in the Company), currently between 10% to 25% for an Approved Enterprise and
Beneficiary Enterprise.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than an Approved Enterprise during the benefit period is
subject to tax at the regular corporate tax rate. In June 2004 and in July 2005, the
Knesset (Israels parliament) adopted amendments to the Income Tax
Ordinance (No.140 and Temporary Provision), 2004 and (No.147), 2005 respectively, which
determine, among other things, that the corporate tax rate is to be gradually reduced as
follows: 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- |  | -----------------------

| | The
entitlement to the above mentioned benefits is dependent upon the Company fulfilling the
conditions stipulated by the Law, regulations published there under and the certificates
of approval for the specific investments in approved enterprises. In the event of failure
to comply with these conditions, the benefits may be canceled and the Company may be
required to refund the amount of the benefits, in whole or in part, with the addition of
linkage differences to the Israeli Consumer Price Index (CPI) and interest.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Measurement
of taxable income under the Income Tax (Inflationary Adjustments)           Law, 1985:
| | -- | --------------------------------------------------------------------------------------------------

| | Results
for tax purposes are measured in terms of earnings in NIS after certain adjustments for
increases in the Israeli Consumer Price Index (CPI). As explained in Note 2b,
the financial statements are measured in U.S. dollars. The difference between the annual
change in the Israeli CPI and in the NIS/dollar exchange rate causes a further difference
between taxable income and the income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the difference between the functional currency and the tax basis of
assets and liabilities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the law, until 2007, the results for tax purposes were measured based on the changes
in the Israeli CPI.
| | ---------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the Knesset (Israeli parliament) passed an amendment to the
Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law
starting 2008 and thereafter. Starting 2008, the results for tax purposes are measured in
nominal values, excluding certain adjustments for changes in the Israeli CPI carried out
in the period up to December 31, 2007. The amendment to the law includes, inter alia, the
elimination of the inflationary additions and deductions and the additional deduction for
depreciation starting 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Non-Israeli
subsidiaries:
| | -- | -------------------------

| | Non-Israeli
subsidiaries are taxed according to the tax laws in their respective domiciles of
residence. The Company has not made any provisions relating to undistributed earnings of
the Companys foreign subsidiaries since the Company has no current plans to
distribute such earnings. If earnings are distributed to Israel in the form of dividends
or otherwise, the Company may be subject to additional Israeli income taxes (subject to
an adjustment for foreign tax credits) and foreign withholding taxes. It is not
practicable to determine the amount of the unrecognized deferred tax liability for
temporary differences related to investments in foreign subsidiaries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Carryforward
tax losses and credits:
| | -- | ------------------------------------

| | As
of December 31, 2008, the Company had operating loss carry forwards for Israeli income
tax purposes of approximately $ 69,000, which may be offset indefinitely against future
taxable income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- |  | -----------------------

| | Carryforward
tax losses in the U.S. subsidiaries amount to approximately $ 229,000. Utilization
of U.S. net operating losses may be subject to substantial annual limitation due to the
change in ownership provisions of Internal Revenue Code of 1986 and similar
state provisions. The annual limitations may result in the expiration of net operating
loss before utilization. In the U.S, carryforward tax losses can be utilized within 20
years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition the Group has carryforward tax losses relating to other subsidiaries in Europe
and Latin America of approximately $ 55,000 and $18,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Deferred
income taxes:
| | -- | ----------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Groups deferred tax
liabilities and assets are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                                                 | December 31,
| | -- | ----------------------------------------------- | ------------
|
|
|
|
| | 1. | Provided in respect of the following:           |             
| |    | Carryforward tax losses                         |             
| |    | Temporary differences relating to property and  |             
| |    | equipment                                       |             
| |    | Other                                           |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Gross deferred tax assets                       |             
| |    | Valuation allowance                             |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Net deferred tax assets                         |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Gross deferred tax liabilities                  |             
| |    | Temporary differences relating to property and  |             
| |    | equipment                                       |             
| |    | Other                                           |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Net deferred tax assets (liabilities)           |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Domestic                                        |             
| |    | Foreign                                         |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| | 2. | Deferred taxes are included in the consolidated |             
| |    | balance sheets, as follows:                     |             
| |    |                                                 |             
| |    | Current assets                                  |             
| |    | Current liabilities                             |             
| |    | Non-current liabilities                         |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             

F - 44

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- |  | -----------------------

| | 3. | As
of December 31, 2008, the Group increased the valuation allowance by
          approximately $ 3,113, resulting from changes in other temporary differences
and           in carry forward tax losses. Management currently believes that it is more
          likely than not that the deferred tax regarding the loss carry forwards and
          other temporary differences for which valuation allowance was provided will not
          be realized in the foreseeable future.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Reconciling
items between the statutory tax rate of the Company and the                effective tax
rate:
| | -- | ----------------------------------------------------------------------------------------------------------

| |                                                                                | Year ended December 31,
| | ------------------------------------------------------------------------------ | -----------------------
|
|
|
|
| | Income before taxes, as reported in the  consolidated statements of operations |                        
| |                                                                                |                        
| |                                                                                |                        
| | Statutory tax rate                                                             |                        
| |                                                                                |                        
| |                                                                                |                        
| | Theoretical tax expenses on the above amount at the                            |                        
| | Israeli statutory tax rate                                                     |                        
| | Currency differences                                                           |                        
| | Tax adjustment in respect of different tax rates                               |                        
| | and "Approved Enterprise" status                                               |                        
| | Changes in valuation allowance                                                 |                        
| | Taxes in respect of prior years                                                |                        
| | Stock compensation relating to options per SFAS 123(R)                         |                        
| | Nondeductible expenses and other                                               |                        
| | differences                                                                    |                        
| |                                                                                |                        
| |                                                                                |                        
| |                                                                                |                        
| |                                                                                |                        

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

| |                       | Year ended December 31,
| | --------------------- | -----------------------
|
|
|
|
| |                       |                        
| | Current year          |                        
| | Prior  years          |                        
| | Deferred income taxes |                        
| |                       |                        
| |                       |                        
| |                       |                        
| |                       |                        
| |                       |                        
| | Domestic              |                        
| | Foreign               |                        
| |                       |                        
| |                       |                        
| |                       |                        
| |                       |                        

F - 45

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- |  | -----------------------

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

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

|NOTE 13: |  | SUPPLEMENTARY BALANCE SHEET INFORMATION
|-------- |  | ---------------------------------------

| | a. | Other
current assets:
| | -- | ---------------------

| |                                                        | December 31,
| | ------------------------------------------------------ | ------------
|
|
|
|
| | Receivables in respect of capital leases (see c below) |             
| | VAT receivables                                        |             
| | Prepaid expenses                                       |             
| | Deferred charges                                       |             
| | Tax receivables                                        |             
| | Employees                                              |             
| | Income receivable                                      |             
| | Advance payments to suppliers                          |             
| | Other                                                  |             
| |                                                        |             
| |                                                        |             
| |                                                        |             
| |                                                        |             

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

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Long-term receivables in respect of capital leases |             
| | (see c below)                                      |             
| | Long-term trade receivables *)                     |             
| | Other receivables                                  |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| |                                                    |             

| | *) | Long
term trade receivables are scheduled to be received by 2010.
| | -- | -----------------------------------------------------------------

F - 46

---

---

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

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

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

| | The
aggregate minimum future payments to be received by the Group under these contracts as of
December 31, 2008, are as follows (including unearned interest income in the amount of $ 760):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, | Capital
lease | Operating
lease | Total
| | ------------------------ | ------------- | --------------- | -----
|
|
|
|
| | 2009                     |               |                 | $    
| | 2010                     |               |                 |      
| | 2011                     |               |                 |      
| | 2012                     |               |                 |      
| | 2013                     |               |                 |      
| |                          |               |                 |      
| |                          |               |                
| |                          |               |                 | $    
| |                          |               |                 |      

| | The
net investments in capital lease receivables as of December 31, 2008, are $ 7,094. Total
revenue from capital and operating leases amounted to $ 13,727, $ 10,815 and $ 7,966
in the years ended December 31, 2008, 2007 and 2006, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |                     | Weighted average
interest rate |  | 
| | ------------------- | ------------------------------ |  | 
|
|
|
|
| | In Dollars          |                                |  | 
| | In other currencies |                                |  | 
| |                     |                                |  | 
| |                     |                                | 
| | Total               |                                |  | 
| |                     |                                |  | 

F - 47

---

---

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

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

| | e. | Other
current liabilities:
| | -- | --------------------------

| |                                        | December 31,
| | -------------------------------------- | ------------
|
|
|
|
| | Deferred revenue                       |             
| | Payroll and related employees accruals |             
| | Government authorities                 |             
| | Advances from customers                |             
| | Provision for vacation pay             |             
| | Other                                  |             
| |                                        |             
| |                                        |             
| |                                        |             
| |                                        |             

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

| |                           |  | Interest rate for |            | December 31,
| | ------------------------- |  | ----------------- | ---------- | ------------
|
|
|
|
| | Restructured loans (a.i): |  |                   |            |             
| | Loan from Bank Leumi      |  |                  
| | (a.ii)(a.iii)(c)          |  |                   | U.S.dollar |             
| | Other long-term loans     |  |                   | U.S.dollar |             
| |                           |  |                   |            |             
| |                           |  |                  
| |                           |  |                   |            |             
| |                           |  |                   |            |             
| | Other loans:              |  |                  
| | Loan from a bank (b)      |  |                   | Euro       |             
| | Other long-term loan      |  |                   | U.S.dollar |             
| |                           |  |                   |            |             
| |                           |  |                  
| |                           |  |                   |            |             
| |                           |  |                   |            |             
| |                           |  |                  
| |                           |  |                   |            |             
| | Less - current maturities |  |                   |            |             
| |                           |  |                   |            |             
| |                           |  |                  
| |                           |  |                   |            |             
| |                           |  |                   |            |             

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

| | ii. | In
addition to existing security interests in their favor, the Company granted           the
banks, a first priority security interest consisting of a floating charge on
          all of the Companys assets and a pledge on Spacenet shares owned by the
          Company. The Company granted a second priority security interest in the same
          collateral to the holders of the new notes.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | iii. | The
Company granted the lender a first priority security interest in its           facilities
in Israel that is limited to $ 12,000.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---

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

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

| | (b) | 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, 2008, is
          collateralized by the subsidiarys facilities in Germany.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | In
order to secure credit lines provided by the banks, the Company granted the
          banks a floating charge on its facilities. As of December 31, 2008, the Company
          used approximately $ 7,281 of those credit lines.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Long-term
debt maturities for loans after December 31, 2008, are as follows:
| | -- | ----------------------------------------------------------------------------

| | Year ending December 31, | 
| | ------------------------ | 
|
|
|
|
| | 2009                     | 
| | 2010                     | 
| | 2011                     | 
| |                          | 
| |                          | 
| |                          | 

| | Interest
expenses on the long-term loans amounted to $ 1,211, $ 1,698 and $ 5,398 for the
years ended December 31, 2008, 2007 and 2006, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | As
for the convertible subordinated notes, see note 10.
| | -- | -------------------------------------------------------

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

| |                                                                 | December 31,
| | --------------------------------------------------------------- | ------------
|
|
|
|
| | Deferred revenue                                                |             
| | Space segment                                                   |             
| | Restructuring charges (mainly termination of lease commitments) |             
| | Long-term tax accrual                                           |             
| | Other                                                           |             
| |                                                                 |             
| |                                                                 |             
| |                                                                 |             
| |                                                                 |             

F - 49

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

|NOTE 14: |  | SELECTED STATEMENTS OF OPERATIONS DATA
|-------- |  | --------------------------------------

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

| |                                              | Year ended December 31,
| | -------------------------------------------- | -----------------------
|
|
|
|
| | Total cost                                   |                        
| | Less:                                        |                        
| | Non-royalty bearing grants                   |                        
| |                                              |                        
| |                                              |                        
| | Total research and development expenses, net |                        
| |                                              |                        

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

| |                              | Year ended December 31,
| | ---------------------------- | -----------------------
|
|
|
|
| | Balance at beginning of year |                        
| | Increase during the year     |                        
| | Write-off of bad debts       |                        
| |                              |                        
| |                              |                        
| | Balance at the end of year   |                        
| |                              |                        

| | c. | Financial
expenses, net:
| | -- | ------------------------

| |                                                | Year ended December 31,
| | ---------------------------------------------- | -----------------------
|
|
|
|
| | Income:                                        |                        
| | Interest on cash equivalents, bank deposits,   |                        
| | restricted cash and accretion of discounts     |                        
| | of held-to-maturity marketable securities      |                        
| | Interest with respect to capital lease         |                        
| | Other                                          |                        
| |                                                |                        
| |                                                |                        
| |                                                |                        
| |                                                |                        
| | Expenses:                                      |                        
| | Interest with respect to short-term bank       |                        
| | credit and trade payables and other            |                        
| | Interest with respect to long-term loans       |                        
| | Accretion of discount related to the York loan |                        
| | Other                                          |                        
| |                                                |                        
| |                                                |                        
| |                                                |                        
| |                                                |                        
| |                                                |                        
| | Total financial income (expenses), net         |                        
| |                                                |                        

| | d. | Other
income:
| | -- | -------------

| | During the year ended December 31,
2008, the Company received a dividend from a company in which it had invested in amount of
$1,182, which investment had previously been written off. A substantial portion of this
investment was subsequently sold in the fourth quarter of 2008. The total income from the sale
transaction amounted to $1,801.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 50

---

---

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

|NOTE 15: |  | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION
|-------- |  | ----------------------------------------------

| | The
Group applies SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information (SFAS No. 131). Segments are managed separately and can be
described as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | GNS:
GNS focuses on sales of solutions to operators by provision of its proprietary 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SRC:
The business of SRC is comprised of several government-sponsored rural projects for
telephony and/or internet and data connectivity. To date, this business segment includes
satellite-based rural telephony and internet access solutions in remote areas in Latin
America.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | Information
on the reportable segments:
| | -- | ---------------------------------------

| | 1) | The
measurement of the reportable operating segments is based on the same
          accounting principles applied in these financial statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | When
reported by segment, the results of Spacenet and SRC are presented based           upon
intercompany transfer prices.
| | -- | --------------------------------------------------------------------------------------------------------------------------

| | 3) | Financial
data relating to reportable operating segments:
| | -- | ---------------------------------------------------------

| |                  | Year ended December 31, 2008
| | ---------------- | ----------------------------
|
|
|
|
| | Revenue:         |                             
| | External revenue |                             
| | Internal revenue |                             
| |                  |                             
| |                  |                             
| |                  |                             
| |                  |                             
| |                  |                             
| | Financial income |                             
| | (expenses), net  |                             
| |                  |                             
| |                  |                             
| | Income (loss)    |                             
| | before taxes on  |                             
| | income           |                             
| |                  |                             
| |                  |                             
| | Taxes on income  |                             
| |                  |                             

F - 51

---

---

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

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

| |                  | Year ended December 31, 2007
| | ---------------- | ----------------------------
|
|
|
|
| | Revenue:         |                             
| | External revenue |                             
| | Internal revenue |                             
| |                  |                             
| |                  |                             
| |                  |                             
| |                  |                             
| |                  |                             
| | Financial income |                             
| | (expenses), net  |                             
| |                  |                             
| |                  |                             
| | Income (loss)    |                             
| | before taxes on  |                             
| | income           |                             
| |                  |                             
| |                  |                             
| | Taxes on income  |                             
| |                  |                             

| |                  | Year ended December 31, 2006
| | ---------------- | ----------------------------
|
|
|
|
| | Revenue:         |                             
| | External revenue |                             
| | Internal revenue |                             
| |                  |                             
| |                  |                             
| |                  |                             
| |                  |                             
| |                  |                             
| | Financial income |                             
| | (expenses), net  |                             
| |                  |                             
| |                  |                             
| | Income (loss)    |                             
| | before taxes on  |                             
| | income           |                             
| |                  |                             
| |                  |                             
| | Taxes on income  |                             
| |                  |                             

| | b. | Revenue
by geographic areas:
| | -- | ----------------------------

| | Following
is a summary of revenue by geographic areas. Revenues attributed to geographic areas,
based on the location of the end customers, and in accordance with FAS 131:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                   | Year ended December 31,
| | --------------------------------- | -----------------------
|
|
|
|
| | United States                     |                        
| | South America and Central America |                        
| | Asia                              |                        
| | Europe                            |                        
| | Africa                            |                        
| |                                   |                        
| |                                   |                        
| |                                   |                        
| |                                   |                        

| | c. | During
2008, 2007 and 2006, the Company did not have any single customer or
               country generating revenue exceeding 10% of the Companys total
revenue.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 52

---

---

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

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

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

| |               | December 31,
| | ------------- | ------------
|
|
|
|
| | Israel        |             
| | Latin America |             
| | United States |             
| | Europe        |             
| | Other         |             
| |               |             
| |               |             
| |               |             
| |               |             

F - 53

---

---