---

---

As
filed with the Securities and Exchange Commission on March 23, 2006

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, 2005

# or

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

# For the transition
period from __________ to __________

# or

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

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

# Commission file
number: 0-21218

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

ISRAEL (Jurisdiction of incorporation or organization)

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

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

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

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

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

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

# 22,556,298 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 oNo 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 xNo o

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

Item 17 oItem 18 x

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

Yes oNo x

This report on Form 20-F is being
incorporated by reference into our Registration Statements on Form S-8 (Registration Nos.
333-123410, 333-113932, 333-08826, 333-10092, 333-12466 and 333-12988) and Form F-3
(Registration Nos. 333-113950 and 333-12698).

- 2 -

---

---



# INTRODUCTION

We
are a leading provider of products and services for satellite-based communications
networks. During the third quarter of 2005, we began to operate under three business
units: (i) Gilat Network Systems, often referred to as GNS, which is a provider of network
systems and associated professional services to service providers and operators; (ii)
Spacenet, which provides managed services for enterprises and businesses through our U.S.
Subsidiary, Spacenet Inc and for consumers through our U.S. subsidiary, StarBand
Communications Inc.; and (iii) Spacenet Rural Communications, which provides communication
services including internet, telephony and data transmissions for rural communities,
primarily in Latin America. In its most recent available report published in 2005,Comsys, a specialized consulting company that analyzes the satellite communications
industry, reported that Gilat is the second-largest manufacturer of very small aperture
terminals, referred to in the network communications industry as VSATs. We were
incorporated in Israel in 1987 and are subject to the laws of the State of Israel.
Gilats corporate headquarters, executive offices and research and development,
engineering and manufacturing facilities are located at Gilat House, 21 Yegia Kapayim
Street, Kiryat Arye, Petah Tikva 49130, Israel. Our telephone number is (972) 3-925-2000.

The
name Gilat and the names TwoWay,
OneWay, FaraWay, DialAw@y IPTM,
SkySurfer, SkyWay, Skydata®,
SkyEdge", Clearlink", SkyBlaster ",
Skystar Advantage® and StarBand appearing in this annual report on
Form 20-F are trademarks of Gilat and its subsidiaries. See Item 4: Information on
the Company  Products and Services. Other trademarks appearing in this annual
report on Form 20-F are owned by their respective holders.

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

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

Our
consolidated financial statements appearing in this annual report are prepared in U.S.
dollars and in accordance with U.S. generally accepted accounting principles, or U.S.
GAAP. All references in this annual report to dollars or $ are to
U.S. dollars and all references in this annual report to NIS are to New
Israeli Shekels. The representative exchange rate between the NIS and the dollar as
published by the Bank of Israel onMarch 21, 2006 was NIS 4.659 per $1.00.

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

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

- i -

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# TABLE OF CONTENTS

|         |                                                                              | Page
|-------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|Part I   |                                                                              |     
|        
|Item 1   | Identity of Directors, Senior Management and Advisers                        | 3   
|Item 2   | Offer Statistics and Expected Timetable                                      | 3   
|Item 3   | Key Information                                                              | 3   
|         | Selected Consolidated Financial Data                                         | 3   
|         | Risk Factors                                                                 | 5   
|Item 4   | Information on the Company                                                   | 19  
|Item 4A  | Unresolved Staff Comments                                                    | 41  
|Item 5   | Operating and Financial Review and Prospects                                 | 41  
|Item 6   | Directors, Senior Management and Employees                                   | 61  
|Item 7   | Major Shareholders and Related Party Transactions                            | 70  
|Item 8   | Financial Information                                                        | 72  
|Item 9   | The Offer and Listing                                                        | 74  
|Item 10  | Additional Information                                                       | 75  
|Item 11  | Quantitative and Qualitative Disclosures about Market Risk                   | 91  
|Item 12  | Description of Securities Other than Equity Securities                       | 93  
|        
|Part II 
|        
|Item 13  | Defaults, Dividends, Arrearages and Delinquencies                            | 93  
|Item 14  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 93  
|Item 15  | Controls and Procedures                                                      | 93  
|Item 16  | [Reserved]                                                                   | 93  
|Item 16A | Audit Committee Financial Expert                                             | 94  
|Item 16B | Code of Ethics                                                               | 94  
|Item 16C | Principal Accountanting Fees and Expenses                                    | 94  
|Item 16D | Exemptions from the Listing requirements and Standards for Audit Committee   | 95  
|Item 16E | Purchase of Equity Securities by the Issuer and Affiliates and Purchases     | 95  
|        
|Part III
|        
|Item 17  | Financial Statements                                                         | 95  
|Item 18  | Financial Statements                                                         | 95  
|Item 19  | Exhibits                                                                     | 95  

- ii -

---

---



# PART I

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

Not
Applicable.

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

Not
Applicable.

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

# Selected Consolidated
Financial Data

The
selected consolidated statement of operations data set forth below for the years ended
December 31, 2003, 2004 and 2005, and the selected consolidated balance sheet data as of
December 31, 2004 and 2005 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, 2001 and 2002 and the selected consolidated balance sheet data as of December
31, 2001, 2002 and 2003 are derived from our audited consolidated financial statements
that are not included in this Report.

The
selected consolidated financial data set forth below should be read in conjunction with
Item 5: Operating and Financial Review and Prospects and the Consolidated
Financial Statements and Notes thereto included in Item 18 in this annual report on Form
20-F for the year ended December 31, 2005.

- 3 -

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|                                        | Year Ended December 31,
|--------------------------------------- | -----------------------
|
|
|
|                                        |                        
|Revenues:                               |                        
|Products                                |                        
|Services                                |                        
|                                        |                        
|                                        |                        
|                                        |                        
|                                        |                        
|Cost of revenues:                       |                        
|Products                                |                        
|Services                                |                        
|Write-off of inventories                |                        
|                                        |                        
|                                        |                        
|                                        |                        
|Gross profit                            |                        
|                                        |                        
|Research and development expenses, net  |                        
|Selling, marketing, general and         |                        
|administrative expenses                 |                        
|Provision and write-off for doubtful    |                        
|accounts and capital lease receivables  |                        
|Impairment of goodwill                  |                        
|Impairment of tangible and intangible   |                        
|assets                                  |                        
|Restructuring charges                   |                        
|Gain from derecognition of liability    |                        
|                                        |                        
|Operating income (loss)                 |                        
|Financial expenses, net                 |                        
|Gain from restructuring of debt         |                        
|Other income (expense)                  |                        
|Gain (loss) from write-off of           |                        
|investments in affiliated and other     |                        
|companies                               |                        
|                                        |                        
|Income (loss) before taxes on income    |                        
|Taxes on income                         |                        
|                                        |                        
|Income (loss) after taxes on income .   |                        
|Equity in earnings (losses) of          |                        
|affiliated companies                    |                        
|                                        |                        
|Minority interest in losses of a        |                        
|subsidiaries                            |                        
|                                        |                        
|                                        |                        
|Income (loss) from continuing           |                        
|operations, before cumulative effect    |                        
|of a change in an accounting principle  |                        
|Gain (loss) from cumulative effect of a |                        
|change in an accounting principle       |                        
|Loss from discontinued operations       |                        
|                                        |                        
|                                        |                        
|Net income (loss)                       |                        
|                                        |                        
|Net earnings (loss) per share from      |                        
|continued operation:                    |                        
|Basic                                   |                        
|                                        |                        
|Diluted                                 |                        
|                                        |                        
|Basic and diluted net earnings (loss)   |                        
|per share from cumulative effect of a   |                        
|change in an accounting principle       |                        
|                                        |                        
|Basic and diluted loss per share from   |                        
|discontinued operation                  |                        
|                                        |                        
|Net earnings (loss) per share:          |                        
|Basic                                   |                        
|                                        |                        
|Diluted                                 |                        
|                                        |                        
|Weighted average number of shares used  |                        
|in computing net earnings (loss) per    |                        
|share:                                  |                        
|Basic                                   |                        
|                                        |                        
|Diluted                                 |                        
|                                        |                        

- 4 -

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

# Risk Factors

# Risks Related To Our
Business

Beginning
January 2005, we began operating our business under two business units. During the third
quarter of 2005, we further modified this change and are now operating under three
business units. It is not yet certain that this change in our operations will be efficient
or successful.

Beginning
January 1, 2005, we began to operate under two business units: Gilat Network Systems and
Spacenet. This division was made as part of the Companys growth strategy aiming to
increase sales for solution driven markets as well as the expansion of its services and
operations business. During the third quarter of 2005, we divided the Spacenet business
unit into two separate units: Spacenet Inc., which provides managed services for
enterprise, business and consumers in the U.S. and Spacenet Rural Communications, which
offers rural telephony and internet access solutions to remote areas, primarily in Latin
America. While the intention is to enable and encourage each business unit to enhance its
business strategy, it is possible that the division will cause competition within our
company and lead to confusion in the market.

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

We
incurred a loss of approximately $100.6 million in 2003 (excluding the gain from
restructuring of debt), a loss of approximately $11.5 million in 2004 and a loss of
approximately $ 3.7 million in 2005. While we achieved operating profitability of
approximately $1 million in the fourth quarter, we cannot assure you that we can operate
profitably in the future or achieve a positive net income. If we do not achieve
profitability, the viability of our company will be in question and our share price could
decline.

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

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

- 5 -

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

There
are trends and factors affecting the telecommunications industry which are beyond our
control and may affect our operations. These trends and factors include:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A
significant portion of our sales revenue is derived from our being selected as the
supplier of networks based on VSATs, under large-scale contracts that we are awarded from
time to time in a competitive bidding process. These large-scale contracts typically
involve the installation of between 2,000 and 10,000 VSATs. The number of major bids for
these large-scale contracts for VSAT-based networks in any given year is limited and the
competition is intense. Losing or defaulting on a relatively small number of bids each
year could have a significant adverse impact on our operating results.

- 6 -

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

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

In
addition, in November 2002, we were awarded two large projects by the Colombian
Government, including the installation and operation of approximately 550 telecenters to
provide Internet connectivity and telephony services in cities and towns throughout
Colombia and a second site of approximately 3,300 public rural satellite telephony
network. The total value of the contracts is approximately $65 million. If we do not meet
certain minimum equity requirements, this customer may assert that we would be in breach
of our contract with them. Any early unilateral termination by the Colombian Government
could have a significant adverse impact on our operating results.

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

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

Our
success is dependent upon our ability to continue to develop new products, applications
and services and meet developing market needs.

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

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

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

- 7 -

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

At
present, we have a backlog of orders, consisting of network service contracts, generally
for three to five years, and of new orders for products and services. As of December 31,
2005 our aggregate backlog for equipment sales and for services under service contracts
for our VSAT products was $206 million. If we are unable to satisfy the entire backlog of
orders, we will not be able to fully recognize the revenues expected from this backlog and
we could lose the contracts from which these backlog of orders arise, either of which
could have a material adverse effect on our business. In addition, an inability to supply
equipment and services could lead to our default on contracts and the subsequent exercise
of performance guarantees by customers and could subject us to penalties and fines.

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

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

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

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

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

| |  | 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 of new
large orders.
| | - | --------------------------------------------------------------------------------------------------------

The
termination or non-renewal of our contracts could have a material adverse effect on our
business, financial condition and operating results. A vast majority of our business
generated in 2005 was from recurring customers. If we are not able to gain new customers
and retain our present customer base, our revenues will decline significantly. In
addition, if we have a higher than anticipated subscriber churn for customers from
StarBand and from Spacenet Inc., this could materially adversely affect our financial
performance.

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

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

- 8 -

---

---



The
terms on which we are able to obtain components for our products are also affected by our
relationship with our suppliers. In this regard, we entered into a non-exclusive Supply
Chain Management agreement with Arrow/Rapac Ltd., or Arrow, a part of Arrow Electronics,
Inc., to purchase certain components necessary for the manufacture of our products as well
as to provide comprehensive logistic services. The agreement is intended to ensure JIT
(just in time) inventory and to reduce prices currently paid by us for components. In
addition, regarding components purchased in bulk by Arrow for other customers, we are
entitled to enjoy existing lower prices. Arrow is to purchase components on our behalf
based upon rolling forecasts provided by us. While this agreement is intended to guarantee
the supply of our products and reduce prices, it also increases our reliance on a single
sub-contractor. Any inability on their part to substantively perform under the agreement
could have an adverse effect on our operations.

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

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

There
are other manufacturers of products that compete with one or more of our products such as
Alcatel Space, NDSatcom, Newtech and Polarsat. Another potential for product
standardization in the VSAT industry is known as DOCSIS (Data Over Cable Service Interface
Specification) for satellite communications. This concept is embedded in a product
produced and sold by ViaSat directly in the international markets. In the United States,
ViaSat delivers the same technology to the WildBlue consumer program that was launched in
June 2005. This product is designed to be a low cost VSAT. This standardization could pose
a threat to the acceptance in the market of our current and future non-DOCSIS for
satellite products and could have an adverse effect on the market price for VSATs
industry-wide.

HNS
introduced its own standard called IPoS (IP over satellite) which relies on the installed
base of their DirecWay System. If accepted by other companies in the industry, this could
have an adverse affect on the acceptance of our products. HNS is also expected to launch
their SpaceWay Ka satellite program in the United States in 2006, which, if successful,
could increase our competition and lower prices.

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

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

- 9 -

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

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

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

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

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

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

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

| |  | political
instability in countries in which we do or desire to do business. For example, economic
instability in Indonesia has led to a decrease in the value of the Indonesian Rupiah. If
such decrease continues, this could adversely affect the ability of the Indonesian market
to finance VSAT projects. We also face similar risks from potential or current political
and economic instability in countries such as Russia, Kazakhstan, Angola, India and
Kenya;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

- 10 -

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

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

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

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

Possible
need for additional funds.

Our
cash and cash equivalents at December 31, 2005 were approximately $74.9 million. We
currently expect our cash and cash equivalents to be sufficient for use in our current
operations. If we choose to expand our business by acquiring a complementary business or
businesses, we may be required to raise additional funds to finance such activities. There
can be no assurance that we will be able to raise necessary funds or that we will be able
to do so on terms acceptable to us. Any such additional funding may result in significant
dilution to existing shareholders

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

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

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

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

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

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

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

- 11 -

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

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

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

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

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

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

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

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

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

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

In
addition, we may be required to commence litigation to protect our intellectual property
rights and trade secrets, to determine the validity of and scope of the proprietary rights
of others or to defend against third-party claims of invalidity. An adverse result in any
litigation could force us to pay substantial damages, stop designing or manufacturing,
using and selling the infringing products, spend significant resources to develop
non-infringing technology, discontinue using certain processes or obtain licenses to use
the infringing technology.  In addition, we may not be able to develop non-infringing
technology, nor might we be able to find appropriate licenses on reasonably satisfactory
terms. Any such litigation could result in substantial costs and diversion of resources
and could have a material adverse effect on our business, financial condition and
operating results.

Potential
product liability claims relating to our products could have a material adverse effect 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 claims. Our business, financial condition and operating
results could be materially adversely affected if costs resulting from future claims are
not covered by our insurance or exceed our coverage.

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

Our
business includes many risks, only some of which are covered by our insurance. For
example, in many of our satellite capacity agreements, we do not have a back up for
satellite capacity, nor do we have indemnification or insurance in the event that our
suppliers satellite malfunctions or is lost. In addition, we are not covered by our
insurance for acts of fraud or theft. Our business, financial condition and operating
results could be materially adversely affected if significant costs resulting from these
exposures are incurred.

- 12 -

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We
are involved in litigation alleging violations of the federal securities laws that may
have an adverse effecton our business.

On
May 13, 2003, a complaint was filed with the United States District Court for the Eastern
District of New York against the Company and certain of its officers and directors
asserting claims under Section 10(b) of the Securities Exchange Act of 1934. The complaint
was the result of the court-ordered consolidation of nine separate similar actions filed
in March 2002 in the United States District Courts. In addition, a request was made to
file a class action lawsuit in the Tel Aviv, Israel, District Court, but this action was
stayed pending the outcome of the class action proceedings in the United States. The
Complaint asserts the claims of purchasers of our securities from February 9, 2000 and
through May 29, 2002, and alleges violations of the federal securities laws and claims
that we issued material misrepresentations to the market. We have filed a motion to
dismiss the amended complaint, and on September 19, 2005, the court dismissed certain of
the plaintiffs claims. The plaintiffs have provided Gilat with a discovery demand. A
conference with the plaintiffs has been scheduled for March to agree on the schedule and
scope of the discovery.

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. While we hold insurance coverage, if we are
not successful in defending these legal proceedings, we could incur substantial monetary
judgments or penalties in excess of the available insurance coverage. In addition,
regardless of the outcome of the litigation, the process could result in damage to our
reputation. The proceedings could result in substantial costs not covered by our insurance
coverage and the process may occupy a significant amount of time and attention of our
senior management.

In
the past twelve months we have experienced significant changes in management and our board
of directors. The changes in top leadership of the Company may have an ongoing adverse
effect on our business.

In
June 2006, Mr. Erez Antebi rejoined the company as the Chief Executive Officer of our
Gilat Network Systems business unit. In addition, in July 2005, in connection with the
assignment of a Gilat loan by Bank Hapoalim B.M. to York Capital Management, six out of
seven of our board members resigned and were replaced by new members. In addition, Shlomo
Rodav, our then-Chairman of the Board and Chief Executive Officer resigned. At that time,
Mr. Amiram Levinberg, a co-founder and former President of our Company who had left
following the restructuring of our Company in March 2003, returned as our Chief Executive
Officer and Chairman of the Board. The many changes in management in the past year could
materially adversely affect our business, financial condition and operating results.

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

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

As
part of our management changes which have occurred over the past three quarters, we have
added a business development team, whose goal is to pursue new business opportunities.
This team will pursue 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 stock:

- 13 -

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| |  | issuance
of equity securities that would dilute our current stockholders' 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.

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

On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No.
123 (revised 2004), Share-Based Payment (SFAS No. 123R), which is a revision
of SFAS No. 123. Generally, the approach in SFAS 123(R) is similar to the approach
described in Statement 123. However, SFAS No. 123 permitted, but not required, share-based
payments to employees to be recognized based on their fair values while SFAS No. 123(R)
requires, as of the first quarter of 2006, all share-based payments to employees to be
recognized based on their fair values. SFAS No. 123R also revises, clarifies and expands
guidance in several areas, including measuring fair value, classifying an award as equity
or as a liability and attributing compensation cost to reporting periods. The adoption of
SFAS No. 123R may have a significant effect on our results of operations. In addition,
such adoption could also limit our ability to continue to use stock options as an
incentive and retention tool, which could, in turn, hurt our ability to recruit employees
and retain existing employees. Had we adopted SFAS 123(R) in 2005, the impact of that
standard would have approximated $7 million, as described in the disclosure of pro forma
net income and earnings per share in our consolidated financial statements.

# Risks Related To The
Shares And Our Capital Structure

Our
share price has been highly volatile, has experienced a significant decline, 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.

- 14 -

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

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

One
of our controlling shareholders is also a major creditor of the Company.

In
July 2005, York Capital Management was assigned the substantial loan that we had from Bank
Hapoalim B.M. York also has a proxy to vote approximately 15% of our shares. The interests
of York as a major creditor of our company may conflict at times with the interests of our
other shareholders. In addition, as per the terms of the amended loan agreement with York
approved in December 2005, York may convert the loan into shares and become a dominating
shareholder with approximately 32% of our outstanding shares. The interests of such a
major potential shareholder may not be inherently the same as those of shareholders with a
smaller ownership in our company.

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

Our
ordinary shares are traded primarily on the Nasdaq National Market and on the Tel Aviv
Stock Exchange. Trading in our ordinary shares on these markets is made in different
currencies (US dollars on the Nasdaq National Market, and New Israeli Shekels on the Tel
Aviv Stock Exchange), and at different times (resulting from different time zones,
different trading days and different public holidays in the United States and Israel).
Consequently, the trading prices of our ordinary shares on these two markets often differ.
Any decrease in the trading price of our ordinary shares on one of these markets could
cause a decrease in the trading price of our ordinary shares on the other market.

# Risks Related To
Regulatory Matters

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

Under
the Israeli Law for Encouragement of Capital Investments, 1959, some of our Israeli
facilities qualify as Approved Enterprises. As a result, we have been eligible
for tax benefits for the first several years in which we generated taxable income. Our
historical operating results reflect substantial tax benefits, including tax exemptions
and decreased tax rates up to December 31, 2000. In, 2003, 2004 and 2005, we had
substantial losses for tax purposes and a decrease in revenues and therefore could not
realize any tax benefits. On April 1, 2005, an amendment to the Investment Law came into
effect (the Amendment) and has significantly changed the provisions of the
Investment Law. 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. The amendment will be applied to new
approved enterprises. Our financial condition and results of operations could suffer if
the Israeli government terminated or reduced the current tax benefits available to us.

In
addition, in order to receive these tax benefits, we must comply with two material
conditions. We must invest specified amount in property and equipment in Israel, and 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 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, if and when we are profitable,
which could harm our financial condition and results of operations.

- 15 -

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

Research
and development grants from the Office of the Chief Scientist of the Israeli Ministry of
Industry and Commerce, or the Chief Scientist during 2003, 2004 and 2005 amounted to
approximately $3.5 million, $2.2 million, and $ 1.3 million, respectively. These grants
enable us to develop new technologies to use in new products and applications. However,
they also impose certain restrictions on us, as discussed below. Israeli authorities have
indicated that the grant program may be reduced in the future. The termination or
reduction of these grants to us could have a material adverse effect on our ability to
develop new products and applications, which could harm our business.

The
transfer and use of some of our technology and its production is limited because of the
research and development grants we received from the Israeli Government to develop such
technology. Such limitations may restrict our business growth and profitability.

Our
research and development efforts associated with the development of our OneWay VSAT
product and our DialAw@y IP product and our SkyBlaster product have been partially
financed through grants from the Chief Scientist. We are subject to certain restrictions
under the terms of the Chief Scientist grants. Specifically, the products developed with
the funding provided by these grants may not be manufactured, nor may the technology which
is embodied in our products be transferred outside of Israel without appropriate
governmental approvals and/or fines. These restrictions do not apply to the sale or export
from Israel of our products developed with this technology. These restrictions could limit
or prevent our growth and profitability.

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

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

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

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

- 16 -

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# Risks Related To Doing
Business In Israel

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

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

Since
October 2000, there has been substantial deterioration in the relationship between Israel
and the Palestinian Authority that has resulted in increased violence. The future effect
of this deterioration and violence on the Israeli economy and our operations is unclear.
In August 2005, Israel evacuated all Israeli settlements in the Gaza Strip and four
settlements in the West Bank. The implications of this action cannot at this time be
foreseen. Ongoing violence between Israel and the Palestinians as well as tension between
Israel and the neighboring Syria and Lebanon may have a material adverse effect on our
business, financial conditions or results of operations.

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

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

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

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

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

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

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

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

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

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

- 17 -

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

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

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

Our
operating results would be adversely affected if inflation in Israel is not offset on a
timely basis by adevaluation of the new Israeli shekel (NIS) against the U.S. dollar.

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

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

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

Israeli
law may delay, prevent or make difficult a merger with or an acquisition of us, which
could prevent achange 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.

- 18 -

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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 (e.g. the confidentiality of certain commercial information or a companys
intellectual property). In the event that any of our employees chooses to go and work for
one of our competitors, we may be unable to prevent our competitors from benefiting from
the expertise of our former employees obtained from us, if we cannot demonstrate to the
court that harm would be caused to us.

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

# History and Development
of the Company

We
are a leading provider of products and services for satellite-based communications
networks. The products that we develop, manufacture and install are known as VSATs, or
very small aperture terminals. VSATs provide highly reliable, end-to-end satellite
communications with guaranteed quality of service regardless of the number of sites or
their geographic location. In its most recent report published in October 2005, Comsys, a
specialized consulting company that analyzes the satellite communications industry,
reported that Gilat is the second-largest manufacturer of VSATs.

Since
the third quarter of 2005, we have operated under three business units:

(i)
          Gilat Network Systems (GNS), which is a provider of VSAT-based network systems
          and associated professional services to service providers and operators
          worldwide;

(ii)
          Spacenet, which is a service provider for data communication via satellite.
          Spacenets customers are enterprises, businesses and consumers primarily
          located in the United States.

(iii)
          Spacenet Rural Communications, which is a service provider for Internet,
          telephony and data communications for rural communities, primarily in Latin
          America.

Gilat
shipped its initial product, a first generation receive only (OneWay) VSAT, in 1989. Since
then, we have devoted significant resources to developing and enhancing our VSAT
applications and establishing strategic alliances, primarily with major telecommunications
companies and equipment suppliers.

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In
1991, we began marketing our second-generation OneWay VSAT. In 1992, we began marketing
our interactive (TwoWay) VSAT with Spacenet Inc., a company engaged in providing
VSAT-based network services, as part of Spacenets Skystar Advantage VSAT service
offering. Over the years, we experienced significant growth in orders, sales and earnings
including from our OneWay and Skystar Advantage products. By an agreement in 1992, COMSAT
RSI, Inc. became our joint venture partner to develop, manufacture and market two-way
rural telephony VSAT products (FaraWay). We began marketing the FaraWay VSAT in 1994. At
the end of 1996, we began marketing the DialAw@y IP VSAT, another rural telephony product
outside of the scope of that joint venture.

In
December 1998, we acquired Spacenet Inc. from SES Americom (formerly known as GE Americom)
and certain affiliates.

In
1999, we began marketing our interactive consumer (SkyBlaster) VSAT . The SkyBlaster is a
two-way IP-based product for broadband Internet services via satellite. One of the first
SkyBlaster models was the 360, designed for consumers and home offices and small business
users. In 2001, we completed development of the next generation interactive (SkyStar 360E)
VSAT, geared toward the enterprise, small business, SME and SOHO markets, that enables
broadband networking between a central hub and up to thousands of locations.

In
2004, we introduced our SkyEdge family of VSAT products, which offers a comprehensive
satellite communications platform to deliver data, voice and video services over a
unified, powerful system. This product family is also used for satellite integrated
communication applications and solutions.

Financing
Transactions. In February 2000, we completed a private offering of $350 million of
convertible subordinated notes due 2005, or the old notes. In December 2000, we entered
into a facility agreement with Bank Hapoalim, under which we borrowed $108 million to
finance our general corporate activities including our working capital. In June 2002, we
paid part of the initial $6 million principal payment that was then due.

In
September 2001, Bank Leumi lent us $30 million to be repaid in a single installment on
April 5, 2003. The loan was secured by a lien on our buildings in Petah Tikva, Israel. In
March 2003, as part of the arrangement detailed below, the terms of the loan made by Bank
Leumi were revised.

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

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

In
March 2003, as part of the Arrangement, we amended our agreement with Bank Hapoalim. The
loan was again amended in April 2004. In July 2005, the loan was assigned by Bank Hapoalim
to York Capital Management and in December 2005, the loan agreement was amended for a
third time. For more details, please see Item 5 Operating and Financial Review and
Prospects  Commitments and Contingencies.

- 20 -

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As
of March 1, 2006, 22,589,698 of our ordinary shares were outstanding.

Capital
Expenditures and Divestitures. In 2003, 2004 and 2005, our property and equipment
purchases amounted to approximately $14.7 million, $6.2 million and $3.6 million
respectively. These amounts do not include the reclassification of inventory to property
and equipment made during 2003, 2004 and 2005 in the amount of approximately $6.8 million,
$21.7 million and $7.3 million respectively. For more details, see Item 4 
Property and Equipment. In 2004, we completed the sale of our Argentinean
subsidiary, Servicio Satelital S.A. to a third party. In 2005, we completed the sale of
Deterministic Networks Inc. to some of its employees, we purchased the remaining shares of
StarBand and our shareholdings in Satlynx were diluted from approximately 40.6% to 0.17%.
Please see Item 8: Significant Changes.

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 Satellite
Communications Industry

Overview

VSATs
enable reliable transmission of data via satellite. A typical VSAT network consists of:
(1) several dozens to several thousands of remote sites with small antennas; (2) a large
central earth station called a hub, which includes a large antenna radio
transmitter/receiver equipment (also known in the industry as RF) and baseband equipment
to enable the connection of all the VSATs in the network; and (3) the capability to
communicate with a specified satellite.

There
are generally two key parts to the communication process:(i)        
the earth segment, consisting of the equipment at the hub and at the remote
          locations; and(ii)       
the space segment, which is the link to and from the satellite.

The
remote terminal equipment consists of two units: the ODU, or outdoor unit which is placed
outdoors and consists of a small antenna with a feed system, transmitter and low noise
converter and the IDU, or indoor unit which fits on a desktop (much like a modem) and
contains the circuitry that activates a communications link between the users
equipment and the satellite. The space segment is comprised of communication transponders
on satellites that are located in a geostationary orbit.

VSATs
enable connectivity via satellite for various applications, such as broadband, Internet,
video and voice. This rapidly deployed technology is often used to bring reliable,
cost-effective communications to remote locations. In addition, VSATs provide a highly
secure and reliable network and service availability across wide geographic areas. The
shared nature of the satellite communications resource enables VSATs to provide
cost-effective communications solutions for a large number of sites per network, each of
which uses a variety of services. VSAT networks support a wide spectrum of capabilities
and customer applications such as e-mail, virtual private networks, or VPN, video, voice,
Internet access, distance learning, content distribution and financial transactions.

The
value chain

We
believe that the value chain of the satellite communications industry consists of the
following elements:

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|n | Satellite
operators who provide satellite transponder capacity on satellites positioned in
geostationary orbit above the equator. Satellite operators finance the satellite
equipment and its launch and then sell the capacity in a variety of leasing agreements.
Once in orbit, a satellite beam can cover a geographic area the size of the continental
United States or Western Europe. This coverage area is known as the satellites
footprint. The satellite receives information from a VSAT, amplifies it and transmits it
back to earth on a different frequency. The current generation of common high-power
satellites uses Ku-band frequencies. Other frequencies are C-band and the more recently
introduced Ka-band. Our technology is compatible with C-band, Ku-band and Ka-band
satellites including special extended C-band and extended Ku-band satellites. Some of the
leading satellite operators are Intelsat/PanAmSat, SES, Eutelsat and Loral.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n | Ground
station equipment providers who manufacture VSAT networks. Our business unit, Gilat
Network Systems, is a leading ground station equipment provider. Our principal
competitors are Hughes Network Systems, ViaSat and iDirect.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n | Service
providers who buy equipment from ground station equipment providers, install and
maintain such equipment, lease capacity from satellite operators and sell full package
communication services to the end user. Our business units, Spacenet Inc. and Spacenet
Rural Communications are leading service providers in North America and Latin America,
respectively. Other examples of service providers are StarOne in Brazil, Optus in
Australia and Satlynx in Europe.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n | End
users, who are the customers utilizing the equipment and satellite communication
services. Examples of end users range from enterprises to small offices/home offices
(SoHos), to consumers.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gilats
primary market segments

The networks we establish are used
within the following markets:

Enterprise: 
The enterprise market includes companies, both large and small, small medium enterprises
(SME) and SOHO end users and government entities. For enterprises, VSAT networks offer
network connectivity that carries applications such as networks within corporations (known
as corporate intranets), Internet connections for data, video and voice (known as
broadband), transaction based connectivity to enable on-line data delivery such as
point-of-sale (credit and debit card authorization), inventory control and real time stock
exchange trading.

Rural
telecommunications: The rural telecommunications market is comprised of rural
communities throughout the world that require telephone, facsimile and Internet access in
areas that are underserved by the existing telecommunications services and/or are in
remote locations without service. This market segment is comprised of
Build-Operate (BO) projects, in which governments subsidize the establishment
and the operation of a rural network to be served by a certain satellite service provider
who is selected via a bid process. In other instances, local communications operators
have universal service obligations (USOs) which require them to serve rural areas lacking
terrestrial infrastructure. In this model, known as Built-Operate-Transfer
(BOT) projects, 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 single resident users. These users require a high-speed
Internet connection which enables the transmission of data, audio and video, similar to a
DSL (digital subscriber line) or cable modem service.

# Our Business Units

# Gilat Network Systems
(GNS)

Through
our GNS business unit, we provide VSAT communication equipment and solutions to service
providers in each of the three market segments, detailed above.

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# GNSs Customers and
Markets

GNS
sells VSAT communications networks and bundled solutions primarily to service providers.
The service providers are mainly serving the enterprise and rural communication market
segments.

Enterprise
service providers use the networks for broadband, transaction data, video and voice
connectivity for applications such as credit card authorization, online banking, corporate
intranet, interactive distance learning, lottery transactions, retail point of sale,
inventory control, and Supervisory Control and Data Acquisition (SCADA) services. Examples
of service providers to whom GNS sells VSAT networks are StarOne in Brazil whose end users
include franchises such as OBoticario, a major Brazilian cosmetics chain, HCL in
India whose end users include stock exchange dealers, and Spacenet Inc., whose end users
include lottery service providers such as Scientific Games International.

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. Examples of rural telecom customers of GNS
include Telkom, in South Africa; China Unicom and Embratel in Brazil. Recently GNS has
begun to sell a new cellular backhaul solution called the SkyAbis, based on our SkyEdge
product to Global System Mobile (GSM) cellular operators that deploy cellular
base-stations in remote areas.

VSAT
networks also provide underserved areas with a high-speed internet connection to single
resident users. This market consists of service providers that provide a DSL-like service
using our VSAT technology. Examples of customers in this area to whom we sell our products
are Spacenet, which delivers satellite communications to consumers in North America
through StarBand, StarOne in Brazil and Optus in Australia.

# Strengths

Through
our equipment sales arm which provides full solutions to its customers, we have achieved
and sustained the following competitive advantages:

| |  | We
are a leading global VSAT provider with a large installed customer base.
| | - | ---------------------------------------------------------------------------

| | We
have sold more than 600,000 VSATs to customers in over 85 countries. According to the
2005 Comsys report, in 2004 our global market share to the enterprise market was
approximately 30%, calculated based on the number of terminals ordered. The report also
states that our global market share for thin-route rural telephony was 97%.
The large installed base of our equipment provides opportunities for new and incremental
sales and also enables us to keep our prices competitive.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
have an experienced management team
| | - | --------------------------------------

| | Our
management team averages fifteen years of experience in the satellite communications
industry. Our management team is supported by approximately 150 engineers and a marketing
and sales force of approximately 130 persons.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
have a diversified revenue stream
| | - | ------------------------------------

| | Our
GNS customer base is diversified geographically. In 2005, 26% of our revenues were
generated from the Americas, 45% from Asia, 16% from Africa and 13% from Europe.We have a
large number of customers, and in 2005, no single customer accounted for more than 10% of
our units revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
SkyEdge is a multi-service solution
| | - | ---------------------------------------

| | In
February 2004, we introduced the SkyEdge product family, which offers a comprehensive
platform to deliver data, voice and video services over a unified platform.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Gilats
technology is advanced and innovative
| | - | ---------------------------------------------

| | We
have been at the forefront of VSAT technology for almost 20 years and are an innovator
and developer of new satellite technologies. We are closely attuned to our customersneeds
and to market trends. We benefit from our service units (Spacenet Inc. and Spacenet Rural
Communications) by receiving inputs that are incorporated into our products. SkyEdge, our
latest-generation VSAT product family, brings new features such as advanced coding and
modulation which reduces operating expense for our customers, up to 2Mb/sec inbound data
rates which increase the range of services for our end-user customers, accelerated VPN
client embedded in the VSAT which enables optimal service for VPN customers and mesh
capability which enable direct communication between VSATs in hybrid topology networks.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
SkyEdge has a single platform, enabling focused research and development and quick time
to market solutions
| | - | ---------------------------------------------------------------------------------------------------------------

| | We
have unified and further enhanced our product lines, such as SkyStar Advantage, 360E and
DialAw@y, into one next generation single product platform  the SkyEdge. Having a
single platform enables us to focus research and development efforts, logistics and
support expenses on a single product line. In addition, it enables us to market new
features and capabilities faster than before.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
provide solutions that move up the value chain
| | - | -------------------------------------------------

| | Our
unified VSAT-based networks often serve as a platform for the delivery of a complete
system, providing a versatile, flexible and customized solution. We offer integrated
solutions that bring value to our customers. We also offer turnkey projects that include
installation, operation and third-party peripheral equipment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
provide support and customer services
| | - | ----------------------------------------

| | Our
experience, both with our large customer base and our service units (Spacenet Inc. and
Spacenet Rural Communications), enables us to provide rapid and full operational service
deployment. We have a two tier customer support program: local support offices and a
central support facility.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Strategy of GNS

We
intend to strengthen our business and organically grow our market share by continuing to
leverage our position as a technologically advanced and cost-effective provider of VSAT
solutions. In addition, we intend to grow in complimentary directions by moving up
the value chain and selling higher-valued solutions. The principal elements of this
strategy are to:

| |  | Focus
our development and marketing efforts on the enterprise and rural communication markets;
| | - | ----------------------------------------------------------------------------------------------

| |  | Maintain
our position as a technology leader by improving our products with enhanced
functionality, in particular for the enterprise and rural communications markets;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sell
more than a VSAT by building turn key projects for selective end users. In these cases,
we will provide the full system including the application and only in a second phase,
hand over the operation of the network (for the end user) to a local service provider;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Constantly
reduce the total cost of ownership of the satellite network solution by leveraging our
design capabilities, economies of scale and one-system architecture; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Develop
strategic relationships for distribution channels of our products.
| | - | --------------------------------------------------------------------------

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# GNS Sales and marketing

We
use both direct and indirect sales channels to market our products, solutions and
services. Our GNS equipment sales division has geographically organized its marketing
activities by geographical areas, with groups, subsidiaries or affiliates covering all
regions of the world. We have thirteen regional sales offices around the world and GNS
sales representatives in our Spacenet Inc. and Spacenet Rural Telecommunications offices.
Our sales teams are comprised of account managers and sales engineers, who are the primary
account interfaces and work to establish account relationships and determine technical and
business requirements for the network. These teams also support the other distribution
channels with advanced technical capabilities and application experience. Sales cycles in
the VSAT network market 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 2 to 3 months. The sales process includes several network
design iterations, network demonstrations, and on occasion, software development, and
integrations with third-party equipment for complete solution offerings.

# GNS Products

We
currently offer our VSATs to the three markets described above. In 2005, we offered the
following satellite networks, VSATs and solutions described below:

SkyEdge
Family of Products

We
have designed the SkyEdge VSATs and hub to support multiple services on a single platform.
Our advanced access scheme and quality of service (QoS) implementation enables delivering
these services simultaneously in an efficient manner and at high quality. The SkyEdge can
support various services, such as toll-quality voice, video, Internet access,
transactional data on the same platform. In addition, multiple network topologies can be
deployed with the same platform; star (hub and spokes), mesh and multi-star. This enables
improved user-experience and reduced operational expenses.

Providing
Solutions

Our
VSAT based networks often serve as a platform for the delivery of a complete system,
providing a versatile, flexible and custom tailored solution. We offer integrated
solutions that bring value to our customers. For example, in 2005, we released an
integrated solution called the Sky-Abis, which supports a backhaul application for GSM
cellular-based stations. We also provide turn-key projects that include installation,
operation and third party peripheral equipment. End-to-end solutions include a variety of
markets, such as communication infrastructure solutions, post offices, military and
defense, transportable VSATs and GSM trunking.

# GNS Competition

The
network communications industry is highly competitive and the level of competition is
increasing. As a provider of satellite network products, GNS competes with a large number
of telecommunications equipment vendors. This increasingly competitive environment has put
pressure on prices and margins and has led to pressures for industry-wide standardization,
which would enable multi-vendor networks. To compete effectively, we emphasize the price
competitiveness of our products as compared to products offered by terrestrial and other
satellite service providers, the advantages of satellite networks in general, our network
quality, our customization capability, our offering of end-to-end solutions and our
provision of a single point of contact for products and services.

Our
principal competitor in the supply of VSAT satellite networks is Hughes Network Systems
which also offers a line of VSAT products. In competing with HNS, we emphasize particular
technological features of our products, the long-term reliability of our products, our
ability to customize networks and perform desired development work and the quality of our
customer service In addition; we face competition from ViaSat, Inc. and iDirect
Technologies, both of whom manufacture their own VSATs.

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

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The
satellite industry currently has two open standards for the return channel, DVB-RCS
(Digital Video Broadcast  Return Channel via Satellite) and IPoS (Internet Protocol
over Satellite). The first is an ETSI (European Telecommunications Standards Institute)
standard backed by a consortium of satellite operators and vendors, including Gilat. The
second is an ETSI and TIA (Telecommunication Industry Association) standard, backed
primarily by HNS. Other companies offer technologies that can be standardized, such as
DOCSIS (Data Over Cable Service Interface Specification) by ViaSat, but these are
currently not open standards. We may see increased competition from other DVB-RCS vendors,
such as Advantech and Nera, and price pressure as a result of these open standards.
Acceptance of DVB-RCS or other standards, as well as interoperability of multi-vendor VSAT
systems, can further increase competitive intensity and price pressures. In October 2005,
Gilats SkyEdge DVB-RCS, was certified as DVB-RCS compliant by Satlabs.

We
are facing increasing competition from terrestrial telecommunications service providers
that use frame relay, fiber optic networks and digital network switching to provide
competitive network offerings. The increase of cellular coverage and development of
General Pocket Radio Service (GPRS) technology, Universal Mobile Telecommunication System
(UMTS) and Code Division Multiple Access 2000 (CDMA2000) is also proving to be a
competitive technology for low-medium bit rate applications. In addition, we are facing
increasing completion from Worldwide Interoperability for Microwave Access (WiMAX) and
similar wireless technologies.

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

# Spacenet

We
provide VSAT communication services and solutions to enterprises and consumers in North
America through our subsidiary, Spacenet Inc. and its wholly-owned subsidiary, StarBand
Communications Inc.

# Spacenets
Customers and Markets

Spacenets
primary business is delivering private-hub and shared-hub managed VSAT networks and
applications to enterprise and government end customers in North America. These customers
contract directly with Spacenet for VSAT equipment and associated network services to be
deployed at customer locations (which may or may not include installation and
maintenance), typically for a contract term between 36 and 60 months. Spacenet also
resells managed terrestrial connectivity equipment and services from facilities-based
Local Exchange Carrier (LEC) partners. In certain markets, Spacenet sells equipment-only
solutions with no recurring service component. Spacenet also provides VSAT equipment and
Internet access service to residential/small-office customers through Starband
Communications Inc.

Spacenet
serves more than 50,000 enterprise and government customer sites with its managed network
services. Notable Spacenet enterprise customers include Dollar General, Goodyear,
Intercontinental Hotels Group, Valero, Countrywide Home Loans, Kroger and many other
Fortune 1000 companies. A 2005 study of the North American enterprise VSAT marketplace by
industry analyst Comsys showed that Spacenet ranked second in the North American market
share with 20.5%, more than four times greater share than the third-ranked provider.

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Spacenets enterprise services
target several key markets.

| |  | Retail
enterprises: Some of America1s leading retailers utilize Spacenet for their
primary or secondary WAN infrastructure. Spacenets VSAT services offer these
customers a combination of near-100% geographic availability, comprehensive
implementation and maintenance capabilities, multicast content delivery and
cost-effective network scalability. Spacenet provides one service point of contact for
satellite and terrestrial DSL (hybrid) networks. Spacenets hybrid network delivery
and management capabilities are increasingly important in this market where internet
technology (IT) infrastructure price sensitivity is high.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Restaurant
and hospitality: Spacenet includes a significant number of the nations leading
restaurant and hospitality chains among its customers. Spacenets VSAT and hybrid
networks are able to meet this markets requirements of uptime, support for
transaction authorization (credit/debit, gift card, central reservation systems)
applications and economical services. Hybrid solutions and low-cost solutions are
especially important in this market, and Spacenet is constantly working to ensure that
its offerings remain highly competitive.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Lottery:
Spacenet was the first service provider to service this market segment and to date,
Spacenet VSAT systems are deployed in 12 state lottery systems in the United States, plus
several international lotteries.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Government:
Spacenet has service and equipment-only offerings for both military and civilian
government agencies. The military market demands high-performance equipment-only
solutions, and Spacenet is attempting to leverage Gilats advanced SkyEdge platform
to expand its presence in this space.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On-demand
services: This market crosses several vertical industries, which are all united by
their need for VSATS as a reliable secondary network for backup/disaster recovery
communications. In 2005, Spacenet launched a line of on-demandusage-based
services designed to facilitate the use of satellite for part-time or failover
connectivity. Markets with strong potential for these services include the financial
services and government/emergency services/first responder industries, as well as all
other existing Spacenet markets in situations where critical backup connectivity is a
requirement.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Energy:
For many years, Spacenet has served a number of leading energy industry customers with
VSAT networks providing Supervisory Control and Data Acquisition (SCADA) services for oil
and natural gas pipelines. During 2005, Spacenet extended its commitment to the energy
sector through an entry into the utility telecommunications market. Spacenet is targeting
this industry for growth through custom-tailored utility offerings that match its
requirements for high-reliability narrowband systems with broad geographic reach.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Consumers: Spacenet
serves nearly 30,000 residential and small office customers with its StarBand VSAT
internet access service. The primary customers for these services are residential and
small office customers in areas underserved by broadband connectivity options. Spacenet
is particularly targeting the SOHO and small business segments of this market for growth.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Spacenets Strengths

Spacenet
has achieved the following strengths:

| |  | Spacenet
has 25 years of experience serving the needs of enterprise and government networks
| | - | -------------------------------------------------------------------------------------------

| | Spacenets
proven track record of reliability and its relationships with Fortune 1000 companies make
it a strong player in the North American enterprise wide area networks (WAN) marketplace.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 27 -

---

---



| |  | Spacenet's
services portfolio is among the most innovative and comprehensive available in its
industry
| | - | ------------------------------------------------------------------------------------------------------

| | Spacenet
was the first large VSAT operator to introduce hybrid terrestrial network services, and
has developed significant experience in deploying and managing these integrated networks
for enterprise customers. The Connexstar On-Demand line of VSAT services enables
customers to pay only for the bandwidth they use, making it well-suited for part-time or
backup/disaster recovery systems. The Connexstar EP service package uses software quality
of service (QoS) hub partitioning to offer the benefits of a private VSAT hub solution
without the capital expenditure of a complete hub system.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Spacenets
focus on managed services
| | - | ------------------------------------

| | Spacenet
has invested heavily in its technology infrastructure and professional services
capabilities in order to deliver a range of managed services. These include basic network
reports, network configuration and hybrid service management, firewall/security
management, proactive monitoring of customer endpoints, network performance analysis and
complete IT outsourcing solution packages. This is an important differentiator in the
highly competitive enterprise WAN services market. In addition, the fact that Spacenet
controls the last mile of its networks (dispatching a maintenance technician
to directly effect any needed repairs) is a key advantage over terrestrial competitors
who must often work through the bureaucracy of multiple LEC (Local Exchange Carrier)
providers to diagnose or fix a problem.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Long
history of customer orientation
| | - | ------------------------------------

| | A
primary strength of Spacenet is its long history of customer orientation. Spacenet is
well regarded by customers for its flexibility in crafting custom services and developing
personalized solutions to meet customer needs. Spacenets customer-centric
engineering orientation and creative thinking is a strong asset to attracting and
retaining large enterprise customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Spacenet
is focused on business services
| | - | ----------------------------------------

| | Spacenet
prides itself on its focus on business services. Spacenets entire history has been
in providing enterprise-grade services, and even today with its Starband business,
Spacenet does not mix its enterprise and residential services on the same hub
infrastructure. This constitutes a significant advantage in relation to competitors who
share business and residential infrastructures or whose most numerous customers are
residential.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Spacenet
is able to leverage Gilat's technology leadership to deliver advantaged services
competitively
| | - | -------------------------------------------------------------------------------------------------------

| | The
SkyEdge VSAT delivers high data rates. The SkyEdges advanced QoS capabilities,
accelerated embedded VPN, strong security infrastructure and high reliability allow it to
compare favorably in Spacenets target markets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | High
level of service availability
| | - | ----------------------------------

| | Spacenets
operations infrastructure is built and maintained to exacting standards, and is capable
of running hubs with greater than 99.99% availability and rolling out thousands of
network locations in a month. Typical service availability for Spacenets networks
is 99.8%. Spacenets Marietta earth station facility in particular is built with the
capacity to handle up to 500,000 subscribers with fully redundant emergency systems and
diverse terrestrial backhaul links.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 28 -

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---



# Spacenets Strategy

Spacenets
strategy is focused on five primary areas.

| |  | Extending
its managed services suite to provide a comprehensive network solution with greater value
to Spacenets customers. Spacenets managed network services for VSAT and
hybrid terrestrial networks is a key selling point for the company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Developing
new markets and new opportunities where its technological and services strengths have a
stronger value proposition than commodity connectivity. With the continuing price erosion
in pure connectivity and the increasing geographic reach of low-cost terrestrial
solutions which favor telco and cable incumbents, Spacenet is pioneering new markets
where VSATs in general and Spacenet in particular have strong advantages. This effort
helps us focus on productive markets with growth potential as well as higher-margin
offerings.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Bringing
to market innovative new applications and services with which to serve emerging markets.
Spacenets enterprise target markets are applications-driven, and Spacenet is
engaged in ongoing efforts to drive revenue and margin growth through delivering new
value-added applications that leverage Spacenets technology management capabilities
and increase its value proposition. Spacenet also seeks innovative methods of pricing and
packaging its enterprise services in order to meet customer needs and open new
opportunities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Expanding
sales and marketing reach through selected partnerships and new channels. Where Spacenet
is not able to deliver a best-of-breed offering on its own, it seeks to partner with
providers of industry-leading products and services to deliver a complete solution to
customers. In addition, Spacenet actively seeks to grow its base of authorized channel
partners through renewed relationships with major carriers as well as specialized
system integrators and service providers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Continuing
strong competitive presence in its existing markets. Spacenets deep penetration in
these industries is a key asset, and the company seeks to build on its successes there
and grow its revenue base.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Spacenet Sales and
Marketing

Spacenet
sells its Connexstar enterprise and government services directly as well as through a
network of more than 30 authorized enterprise channel partners. Spacenets direct
sales efforts are based in its McLean, Virginia headquarters, with field sales offices in
the Midwest, Southwest and California. Sales cycles to these key enterprise markets are
typically long (9-18 months) and complex, involving extensive pre-sales testing and
competitive bidding. Spacenet gathers leads in these target markets through a
comprehensive outreach program that includes direct marketing, public relations and media
relations, advertising, web seminars and conferences/events. In furtherance of its
strategy, Spacenet is increasingly focusing its sales and marketing efforts on opening new
markets where it has strengths and a strong value proposition.

Spacenets
subsidiary, Spacenet Government Services Inc., is dedicated to serving civilian and
military US government customers. Spacenet does not currently directly service government
organizations; instead, it typically works through established government contractors and
system integrators to form part of a complete solution.

Spacenets
StarBand residential/small office services are sold directly and through approximately 400
active residential dealers, which are typically direct-to-home (DTH) satellite TV
resellers and/or satellite Internet service resellers. In late 2005 and early 2006,
Spacenet undertook a successful program to remove non-productive dealers from the program
and boost the resources available to high-volume dealers.

- 29 -

---

---



# Spacenets Products
and Solutions

The
Connexstar service portfolio includes a broad variety of commercial-grade satellite and
hybrid terrestrial managed connectivity services. Connexstar SE, based on the SkyEdge VSAT
platform, offers full-time shared-hub services with excellent performance characteristics
(up to 2 Mbps inbound data rates), strong security and competitive pricing. Connexstar
On-Demand delivers usage-based shared-hub services designed for backup/disaster recovery
and part-time applications. Connexstar EP and enterprise solutions offer virtual
hub or complete managed private hub solutions with total customizability for large
networks. Connexstar hybrid services deliver mixed terrestrial and satellite networks
completely managed by Spacenet, including both network-level and site-level hybrids. These
Connexstar services are all provided with service level agreements or SLAs and advanced
network monitoring/reporting, and can be delivered through multiple hardware platforms
including transportable VSAT systems, ruggedized all-weather units or router-integrated
network modules. Spacenet1s StarBand services provide competitive VSAT-based internet
access packages, focusing on high-performance options for small office/home office and
small business users.

In
addition to its narrowband and broadband connectivity services, Spacenet offers a variety
of network management and application services. Spacenet provides comprehensive program
management and network implementation services to its enterprise customers, as well as
help desk, network management and field maintenance support. Spacenets SmartCare
services range from network monitoring to complete IT/network outsourcing solutions.
Spacenets Prysm services use a custom hardware and software platform to provide
firewall/security, network failover and VSAT acceleration solutions. Spacenets
SmartSource value-added services deliver first-party integrated applications including
in-store digital content, transaction support and multicast content delivery.
Spacenets enterprise connectivity and management services are offered in North
America directly by Spacenet, and internationally through Spacenets Global Services
Alliance.

In
support of its service offerings, Spacenet operates three network operation centers
(NOC)in the United States: McLean, Virginia; Chicago, Illinois and Marietta, Georgia.
Spacenets operations staff supervises network implementation and installation
quality assurance (QA); manages shared-hub and private-hub networks; provides first-level
and escalated help desk/problem resolution; manages inventory and shipping; and dispatches
field service/maintenance technicians. The Chicago NOC facility specializes in operation
of high-availability networks on legacy VSAT platforms. The Marietta NOC facility operates
the newer Connexstar and StarBand services as well as providing the first- and
second-level call center. The McLean headquarters facility provides pilot and disaster
recovery hub operations, third-tier network escalation and advanced network management
services.

# Spacenets
Competition

In
all of its markets (enterprise/government and residential/small office), Spacenet competes
with both satellite and terrestrial service providers.

Enterprise
competition. The North American enterprise WAN market is extremely competitive, with a
number of established terrestrial and VSAT providers vying for nearly all contracts. Most
of these service providers are larger than Spacenet in terms of revenue and resources, and
Spacenet must leverage all of its technical and business strengths to compete effectively.

The
United States enterprise VSAT market has traditionally been a near-duopoly of Spacenet and
Hughes Network Systems (HNS), and these two companies regularly compete head-to-head for
customer contracts. HNS has a larger market share as a service provider than does Spacenet
in North America. Service providers using VSAT platforms from ViaSat and iDirect are also
competitive in some situations. iDirect and ViaSat have been successful selling to the
government market, and represent the major source of competition in that market. Spacenet
seeks to differentiate itself on broader standards than VSAT technical capabilities and
bandwidth pricing, so elements like managed networks capability and hybrid services are
intended to diminish price pressure in the future.

- 30 -

---

---



Spacenets
primary competitors in the enterprise WAN market are large terrestrial carriers such as
AT&T, Verizon and Qwest; recently announced consolidation of these players has
strengthened their competitive positions. While private line/frame relay services once
dominated the terrestrial enterprise WAN landscape, emerging technologies are eclipsing
these platforms and increasing the degree of terrestrial competition in Spacenets
traditional markets. DSL services have decreased in price, and increased in reliability
and geographic availability over the past five years. Although these services are not
typically able to deliver the same level of reliability as private line or enterprise VSAT
solutions, DSL services (especially higher-end consumer services) are able to deliver much
lower prices and adequate services for some customers. Similarly, cable Multi-Service
Operators (MSOs) are increasing the availability of cable modem services with comparable
characteristics to DSL. To counter this competition, Spacenet began offering DSL services
in 2004 and is able to provide these services to enterprise customers. However, Spacenet
will likely not be able to match Incumbent Local Exchange Carrier (ILEC) or large
Competitive Local Exchange Carrier (CLEC) providers on pure commodity connectivity
pricing; therefore it is focusing on business where its added value can provide a
competitive advantage, such as reliability and additional value added services.

Frame
relay and private line solutions continue to be popular, as they deliver very high levels
of service availability (albeit at a generally significantly higher cost than VSAT) and
continue to be the platform of choice for customers that are willing to pay a premium for
reliability. Spacenet has adapted its stance in these accounts to position VSATs as an
additive backup/network augmentation technology as well as a potential replacement for
private line networks.

Spacenet
is carefully monitoring the development of new terrestrial wireless network technologies
such as WiMAX, GPRS and CDMA2000 Evolution Data Optimized/Evolution Data and Voice
(EVDO/EVDV) being deployed by wireless phone operators.

Residential/small
office competition. The residential/small office Internet access market is very large
and highly competitive. Because of lower prices, ILECs and MSOs deploying broadband
Internet services have effectively removed satellite broadband from competition in the
areas where DSL and cable are available. Satellite accounts for only a tiny percentage of
overall broadband subscribers in the United States (according to FCC statistics current as
of July 2005, satellite/wireless subscribers accounted for 1.48% of total broadband
users).

However,
according to MBC Research 2005 estimates, there are 10-15 million homes and businesses in
the United States without access to terrestrial broadband connectivity, which is the
addressable market for satellite Internet services. HNS DirecWay and Spacenets
StarBand were the only two significant players in this market until the mid-2005 launch of
the WildBlue service. Since then, these three services have comprised close to 100% of the
market, with StarBand accounting for approximately 10% of this market.

The
DirecWay service uses HNS VSAT terminals and standard Ku-band RF technology, and is
sold primarily through DirecTV marketing and the network of DirecTV resellers. StarBand
uses Gilats VSAT terminals with Ku-band technology, and is sold primarily through
its network of dealers/agents. The WildBlue service uses ViaSat VSAT terminals with
Ka-band RF technology, and is sold through National Rural Telecommunications Coalition
members and independent dealers. Entry of Wildblue as a new competitor for consumer
services has resulted in increased price pressures in this market.

- 31 -

---

---



# Spacenet Rural
Communications

Our
Spacenet Rural Communications business unit is a service provider for Internet, telephony
and data communications for rural communities, primarily in Latin America.

Spacenet
Rural Communications primary business is providing public telephone services to
rural areas in Latin America. In addition, this business unit provides data communication,
computer and other related services such as Internet access, telecenters and remote
learning centers. Spacenet Rural Communications also provides VSAT services, such as hub
operation, dedicated network services and shared hub services. These typically utilize the
infrastructure of existing rural telecom projects and leverage experience from these
operations.

# Customers and Markets
 Spacenet Rural Communications

Public Rural Telecom
Services

In
a large number of remote, rural and semi urban 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 are able to 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, such as electricity. A proportion of the VSATs
are typically required to be powered by solar energy, without any reliance on existing
power infrastructure. Lastly, VSATs deliver reliable service, seldom require maintenance
and repair is relatively simple.

As
a result of the above advantages, there is a demand for VSAT-based bundled services of
fixed telephony and Internet access. This market consists primarily of government
subsidized projects and projects deployed by public telephone operators that need to
fulfill Universal Service Obligations (USO) worldwide. 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. Examples of rural
telecom government customers include Compartel in Colombia and FITEL in Peru.

VSAT services to Public
Telephony Operators (PTO)

In
some markets, existing PTOs are mandated by the government to provide universal services.
Providing these services in remote areas is a challenge to these PTOs, and they typically
outsource these services to rural telecom service providers. The exact nature of these
outsourcing projects varies, but they are typically of a Build and Transfer
model or a Build, Operate and Transfer model. In the first option the PTO
requires a fully functional and operating network to be provided. In the second option,
Spacenet Rural Communications builds the network, operates it for a certain period of time
and then transfers a fully operational network to the PTO. An example of a Spacenet Rural
Communication PTO customer, is Cable & Wireless in Panama.

Commercial enterprise and
government agencies

Spacenet
Rural Communications also provides private network services to large companies or
government agencies. These customers contract directly with Spacenet Rural Communications
for VSAT equipment and associated network services to be deployed at customer locations
(which may or may not include installation and maintenance), typically for a contract term
of 36-60 months. Spacenet Rural Communications also resells managed terrestrial
connectivity equipment and services from facilities-based Local Exchange Carrier (LEC)
partners. Customers include Venezuela  CNE (Electoral Nacional Council) and Banco de
la Nacion in Peru.

- 32 -

---

---



# Strengths of Spacenet
Rural Communications

Spacenet
Rural Communications has consistently aimed to achieve and sustain competitive advantages
by:

| |  | Becoming
a leading public rural telecom service provider
| | - | --------------------------------------------------------

| | Spacenet
Rural Communcations operates one of the largest rural telephony networks in the world.
Its large network size (over 18,000 VSATs) enables it to enjoy efficiencies as a result
of economies of scale.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Utilizing
Gilats advanced technology and innovation
| | - | ----------------------------------------------------

| | Spacenet
Rural Communications uses Gilats VSAT equipment, which has been designed for rural
telecommunications services with very efficient operation. Its legacy networks are based
on DialAw@y IP while its newer networks are based on the SkyEdge product family. These
solutions have been designed for toll quality voice over satellite links, based on
advanced voice compression, mesh topologies and access schemes optimal for voice
services. In addition, the technology is designed to work efficiently with solar energy.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Focusing
the business model on rural telecom services
| | - | -----------------------------------------------------

| | Standard
telecom business models are extremely challenged by the business environment of rural
telecom services. Our focus on public rural telecom services has enabled us to overcome
these challenges: (i) fixed-subsidy projects mandate high operational efficiencies; (ii)
end-customer usage is typically low in the initial period of deployment as a result of
both cultural and economic factors, which mandates relatively long return on investment
which Spacenet Rural Communications factors into its business model; (iii) some of the
revenues are generated from interconnection charges, which requires it to carefully
monitor and manage both our agreements with other operators and collection; (iv) payment
collection from end-users is difficult and expensive, and as such, it has implemented
pre-paid solutions; (v) regulatory and interconnection standards which do not
differentiate between urban and rural areas.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Benefiting
from experience in operating communications services in rural areas.
| | - | -------------------------------------------------------------------------------

| | Spacenet
Rural Communications has a solid business experience in operating, deploying, maintaining
and billing rural public communications networks. This experience stems from ongoing
operational projects in Peru, Colombia and Panama. The ability to efficiently offer
public rural telecom is an important factor for Spacenet Rural Communications success.
 The business units senior management team averages over 7 years of experience in
the satellite communications industry and is supported by approximately 25 experienced
engineers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Providing
Excellence in Logistics, Support & Customer Services
| | - | --------------------------------------------------------------

| | Spacenet
Rural Communications experience includes mobilizing large amounts of equipment to remote
areas, as well as installing and commissioning this equipment. It has managed up to
approximately 300 rural installations per day and has developed tools to optimize
installation and commissioning and optimize installation routes utilizing geo-referential
tools.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 33 -

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---



# Strategy

Spacenet
Rural Communications intends to strengthen its business and grow using the following
strategy:

| |  | Continue
to focus its service development and marketing efforts on the government-funded public
rural telecom                   market;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | Identify
public telecom operators with a need to fulfill their USO and offer them a Build,
Transfer & Operate solution;
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | Leverage
existing government subsidized networks which are operated by it to sell additional
services in the private sector to enterprise and SOHO customers.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Leverage
GNS sales and marketing expertise with specific terrestrial public service providers by
offering outsourcing public communication services by Spacenet Rural Communications.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Sales and marketing

Spacenet
Rural Communications uses direct sales channels to market its services. It sales team is
comprised of account managers and sales engineers, who are the primary account interfaces
and work to establish account relationships and determine technical and business demands.
There are a small number of identified government subsidized projects and USO deals in any
given year and in Latin America in particular. The sales team spends anywhere from 6 to 12
months on the preparation of proposals for these projects. Some of the larger government
bids in Latin America include service provision for up to ten years.

- 34 -

---

---



# Products and Solutions

Public
Rural Telecom Services

In
countries in which Spacenet Rural Communications operates its own rural telephony and
Internet networks, the services are sold to the local population, either directly or
indirectly through resellers. The services rendered to the population are usage of public
phones in order to make local, national and international calls and calls to cellular
networks, and Internet access, or per usage for peripheral equipment such as printers and
scanners. Spacenet Rural Communications predominantly sells its products pre-paid, so as
to minimize the potential negative impact of unsuccessful collection.

VSAT
Services

Spacenet
Rural Communications VSAT service portfolio includes a variety of commercial-grade
satellite service based on the SkyEdge VSAT platform. This platform offers full-time,
shared-hub services with excellent performance characteristics (up to 2 Mbps inbound data
rates), strong security and competitive pricing. Its services are all provided with
service level agreements (SLAs) and advanced network monitoring/reporting, and can be
delivered through multiple hardware platforms including transportable VSAT systems,
ruggedized all-weather units or router-integrated network modules.

Spacenet
Rural Communications also offers a variety of network management and application services.
It provides comprehensive program management and network implementation services to its
enterprise customers, as well as help desk, network management and field maintenance
support.

BT
and BOT projects

Spacenet
Rural Communications offers a variety of Build and Transfer and Build,
Operate and Transfer projects. These include full network design, installation,
commissioning and operations. Some projects include a period where it operates the network
and receive revenues directly from the end customers, or it may operate and receive
revenues from the network owner, typically a PTO. These projects may also be extended by
additional periods for operation of the VSAT network.

# Competition

Public
Rural Telecom Services

As
a public rural telecom operator, Spacenet Rural Communications typically encounters
competition from various service providers, system integrators and consortiums that offer
competitive bids. Some of these are based on VSAT technology (either based on Gilat VSATs
or based on competitive VSATs), some on terrestrial technology (typically Cellular, WLL,
WiMAX or WiFi) and some on hybrid solutions with both satellite and terrestrial
technology. We believe that Spacenet Rural Communications operational experience and
Gilat technology give it a technological advantage in some of these tenders. In its
operation stage, Spacenet Rural Communications encounters increased competition from
terrestrial technologies, especially Cellular and WiMAX service providers.

VSAT
Services

The
Latin American WAN market is competitive, with a number of established terrestrial and
VSAT providers vying for nearly all contracts. Some of these service providers are larger
than Spacenet Rural Communications in terms of revenue and resources, and it must leverage
all of its technical and business strengths to compete effectively. The economies of scale
we enjoy from our public rural telecom services has advantages over some of our
competitors and can enable us to offer lower priced service.

- 35 -

---

---



# 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 and includes countries in which revenues exceeded 10% in
any of the reporting years:

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

(1)
          Includes revenues from related parties of 4.0%, and 1.2% and 0.8% for the years
          ended December 31, 2003, 2004 and 2005, respectively.

# Strategic Alliances,
Joint Ventures and Acquisitions

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

Spacenet
Inc. In December 1998, we acquired Spacenet Inc., a company engaged in providing
VSAT-based network services, from SES Americom (formerly known as GE Americom) and certain
affiliates.

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

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

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

- 36 -

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Deterministic
Networks Inc. In July 2000, we acquired all of the shares of Deterministic Networks,
Inc. (Deterministic), a privately held company based in California.
Deterministic is a supplier of policy-based networking products and toolkits to several
major technology companies, providing quality of service, network management and Internet
security capabilities that enhance the products and services of its customers. In
September, 2005 we sold our ownership in this California-based subsidiary for an
immaterial amount.

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

In
December 2003, we entered into an agreement with certain rStar stockholders to acquire an
additional 9.3% of rStars shares for $0.60 per share. In April 2004, immediately
following such transaction, we effected a short-form merger and acquired the shares held
by all other rStar stockholders. rStar is a holding company for most of our service
entities in Latin America.

Satlynx
S.A. In April 2002, together with SES Global SA (formerly known as SES Finance SA), we
announced the formation of a new company that provides two-way satellite broadband
communications services to enterprises, consumers and SOHO users throughout Europe. We and
SES Global contributed cash and in kind contributions, which included existing facilities,
transponder capacity, hubs, terminals, other technology and technical as well as marketing
assistance. Gilat transferred six of its European subsidiaries (in Italy, Germany, the
Czech Republic, England, Holland and France). As a result, substantially all of the
service-providing business of Gilat in Europe was transferred to this joint venture. The
transaction between Gilat and SES Global was completed on May 24, 2002. In June 2003, and
in March 2004, Alcatel Space and Skybridge (Alcatel subsidiaries) invested cash and
in-kind contributions in Satlynx. Subsequent to these transactions, we held approximately
40.6% of Satlynxs issued shares. In April, 2005, following a restructuring of
Satlynxs obligations our holdings were reduced to 17%. In December 2005, following a
conversion by SES of loans provided to Satlynx into Satlynx shares, our shareholdings were
further reduced to less than 1%. Please see Significant Changes.

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# Backlog

The
2005 year-end backlog for equipment sales and revenues from multi-year service contracts
for our VSAT products was approximately $206 million, up from approximately $191 million
at the year-end 2004. Backlog does not include revenues from future traffic on our rural
networks, future revenues from subscribers from our consumer and enterprise operation and
other cancelable agreements. Backlog is not necessarily indicative of future sales. Many
of our contracts can be terminated at the convenience of the customer. In addition, some
of our contracts may include product specifications that require us to complete additional
product development. Any inability to meet the specifications or complete the product
development could lead to a termination of the related contract.

# Patents and Intellectual
Property

We
currently rely on a combination of patent, trade secret, copyright and trademark law,
together with non-disclosure agreements and technical measures, to establish and protect
proprietary rights in our products. Our patent portfolio includes 55 patents issued (24
U.S. and 31 foreign patents), 12 U.S. patent applications pending and 13 foreign
applications pending. All of the patents and applications that were developed and/or owned
by our subsidiaries have been formally transferred to the parent company and are now
controlled by us. In addition, we have filed patent applications with respect to our
SkyEdge family of products, as well as patents concerning a range of other inventions. As
part of our patent program, Gilat intends to file additional patent applications on an
ongoing basis.

We
believe that our patents are important to our business. We also believe that the
improvement of existing products, reliance upon trade secrets and unpatented proprietary
know-how as well as the development of new products are generally as important as patent
protection in establishing and maintaining a competitive advantage. We believe that the
value of our products is dependent upon our proprietary software and hardware remaining
trade secrets or subject to copyright protection. Generally, we enter into
non-disclosure and invention assignment agreements with our employees, subcontractors and
certain customers and other business partners. However, we cannot assure that our
proprietary technology will remain a trade secret or that others will not develop a
similar technology or use such technology in products competitive with those offered by
us.

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

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

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# Government Regulation

# Regulatory Overview

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

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

# United States Regulation

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

# International Regulation

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

# Trade Agreements

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

Israel
and the European Union concluded a Free Trade Agreement in July 1975 that confers certain
advantages with respect to Israeli exports to most European countries and obligates Israel
to lower its tariffs with respect to imports from these countries over a number of years.
In June 2000, Israel was admitted as an Associate Member of the European Union. In 1985,
Israel and the United States entered into an agreement to establish a Free Trade Area that
has eliminated all tariff and certain non-tariff barriers on most trade between the two
countries. On January 1, 1993, Israel and the European Free Trade Association, or EFTA,
entered into an agreement establishing a free-trade zone between Israel and the EFTA
nations. In recent years, Israel has established commercial and trade relations with a
number of other nations, (including Russia, the Peoples Republic of China, India and
nations in Eastern Europe and Asia), with which Israel had not previously had such
relations.

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# Our significant
subsidiaries

We
own a number of subsidiaries and affiliated companies that provide marketing and sales
support, sell our VSAT products or provide related services. The following table sets
forth our significant subsidiaries, as of March 15, 2006:

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

# Property and Equipment

Our
products are primarily designed, assembled, manufactured and tested at our facility in
Petah Tikva, Israel. The net book value of the facilities in Petah Tikva is $67.7 million.

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

We
have network operations centers at 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. The network operations centers
allow us to perform diagnostic procedures on customer networks and to reconfigure networks
to alter data speeds, change frequencies and provide additional bandwidth.

Our
offices in McLean, Virginia comprise approximately 137,000 square feet, portions of which
we sublease, such that our current monthly rental cost is approximately $318,120. These
offices house our personnel and also contain one of our U.S. shared hub centers. In June
2000, we purchased the land and building facilities used by Spacenet Inc. for a purchase
price of approximately $24.3 million. In March 2001, we sold these premises for
approximately $31.5 million (net of related costs of approximately $1.5 million) and
entered into a 15-year lease for this space, at an initial annual rent of approximately
$3.7 million. In addition, we lease additional office space in McLean comprising
approximately 42,500 square feet at a monthly rental of approximately $61,000. We also
maintain space in Marietta, Georgia, Chicago, Illinois and Houston, Texas for sales and
operations.

In
2000 and 2002, we purchased and developed facilities on approximately 140,400 square feet
of land in Backnang, Germany, for approximately $13 million. In June 2001, we entered into
a mortgage and loan agreement with a German bank, secured by our Backnang facilities. The
mortgage is for approximately Euro 5.2 million, of which (i) approximately one-fifth bears
interest at 5.86% and is repayable over 5 years commencing July 2001 and (ii)
approximately four-fifths bears interest at 6.3% and is repayable quarterly over 20 years
commencing July 2006. Since May, 2002, these facilities are leased to Satlynx.

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

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

Not
applicable.

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

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

# Introduction

We
are a leading provider of products and services for satellite-based communications
networks. During the years ended December 31, 2003 and 2004, we operated under a single
reportable business segment. As of January 2005, we changed our business reporting to
reflect operation under two business units: Gilat Network Systems, or GNS, and Spacenet.
During the third quarter of 2005, we further modified our segment reporting by dividing
the Spacenet segment into two segments, and our Companys 2005 financial statements
reflect operation under three business units:

(i)
          Gilat Network Systems, a provider of network systems and associated
professional           services to service providers and operators; (ii) Spacenet, which
provides           managed services of data for enterprises, businesses and internet
connectivity           for consumers, primarily in the United States; and (iii) Spacenet
Rural           Communications, which provides telephone and internet access as an
operator of           networks in rural communities, primarily in Latin America.

Our
reportable segments are differentiated by whether the nature of the transaction is
dominated by an equipment sale, a GNS transaction, by the operation of an enterprise or
consumer network, a Spacenet Inc. transaction or by the operation of a rural network in
Latin America, a Spacenet Rural Communications transaction. Each of the segments is
managed separately. For more detail, please see Item 4: Information on the Company,
Our Services Segments  Spacenet Inc. and Spacenet Rural Communications

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

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 a specific exchange rate for each
transaction. The resulting translation adjustments are reported as a component of
shareholders equity in accumulated other comprehensive income (loss).

# Critical Accounting
Policies and Estimates

The
preparation of the financial information in conformity with generally accepted accounting
principles requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, mainly related to
account receivables, inventories, deferred charges, long-lived assets, restructuring
charges, revenues 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 under
different assumptions or conditions.

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

Revenues.           A
significant portion of our revenues is derived from the sale of products and
          services for satellite-based communications networks. Sale of products includes
          mainly the sale of VSATs and hubs. Services revenues include access to
and           communication via satellites (space segment), installation of
          network equipment, telephony services, internet services, consulting, on-line
          network monitoring, network maintenance and repair services. We sell our
          products primarily through a direct sales force and indirectly through
          resellers. Sales consummated by our sales force and sales to resellers are
          considered sales to end-users.

Revenues
from product sales are recognized when delivery has occurred, persuasive evidence of an
agreement exists, the vendors fee is fixed or determinable, no further obligation
exists and collectability is probable. We do not grant rights of return. Service revenues
are recognized ratably over the contractual period or as services are performed.

We
record a significant amount of revenue from arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. A multiple-element
arrangement is separated into more than one unit of accounting if the functionality of the
delivered element(s) is not dependent on the undelivered element(s), there is
vendor-specific objective evidence, or 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 VSOE.

Revenues
from products under sales-type-lease contracts are recognized upon installation or upon
shipment, in cases where the customer obtains its own or others installation services. The
net investments in sales-type-leases are discounted at the interest rates implicit in the
leases. The present values of payments due under sales-type-lease contracts are recorded
as revenues at the time of shipment or installation, as appropriate. Future interest
income is deferred and recognized over the related lease term as financial income.

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

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 or
over the term of the contract. At each balance sheet date, we evaluate our inventory
balance for excess quantities and obsolescence. This evaluation includes an analysis of
sales levels by product and projections of future demand. In addition, we write off
inventories that are considered obsolete. Remaining inventory balances are adjusted to the
lower of cost or market value. If future demand for our old or new products or market
conditions are less favorable than our projections, inventory write-offs may be required
and would be reflected in cost of revenues for such period.

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

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

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

Our
long-lived assets are reviewed for impairment annually and whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of the assets to the future undiscounted cash flows expected to be generated by the
assets. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. In measuring the recoverability of assets, we are required to make
estimates and judgments in assessing our five year forecast and cash flows, which is the
estimated useful life of our current primary asset, and compare that with the carrying
amount of the assets. Additional significant estimates used by management in the
methodologies used to assess the recoverability of our long-lived assets include estimates
of future short-term and long-term growth rates, market acceptance of products and
services, our success in wining bids and other judgmental assumptions, which are also
affected by factors detailed in our risk factors section in this annual report. If these
estimates or the related assumptions change in the future, we may be required to record
impairment charges for our long-lived assets.

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

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

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

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

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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 for such proceedings is prescribed by the
Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies (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 5, accruals for
exposures or contingencies are being provided when the expected outcome is probable. 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.

# Restructuring Charges,
Write-Offs and Other Significant Changes

The
following disclosure provides in-depth background for each financial year which will
enable a better analysis of our financial condition and results of operations.

2003.           In
October 2002, we commenced an arrangement to restructure our debt with           holders
of our convertible bonds, bank lenders and other creditors, which was
          successfully completed in March 2003. In 2003, our financial weakness in the
          early part of the year continued to impact our orders globally and in
particular           in the United States. At that time, our management went through
significant           change, with the resignation of our CEO and President (founders of
our company)           and the resignation of the CEO of Spacenet Inc. On April 15, 2003,
our           shareholders elected an almost entirely new board of directors and Chief
          Executive Officer and President. Also, during 2003, our COO, CFO, and other
          members of senior management resigned. In June 2003, new management imposed an
          additional set of lay-offs and budget cuts and embarked on an effort to
          streamline our operations in order to increase efficiency and reduce costs.
This           effort included a variety of measures including organizational and
structural           changes and office consolidation as well as the involuntary
termination of 88           employees worldwide. The reductions have resulted in a
decrease in annual           expenses of approximately $16 million. In November 2003, we
concluded an           exchange offer pursuant to which the majority of the holders of
our new notes           (that were issued in March 2003 as partial consideration for the
exchange of           $350 million of 4.25% convertible subordinated notes) converted
their new notes           into equity. As a result of all of the above factors, we
recorded the following           charges in 2003:

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

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

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

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

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| |  | In
light of managements decision to dispose of our Servicio Satelital S.A. subsidiary
in Argentina we recorded an impairment of approximately $3.2 million, which is recorded
as an impairment of tangible and intangible assets. This entity was sold in 2004 (please
see reference below).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| |  | Bank
Hapoalim. Of the $102 million we owed Bank Hapoalim (i) $25.5 million was converted into
924,430 Shares; (ii) $5.1 million was converted into new notes of the same principal
amount; and (iii) the remaining debt of $71.4 million remained as a loan with revised
terms. For the repayment terms of this loan, please see details of the further revisions
to this loan described in 2004 and 2005 below.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Israel
Discount Bank Ltd.  In March 2003, Israel Discount Bank Ltd. agreed to continue to
provide its                performance guarantees for our benefit in the amount of up to
$13.2 million for at least one year.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

In
March 2003, we finalized the financial restructuring arrangement described above. As a
result, we reduced our principal debt by approximately $309 million, which included $12
million of accrued interest. The arrangement significantly increased our
shareholders equity, reduced our debt and reduced our financing costs. We recorded
an increase in our shareholder capital in the amount of $55.2 million (net of expenses in
the amount of $2.8 million) and a gain of approximately $185.6 million (net of related
expenses in the amount of approximately $11.9 million) and $5.7 million in tax expenses.
The related expenses included settlement payments to outgoing management in the amount of
$2.4 million and debenture issuance expenses in the amount of $4.1 million.

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

- 45 -

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

2004.

In
November 2003, upon StarBands emergence from Chapter 11, we determined that we did
not control StarBand since we did not hold the majority of its voting interest and could
not gain control in any other way over such company. In the first quarter of 2004, we
evaluated the applicability of FIN 46 on our investment in StarBand. Fin 46 requires
consideration and estimates of a significant number of possible future outcomes of the
Variable Interest Entity, or a VIE, as well as the probability that each of the outcomes
will occur. The results of each possible outcome are allocated to the parties holding
interests in the VIE and a calculation is performed to determine which party, if any, has
a majority of potential negative outcome (expected losses) or a majority of the potential
positive outcomes (expected residual returns). That party, if any, is the VIEs
primary beneficiary and is required to consolidate the VIE.

As
of January 1, 2004, we analyzed whether StarBand was able to finance its activities
without additional subordinated financial support from other parties and concluded that
the equity investment at risk was not greater than the expected losses of the entity.
Accordingly we concluded that StarBand is a VIE. Through our analysis, we concluded that
we were the primary beneficiary of StarBand, and as such, we consolidated StarBand into
our consolidated financial statements.

In
addition, we analyzed whether Satlynx could finance its activities without additional
financial support from other parties and concluded that the equity investment at risk was
not greater than the expected losses of the entity. Accordingly, we believed that Satlynx
is a VIE. As such, we performed an analysis and concluded that we did not absorb the
majority of Satlynxs expected losses and we would not receive the majority of the
residual return. Accordingly, we believed that we were not the primary beneficiary of
Satlynx, and therefore Satlynx was not consolidated into our consolidated financial
statements. In addition, we have not provided any undertaking or commitment to finance the
losses of Satlynx. For more details, see 2005".

In
April 2004, we further revised the terms of our loan from Bank Hapoalim, to whom we owed a
principal debt amount of $71.4 million. As part of this amendment, we granted Bank
Hapoalim a right to receive a warrant or warrants for the purchase of our ordinary shares.
The maximum exercise amount to be paid under the warrant is equal to the then-outstanding
balance on the loan due by us. The modification of the loan terms was accounted for as a
debt extinguishment due to the addition of a conversion option to the debt instrument
which was considered substantial. The fair value of the amended loan was recorded, and the
book value of the old loan was removed from our financial statements. Since Bank Hapoalim
is a related party, the extinguishment gain of approximately $15.5 million was recorded as
an equity contribution. For the repayment terms of this loan and current warrant
information, please see details of the further revisions to this loan described in
2005 below.

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

- 46 -

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In
June 2004, our then CEO and President resigned and was replaced by Mr. Shlomo Rodav who
served as CEO and Chairman of the Board of Directors until July 2005.

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

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

2005.

At
the beginning of 2005, we purchased the minority shares of StarBand for $ 0.6 million and
consolidated the operation of this entity with Spacenet Inc.

In
addition, during 2005, our holding in Satlynx was diluted to 0.17% from 41.6% at the end
of 2004. For information about our further dilution in Satlynx, please see Item 8:
Significant Changes.

We
also sold our 100% ownership in Deterministic Networks Inc., a California-based
subsidiary, for an immaterial amount. We recorded a capital loss of $0.2 million
associated with this transaction.

In
July 2005, Bank Hapoalim assigned our outstanding loan to York Capital Management Ltd. As
part of that transaction, Bank Hapoalim and an additional shareholder, Mivtach Shamir,
granted a proxy to York to vote a portion of their shares in our Company. Following the
assignment and the related transactions, York is considered a related party. At that time,
six out of seven of our board members resigned and were replaced by new board members. In
addition, our CEO and chairman of the board resigned and was replaced by our co-founder
Amiram Levinberg. For more details, please see Item 7: Major Shareholders and
Related Party Transactions.

In
December 2005, we again revised the terms of the loan with Bank Hapoalim (now assigned to
York). Under the amendment, York agreed to defer $19.35 million of principal payments due
in installments from January 5, 2006 through January 1, 2008. The new payment schedule
provides that: (i) no principal payments will be due in 2006, 2007 or January 2008 (with
those payments being deferred until July 2012) (ii) approximately $4.5 million will be
paid on July 1, 2008; (iii) approximately $9 million will be paid in semi-annual
installments on January 1 and July 1 of 2009, 2010 and 2011; and (iv) approximately $39
million will be paid in 2012.

- 47 -

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In
consideration for the above, we agreed to revise the terms of the warrant issuable to York
(formerly issuable to Bank Hapoalim) for the period until September 30, 2006. During this
period, the exercise price of the warrant is $6.75 per share. In addition, during this
period we have been granted the right to require the conversion of the outstanding loan
from York at $6.75 in the event that our average closing share price of our ordinary
shares as published by NASDAQ over twenty consecutive trading days will exceed $9.00, or
the Triggering Price, provided that the aggregate trading volume during this twenty day
period is a minimum of 1,700,000 ordinary shares. Beginning October 1, 2006, the exercise
price of the warrant will revert to the original terms, which is equal to the average
closing sale price of our shares, as published by the NASDAQ Stock Market over the thirty
(30) consecutive trading days immediately preceding the day of the notice of exercise by
the warrant holder plus 1%, however, in no event shall the per share price be less than
$7.50 or in excess of $40.00. In addition, in the event that in the three-year period in
which York can request the issuance of the warrant, we complete a private placement
investment by a third party in Gilat for an amount which exceeds $20 million, we are
required to enable the holder of the warrant to exercise such warrant based on the same
price offered in the private placement. Once issued to a holder, the warrant is
exercisable for a thirty-day period only. The warrant can be issued at any time at the
request of York between July 1, 2004 and June 30, 2007. As set forth in the loan
agreement, the proceeds payable to Gilat from the exercise of a warrant will be applied to
reduce all future installments of the principal due to York, on a pro-rata basis.

The
following provides information about our business during 2003, 2004 and 2005. The
information is presented as if our business was operating under the new business segments
since 2003. The financial information was extracted, from a practical prospective, from
the consolidated results reported for those years.

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

# Revenues:

|               | 2005 | 2004 | % | 2005    | 2004
|-------------- | ---- | ---- | - | ------- | ----
|
|
|
|
|Spacenet Inc.  |      |      |   |         |     
|Equipment      |      |      |   | 15,424  |     
|Services       |      |      |   | 70,772  |     
|               |      |      |   |         |     
|               |      |      |   | 86,196  |     
|               |      |      |   |         |     
|Spacenet Rural |      |     
|Equipment      |      |      |   | 4,666   |     
|Services       |      |      |   | 35,891  |     
|               |      |      |   |         |     
|               |      |      |   | 40,557  |     
|               |      |      |   |         |     
|GNS            |      |     
|Equipment      |      |      |   | 68,615  |     
|Services       |      |      |   | 14,027  |     
|               |      |      |   |         |     
|               |      |      |   | 82,642  |     
|               |      |      |   |         |     
|               |      |     
|Total          |      |     
|Equipment      |      |      |   | 88,705  |     
|Services       |      |      |   | 120,690 |     
|               |      |      |   |         |     
|Total revenues |      |      |   | 209,395 |     
|               |      |      |   |         |     

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

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Gross
profit:

|                   | 2005 | 2004 | 2005 | 2004  
|------------------ | ---- | ---- | ---- | ------
|
|
|
|
|Spacenet Inc.      |      |      |      |       
|Equipment          |      |      |      | 1,404 
|Services           |      |      |      | 11,457
|                   |      |      |      |       
|                   |      |      |      | 12,861
|                   |      |      |      |       
|Spacenet Rural     |      |     
|Equipment          |      |      |      | 3,913 
|Services           |      |      |      | 4,257 
|                   |      |      |      |       
|                   |      |      |      | 8,170 
|                   |      |      |      |       
|GNS                |      |     
|Equipment          |      |      |      | 36,306
|Services           |      |      |      | 7,173 
|                   |      |      |      |       
|                   |      |      |      | 43,479
|                   |      |      |      |       
|                   |      |     
|Consolidation      |      |      |      | 11,666
|                   |      |      |      |       
|                   |      |     
|Total Gross Profit |      |      |      | 76,176
|                   |      |      |      |       

The
increase in our gross profit margin from 31.9% in 2004 to 36.4% in 2005 can be attributed
mainly to the following factors: (i) reduced operating expenses in our Spacenet Inc.
operations, mainly relating to lower space segment expenses, the operational merger of
StarBand and Spacenet Inc. and lower depreciation and amortization expenses, ; (ii) in
Spacenet Rural Communications, since the GESAC project embedded a very low margin, the
shut down of its operation, increased our services gross margin; (iii) in our GNS segment,
we experienced higher profit margins and decreased wages and overhead costs due to a
reduction in headcount worldwide in 2005 and (iv) also in GNS, in 2004, we wrote off $2
million of excess inventory in GNS as part of our cost of goods sold compared to
approximately $0.5 million in 2005.

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

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# Research and Development
Expenses:

|                  | 2005 | 2004 | % | 2005   | 2004
|----------------- | ---- | ---- | - | ------ | ----
|
|
|
|
|Spacenet Inc.     |      |      |   |        |     
|Expenses incurred |      |      |   | -      |     
|Less - grants     |      |      |   | -      |     
|                  |      |      |   |        |     
|Total Spacenet    |      |      |   | -      |     
|                  |      |      |   |        |     
|                  |      |     
|GNS               |      |     
|Expenses incurred |      |      |   | 16,944 |     
|Less - grants     |      |      |   | 2,950  |     
|                  |      |      |   |        |     
|Total GNS         |      |      |   | 13,994 |     
|                  |      |      |   |        |     
|                  |      |     
|Total             |      |      |   | 13,994 |     
|                  |      |      |   |        |     

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

# Selling, Marketing,
General and Administrative Expenses

|               | 2005 | 2004 | % | 2005   | 2004
|-------------- | ---- | ---- | - | ------ | ----
|
|
|
|
|Spacenet Inc.  |      |      |   | 21,161 |     
|Spacenet Rural |      |      |   | 8,343  |     
|GNS            |      |      |   | 31,290 |     
|               |      |      |   |        |     
|Total          |      |      |   | 60,794 |     
|               |      |      |   |        |     

Selling,
marketing, general and administrative expenses decreased in 2005 by $9.1 million. The
decrease can be attributed mainly to (i) given that overall sales in 2005 were reduced,
selling expenses related thereto were also reduced by approximately $4.5 million; (ii) a
reduction in depreciation and amortization expenses of approximately $1.4 million; (iii)
the completion of the GESAC project resulted in  layoffs and reduced expenses in an
amount of approximately of $1.2 million; (iv) a reduction of lease expenses in an amount
of $1.2 million due to increased subleasing of our premises in Israel and additional
reduced expenses due to having closed or reduced the size of certain regional offices; and
(v) legal expenses of $0.5 million incurred in 2004 in connection with the emergence of
StarBand from Chapter 11.

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

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

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

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

# Revenues:

|               | 2004 | 2003 | % | 2004    | 2003
|-------------- | ---- | ---- | - | ------- | ----
|
|
|
|
|Spacenet Inc.  |      |      |   |         |     
|Equipment      |      |      |   | 15,821  |     
|Services       |      |      |   | 72,994  |     
|               |      |      |   |         |     
|               |      |      |   | 88,815  |     
|               |      |      |   |         |     
|Spacenet Rural |      |     
|Equipment      |      |      |   | 1,711   |     
|Services       |      |      |   | 50,532  |     
|               |      |      |   |         |     
|               |      |      |   | 52,243  |     
|               |      |      |   |         |     
|GNS            |      |     
|Equipment      |      |      |   | 82,590  |     
|Services       |      |      |   | 17,850  |     
|               |      |      |   |         |     
|               |      |      |   | 100,440 |     
|               |      |      |   |         |     
|               |      |     
|Total          |      |     
|Equipment      |      |      |   | 100,122 |     
|Services       |      |      |   | 141,376 |     
|               |      |      |   |         |     
|Total revenues |      |      |   | 241,498 |     
|               |      |      |   |         |     

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

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# Gross profit:

|                   | 2004 | 2003 | 2004 | 2003  
|------------------ | ---- | ---- | ---- | ------
|
|
|
|
|Spacenet Inc.      |      |      |      |       
|Equipment          |      |      |      | 438   
|Services           |      |      |      | 9,899 
|                   |      |      |      |       
|                   |      |      |      | 10,337
|                   |      |      |      |       
|Spacenet Rural     |      |     
|Equipment          |      |      |      | 477   
|Services           |      |      |      | 1,568 
|                   |      |      |      |       
|                   |      |      |      | 2,045 
|                   |      |      |      |       
|GNS                |      |     
|Equipment          |      |      |      | 39,649
|Services           |      |      |      | 9,366 
|                   |      |      |      |       
|                   |      |      |      | 49,015
|                   |      |      |      |       
|                   |      |     
|Consolidation      |      |      |      | 15,706
|                   |      |      |      |       
|                   |      |     
|Total Gross Profit |      |      |      | 77,103
|                   |      |      |      |       

The
increase in our gross profit margin in 2004 can be attributed to the following factors:
(i) an increase in gross profits from our rural operations, primarily due to the
implementation of the Compartel project and better efficiency in the maintenance of our
network operations; (ii) in our GNS segment, higher profit margins in 2004 than in past
years and a decrease in the amount of inventory write-offs from approximately $6.4 million
in 2003 to approximately $2.0 million in 2004; and (iii) cost reductions attributed to the
implementation of our restructuring plan in June 2003 which led to a decrease in personal
and other related expenses in all of our segments. When reported by segment, Spacenet Inc.
and Spacenet Rural Communication results are presented based upon transfer prices. The
consolidation line reflects the effect of unrealized profits derived from the transactions
between GNS, Spacenet, and Spacenet Rural Communications in order to adjust the transfer
price to Gilats cost.

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

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# Research and Development
Expenses:

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

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

# Selling, Marketing,
General and Administrative Expenses

|               | 2004 | 2003 | % | 2004   | 2003
|-------------- | ---- | ---- | - | ------ | ----
|
|
|
|
|Spacenet Inc.  |      |      |   | 20,762 |     
|Spacenet Rural |      |      |   | 12,810 |     
|GNS            |      |      |   | 36,319 |     
|               |      |      |   |        |     
|Total          |      |      |   | 69,891 |     
|               |      |      |   |        |     

Selling,
marketing, general and administrative expenses decreased in 2004 by $3.2 million. The
decrease can be attributed mainly to overall staff reductions which led to a decrease in
the salaries and related expenses in the amount of approximately $3.5 million, reduced
depreciation and amortization expenses of approximately $1.4 million, reduced professional
fees and legal claims of approximately $2.5 million and the going-private of rStar which
reduced fees associated with being a public company including directors and officers
insurance, on-going public filing fees by approximately $1.0 million and lower levels of
write-offs of doubtful accounts of approximately $0.7 million.. The decrease was offset by
the consolidation of StarBand, in the amount of approximately $5.8 million and by lower
levels of write offs of doubtful accounts in the amount of approximately $0.7 million.

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

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

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

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

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

# Variability of Quarterly
Operating Results

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

Annual
and quarterly fluctuations in our results of operations may be caused by the timing and
composition of orders by our customers and the timing of our ability to recognize
revenues. Our future results also may be affected by a number of factors, including our
ability to continue to develop, introduce and deliver new and enhanced products on a
timely basis and expand into new product offerings at competitive prices, to anticipate
effectively customer demands and to manage future inventory levels in line with
anticipated demand. Our results may also be affected by currency exchange rate
fluctuations and economic conditions in the geographical areas in which we operate. In
addition, our revenues may vary significantly from quarter to quarter as a result of,
among other factors, the timing of new product announcements and releases by our
competitors and us. We can not be certain that revenues, gross profit and net income (or
loss) in any particular quarter will not be 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 is 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. While we are likely to seek additional sources of funding for our operations
through bank lenders or equity financing, we believe that we have sufficient funds to
operate our business in 2006 and 2007. Thereafter, if we do not have available sufficient
cash to finance our operations, we may be required to obtain additional debt or equity
financing. We cannot be certain that we will be able to obtain, if required, additional
financing on acceptable terms, or at all. If we are to raise additional funding through an
equity investment, any such transaction will dilute the holdings of our present
shareholders.

- 55 -

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As
of December 31, 2005, we had cash and cash equivalents of $74.9 million, short-term bank
deposit of $3.3 million, short-term and long-term restricted cash of $22.5 million,
short-term and long-term restricted cash held in trustees accounts of $20.3 million
and short-term bank credit of $8.2 million. As of December 31, 2004, we had cash and cash
equivalents of $75.8 million, short-term and long-term restricted cash of $21.7 million,
restricted cash held in trustees accounts of $29.6 million and short-term bank
credits of $4.2 million.

Our
cash and cash equivalents decreased in 2005 by $0.9 million as a result of the following:

Operating
activities. In 2005, cash provided by operating activities was approximately $3.7
million and was comprised of amounts provided by: (i) a decrease in other assets
(including short-term, long-term and deferred charges) in the amount of $6.7 million; (ii)
an increase in other accounts payable and other long-term liabilities in the amount of
$3.5 million; (iii) an increase in trade payables in the amount of $2.9 million; and (iv)
net cash provided by other operating activities in the amount of $13.3 million, net of (a)
an increase in advances from a customer held by trustees (including long-term) in the
amount of $10.4 million; (b) a decrease in inventories in the amount of $5.2 million; (c)
a decrease in accrued expenses in the amount of $4.7 million (net of a $5.1 million
payment made in the settlement of our 1998-2003 tax assessments in Israel and $5.6 million
in interest payments for our long term debt); and (d) an increase in trade receivables in
the amount of $2.4 million.

Investing
activities. In 2005, cash used in investing activities was approximately $1.3 million,
and was comprised of: (i) investments in restricted cash held by trustees in the amount of
$3.3 million net of $13.1 million cash that was released from a trust account; (ii) the
purchase of property and equipment in the amount of $3.6 million; (iii) loans to
employees, net in an amount of approximately $3.6 million; (iv) a net investment in
short-term bank deposits in the amount of $3.3 million; (v) net investments in short-term
and long-term restricted cash in the amount of $0.8 million; and (vi) net cash received
from the disposal of a subsidiary in the amount of $0.2 million, net of a $0.4 million
return on an investment.

Financing
activities.In 2005, cash used in financing activities was approximately $3.6 million,
and was comprised mainly from principal payments on loans and convertible loan in the
amount of $8.8 million, net of (i) proceeds from short term bank credit in the amount of
$4 million; and (ii) proceeds from the exercise of options in the amount of $1.2
million.

The
$20.3 million of restricted cash held in a trustees account relates to funds
collected from our largest project in Colombia. The release of these funds from the trust
is dependent both on a schedule of payments and on the achievement of operational
milestones. In 2005, we released from the trust account approximately $13.1 million
(irrespective of the $20.3 currently held in the trust). Based on the milestones and
scheduling of payment set forth in the project contract, we expect to collect from
restricted cash approximately $6.6 million in 2006. However, in the remote event that we
do not meet certain milestones, or if the bids are terminated unilaterally by the
government of Colombia, we may be unable to receive this restricted cash.

Our
inventory levels decreased significantly in 2003 and 2004 and increased slightly in 2005.
In 2006, we expect to increase our inventory levels in an effort to respond to heightened
short-term needs for products.

We
repaid $4 million in principal to Bank Leumi in 2005. The loan is scheduled to be repaid
by principal payments of $4 million annually during each of the years 2006 through 2011.

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In
July 2005, Bank Hapoalim assigned our outstanding loan in the amount of $70.4 million to
York Capital Management Ltd. Please see 2005 above.

The
deed of pledge securing our obligations to Bank Leumi and an additional Israeli bank sets
forth events which entitle the banks to declare their respective outstanding amounts due
and payable. Our obligations include a loan from Bank Leumi for $24 million and an
informal credit facility for guarantees aggregating $13.2 million from the banks.

Our
credit agreements contain various restrictions and limitations that may impact us. 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.

As
of December 31, 2005, our short and long term obligations were as follows:

|Contractual Obligations                  | Payments due by period (in thousands)
|---------------------------------------- | -------------------------------------
|
|
|
|
|Long-term debt (*) (**)                  |                                      
|Convertible subordinated notes           |                                      
|Accrued interest related to restructured |                                      
|debt (including $794 as short term       |                                      
|accrued expenses)                        |                                      
|Capital lease obligations                |                                      
|Operating lease                          |                                      
|Other long-term debt                     |                                      
|Total contractual cash obligations       |                                      

(*)
          In December 2005, we revised the terms of our loan with York. The fair value of
          the change in the conversion feature of the loan in the amount of $3.8 million
          was recorded as a reduction of the loan and an increase in the
          shareholders equity. The fair value will be amortized to financial
          expenses over the term of the loan.

(**)
          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.

At
December 31, 2005, the aggregate amount of bank guarantees provided in order to secure our
performance obligations is approximately $15.4 million, comprised mainly of performance
guarantees provided on behalf of our subsidiary in Peru in an amount of approximately $9.1
million. We have restricted cash as collateral for these guarantees in an amount of
approximately $7.4 million.

In
addition, we have provided corporate and bank guarantees for certain leases throughout the
world, lines of credit and capital lease agreements for an aggregate amount of
approximately $21.5 million. We have restricted cash as collateral for these guarantees in
an amount of approximately $5.7 million.

From
time to time, our parent company provides corporate guarantees to guarantee the
performance of our subsidiaries, including for example, a currently outstanding guarantee
for projects in Colombia of approximately $ 60.1 million. We have not recorded any
liability for the above amounts, as we expect that our performance will be acceptable. No
guarantees have ever been exercised against us.

- 57 -

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# Impact of Inflation and
Currency Fluctuations

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

The
U.S. dollar cost of our operations in Israel is influenced by the extent to which any
increase in the rate of inflation in Israel is not offset (or is offset on a lagging
basis) by a devaluation of the NIS in relation to the U.S. dollar. The influence on the
U.S. dollar cost of our operations in Israel relates primarily to the cost of salaries in
Israel, which are paid in NIS and constitute a substantial portion of our expenses in NIS.
In 2005, there was inflation in Israel of 2.4% while the NIS depreciated in relation to
the U.S. dollar at a rate of 6.8%, from NIS 4.3 per $1 on December 31, 2004 to NIS 4.6 per
$1 on December 31, 2005. In 2004 inflation in Israel was 1.2% while the NIS appreciated in
relation to the U.S. dollar at a rate of 1.6%. In 2003, the rate of deflation in Israel
was 1.9% while the NIS appreciated in relation to the U.S. dollar at a rate of 7.6%. 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.

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 the twelve-month periods ended December 31, 2005 and 2004. This is due to heavy
fluctuations in currencies in certain regions of Latin America in which we do business.
There can be no assurance that in the future our results of operations may not be
materially adversely affected by other currency fluctuations. See Item 11:
Quantitative and Qualitative Disclosures About Market Risk.

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

# Effective Corporate Tax
Rate

Israeli
companies are generally subject to income tax at the rate of 34% of taxable income in
2005. However, most of our production facilities in Israel have been granted Approved
Enterprise status under Israeli law for Encouragement of Capital Investments, 1959, and
consequently are eligible for certain tax benefits for the first several years in which
they generate taxable income. We currently have nine Approved Enterprises. Income derived
from the nine Approved Enterprises is entitled to tax benefits for periods of seven years
(in the case of two of the enterprises) or ten years (for the remaining seven
enterprises), from the first year in which we generate income from the respective Approved
Enterprise, on the basis of the nature of the incentives selected by us. The main tax
benefits are a tax exemption for two or four years and a reduced tax rate of 15% to 25%
for the remainder of the benefits period depending upon the level of foreign ownership of
us.

In
2003, we had a loss for tax purposes mainly due to recognition of StarBand bad debts and a
ruling we obtained from the Israeli tax authorities regarding the gain from restructuring
of debts. In 2004 and 2005 we also had losses for tax purposes and therefore could not
realize any tax benefits. We anticipate that we will not have to pay taxes relating to
2006 tax year for most of our entities due to current and/or carry forward tax losses.
Cash outlays for income taxes in the future might be different from tax expenses mainly
due to cash tax payments for previous years that might be triggered by tax audits in the
various tax jurisdictions, deferred tax expenses and payments usually made in arrear for
annual taxes in profitable years.

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

# Research and Development

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

We
devoted significant research and development resources in 2003, 2004 and 2005 to the
development of our SkyEdge family of products. We develop our own network software and
software for our VSATs. We generally license our software to customers as part of the sale
of our network products and services. We also license certain third party software for use
in our products.

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

# Third-Party Funding

|In
2001, we entered into an agreement with the Chief Scientist for the early payment of all
royalties arising from future sales with respect to previous Scientist grants we received.
The Company recorded a one-time operating charge of $3.4 million. This amount, of which we
still owe approximately $1.1 million, is payable in semi-annual installments over a
four-year period and bears an interest rate equal to the Accountant Generals Index
and limited to the change in the CPI. This agreement enables us to participate in a
program under which we are eligible to receive future research and development grants for
generic research and development projects without any royalty repayment obligations.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
June 2003, we entered into two development agreements with SES Global which entitled us to
an aggregate of $6 million for the development of certain ODU (outdoor unit) technology,
all of which funding has been received In addition, we are required to pay SES Global a
royalty of 10% calculated based upon the purchase price for each Ka-band transmitter
contained within each VSAT sold and 10% of the purchase price for each Ka-band antenna and
feed contained within each VSAT sold by Gilat up to a total recoupment by SES Global of
its investment and thereafter, the royalties decrease to 5% per unit. Royalties will be
payable for some of the sales of product units which include components developed under
the agreements. As of December 31, 2005 we have not begun selling these units and, as
such, no royalties have been paid or accrued. Please see Item 8: Significant
Changes.

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

*
Consists of funding from SES Global.  Please see Item 8:  "Significant Changes".

# Trend Information

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

In
2006, our inventory levels will be higher than in past years. In addition, we estimate
that the political environment in Israel could continue to prevent certain countries from
doing business with Gilat and this, in addition to the increased competition and reduced
prices in the telecommunications industry overall, may have adverse effects on our
business. Given all of the above, we cannot guarantee or predict what our sales will be,
what trends will develop and if any changes in our business and marketing strategy will be
implemented.

# IMPACT OF RECENTLY
ISSUED ACCOUNTING STANDARDS:

In
November 2004, the FASB issued Statement of Financial Accounting Standard No. 151,
Inventory Costs, an Amendment of ARB No. 43, Chapter 4. (SFAS No.
151). SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43,
Chapter 4, to clarify that abnormal amounts of idle facility expense, freight handling
costs and wasted materials (spoilage) should be recognized as current-period charges. In
addition, SFAS No.151 requires that the allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production facilities. SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning after
September 15, 2005. As of December 31, 2005, we do not expect that the adoption of SFAS
No. 151 will have a material effect on our financial position or results of operations.

In
May 2005, the FASB issued Statement of Financial Accounting Standard No. 154 (SFAS
No. 154), Accounting Changes and Error Corrections, a replacement of APB
No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. APB No. 20 previously
required that most voluntary changes in accounting principles be recognized by including
in net income for the period of change the cumulative effect of changing to the new
accounting principle. SFAS No. 154 requires retroactive application to prior periods
financial statements of a voluntary change in accounting principles unless it is
impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005.

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

Statement
123(R) permits public companies to adopt its requirements using one of two methods: A
modified prospective method in which compensation cost is recognized beginning
with the effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to the effective date of Statement
123(R) that remain unvested on the effective date.

A
modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures
all prior periods presented. We adopted Statement 123(R) using the modified prospective
method.

|In
March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share Based
Payment (SAB 107). SAB 107 provides the SECs staff position
regarding the application of FAS 123(R) and contains interpretive guidance relating to the
interaction between FAS 123(R) and certain SEC rules and regulations, and also provides
the SEC staffs view regarding the valuation of share-based payment arrangements for
public companies. SAB 107 highlights the importance of disclosures made relating to the
accounting for share-based payment transactions. We evaluated the expected term of the
options granted in 2005 in accordance with the guidance of SAB 107.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# Directors

|Name                  | Age | Position                                                      
|--------------------- | --- | --------------------------------------------------------------
|
|
|
|
|Amiram Levinberg      | 50  | Chairman of the Board of Directors and Chief Executive Officer
|Haim Benjamini(1) (2) | 67  | External Director                                             
|Jeremy Blank          | 27  | Director                                                      
|Udi Ganani            | 54  | Director                                                      
|Leora Meridor(1) (2)  | 58  | External Director                                             
|Karen Sarid(1) (2)    | 54  | Director                                                      
|Izhak Tamir(1) (2)    | 52  | Director                                                      

| | 
| | 

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

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

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Amiram
Levinberg, age 50, co-founded our company and served as a director on our
board since its inception and until April 2004. Since July 18, 2005, Mr. Levinberg has
served 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.
In this capacity, he supervised the development of the OneWay and Skystar Advantage VSATs.
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 the Technion 
Israel Institute of Technology. Mr. Levinberg serves on the board Cardboard Industries and
Kargal, a cardboard manufacturer in Israel and serves on the on the board of Kasamba, an
internet company offering online professional expert advice.

Haim
Benjamini, age 67, 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 Force and served in various command staff and training
roles from 1957 until 1982.

Jeremy
Blank,age 27, is the sole principal of J Blank Management Ltd, a company
which provides advisory services to York Capital Management (York).
Previously, Mr. Blank served as a Vice President within York. York is a private investment
fund based in New York with approximately $7.5 billion in assets under
management.  York was founded in 1991 and specializes in value oriented and event
driven equity and credit investments.  In addition, Mr. Blank worked as a
vice president within Morgan Stanleys fixed income department and earlier in his
career 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. Mr. Blank has served on our board since July, 2005

Udi
Ganani,age 54, has served on our board since July,
2005. Dr. Ganani currently serves as Chairman of the boards of several companies, all in
the security and defense markets: Trace Guard Technologies Inc., (OTCBB:TCGD), Aeronautics
Defense Systems and 3D ACT Ltd. He 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 holds a Doctorate of Science
in chemical engineering from Washington University and a Bachelor of Science in Chemical
Engineering from the Technion  Israel Institute of Technology in Haifa, Israel.

Dr.
          Leora (Rubin) Meridor , age 58, is a business and financial
          consultant and serves on the boards of Teva Pharmaceutical Industries and Nice
          Systems. Between 2001 and 2004, Dr. Meridor served as chair of the board of
          Poalim Capital Markets Ltd. and between 2001 and 2005, as chair of the boards
of           Bezeq International and Walla! Communications Ltd. Between 1996 and 2000 she
          served as Senior Vice President, Head of Credit & Risk Mgmt. Div. 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 M.I.T.

Karen
Sarid, age 54, has served on our board since July, 2005. Ms. Sarid has
served as a General Manager of Orex Computed Radiography Ltd., a Kodak Company focusing on
advanced radiography systems for the digital x-ray market since September 2000. 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 NASDAQ Stock Market. She was Chief Financial
Officer of LanOptics Ltd. (NASDAQ: LNOP) from 1993 through 1996. Ms. Sarid currently
serves as a director of LanOptics and as chair of its audit committee. Ms Sarid also
serves as a director of Oridion Ltd (SWXNM: ORIDN). 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.

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Izhak
Tamir,age 52, has served on our board since July, 2005. Mr. Tamir has been
President and a Director of Orckit since its founding in 1990. Orckit Communications Ltd.
(NASDAQ: ORCT) is a leading provider of advanced telecom equipment targeting high capacity
packetized broadband services. Mr. Tamir has served as a Director of of Scopus Video
Networks since 2005. From 1987 until 1989, Mr. Tamir was employed by Comstream Inc., in
San Diego, California. From 1985 until 1987, he was vice president of A.T. Communication
Channels Ltd., a subsidiary of Bezeq. From 1978 to 1985, he was a senior engineer in the
Israeli Government. Mr. Tamir holds an engineering degree from the Technion  Israel
Institute of Technology and an M.B.A. from Tel Aviv University. Mr. Tamir has been
chairman of the board of directors of Tikcro Technologies Ltd. since January 2000 and its
chief executive officer since August 2003.

# Senior Management

The
executive officers and key executives of our company and its subsidiaries as of March 15,
2006, are as follows:

|Name                | Age | Position                                                          
|------------------- | --- | ------------------------------------------------------------------
|
|
|
|
|Amiram Levinberg(1) | 50  | Chief Executive Officer and Chairman of the Board of Directors    
|Erez Antebi         | 47  | Chief Executive Officer - Gilat Networks Systems                  
|Rocio del Campo     | 43  | President, Spacenet Rural Communications                          
|Bill Gerety         | 47  | President, Spacenet Inc.                                          
|Yoav Leibovitch     | 48  | Executive Vice President Corporate Development                    
|Joshua Levinberg    | 52  | Executive Vice President Corporate Business Development & Strategy
|Tal Payne           | 34  | Chief Financial Officer                                           

| | 
| | 

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

Erez
Antebi, age 47, was appointed as Chief Executive Officer of Gilat Networks
Systems on June 1, 2005. Prior to that time, Mr. Antebi served as our Chief Operating
Officer from October 2002 until September 2003, when he left to serve as Chief Executive
Officer of Clariton Networks Ltd.. From the beginning of 1998 until being appointed our
Chief Operating Officer, Mr. Antebi served as our Vice President, General Manager for
Asia, Africa and Pacific Rim. From September 1994 until the beginning of 1998, he served
as Vice President and General Manager of Gilat Inc. Mr. Antebi joined our company in May
1991 as product manager for the Skystar Advantage VSAT product. From August 1993 until
August 1994, he served as Vice President of Engineering and Program Management of Gilat
Inc. Prior to joining us, Mr. Antebi worked for a private importing business from 1989 to
1991, after having served from 1987 to 1989 as marketing manager for high frequency radio
communications for Tadiran Limited, a defense electronics and telecommunications company,
and as a radar systems development engineer at Rafael, the research and development and
manufacturing arm of the Israel Defense Forces, from 1981 to 1987. Mr. Antebi holds a
B.Sc. and an M.Sc. Electrical Engineering from the Technion  Israel Institute of
Technology.

Rocio
del Carmen del Campo, age 43, joined Gilat to Home Peru S.A in 2000 as its
General Manager. In June 2003, Ms. Del Campo was appointed General Manager of Gilat
Colombia as well. Since January 2005, Ms. del Campo has served as the president of our
rural operations business, Spacenet Rural Communications.. Before coming to Gilat, Ms. del
Campo served as General Manager of Acer Peru, S.A. Ms. Del Campo holds a B.Sc. degree in
Industrial Engineering from the University of Lima.

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Bill
Gerety, age 47, joined Spacenet Inc. as its President in July 2003. Prior
to joining Spacenet Inc., from August 2000 until January 2002, Mr. Gerety served as acting
Chief Executive Officer and Chief Operating Officer of Astrolink International, a
broadband satellite venture headed by Liberty Media, Lockheed Martin, TRW and Telespazio.
His experience also includes holding the COO position at telecom service provider World
Access/Facilicom International and leading international network sales efforts for GTE and
Sprint Communications. In addition to his telecommunications industry experience, Mr.
Gerety has had a distinguished career as a senior officer in the U.S. Army, and continues
to serve as a colonel in the U.S. Army Reserve. Mr. Gerety holds a B.S. in Engineering
from the U.S. Military Academy at West Point, an M.S. in Strategic Studies from the U.S.
Army War College, an M.S. in Contracts and Acquisition Management and an M.B.A. from the
Florida Institute of Technology. As of September 2004, Mr. Gerety serves as a director of
StarBand Communications Inc. and Satlynx S.A.

Yoav
Leibovitch,age 48,rejoined our company in his
current position as Executive Vice President of Corporate Development in September 2005.
Prior thereto during2004, Mr. Leibovitch served as a consultant for business development
in Kasamba Ltd. and assisted in the initial public offering of Scopus Ltd. Mr. Leibovitch
first joined our company in early 1991 as Vice President of Finance and Administration and
Chief Financial Officer, a position he held until December 2003. From 1989 to 1990, Mr.
Leibovitch worked in the United States at Doubleday Books and Music Clubs, a subsidiary of
Bertelsmann, A.G., as special advisor for new business development. From 1985 to 1989, he
was the Financial Officer of a partnership among Bertelsmann, A.G., a large German media
and communications company; Clal Corporation, a major Israeli industrial holding company;
and Yediot Aharonot, an Israeli daily newspaper. Mr. Leibovitch holds a B.A. (Economics
and Accounting) and a M.B.A. (Finance and Banking) from the Hebrew University of
Jerusalem. Mr. Leibovitch is a Certified Public Accountant in Israel.

Josuha
Levinberg,age 52,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 (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. From 1985 to 1987, Mr. Levinberg held various positions,
including Manager of System Development and Marketing Manager at the Israeli subsidiary of
DSP Group Inc., a U.S. company specializing in digital signal processing. Mr. Levinberg
holds a B.Sc. (Electrical Engineering and Electronics) from Tel Aviv University. Amiram
Levinberg and Joshua Levinberg are brothers.

Tal
Payne, age 34,was appointed Chief Financial Officer
of our company in May 2005. Before that, Ms. Payne served as our Vice President of Finance
starting January 2004. Prior to holding this position and since July 1999, Ms. Payne
served as our Financial Director. Prior to joining us, Ms. Payne, a CPA, was employed as a
Manager for Kesselman & Kesselman, PriceWaterhouseCoopers Israel office from
1994 to 1999. She holds a B.A. in Economics and Accounting, as well as advanced studies in
accounting from Tel Aviv University.

# Compensation of
Directors and Officers

The
following table sets forth the aggregate compensation paid to or accrued on behalf of all
of our directors and officers as a group for the year ended December 31, 2005:

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|                                      | Salaries, Fees, Directors'
Fees, Commissions and Bonuses | Pension, Retirement and Similar
Benefits
|------------------------------------- | -------------------------------------------------------- | ----------------------------------------
|
|
|
|
|All directors and officers as a group |                                                          |                                         
|(24 persons*)                         |                                                          |                                         

*
Also includes bonuses and stock option compensation accrued in 2005.

# Management Agreements

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

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

# Board Compensation

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

# Board Composition and
Practices

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

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

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

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

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

# Alternate Directors

Our
Articles of Association provide that a director may appoint, by written notice to us and
subject to the consent of the board of directors, any person qualified to serve as a
director to serve as an alternate director (provided such person does not already serve as
a director or an alternate director). An 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 Gilat, 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.

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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.

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

# Audit Committee

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

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

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

# Independent Directors

Pursuant
to the current listing requirements of the NASDAQ National Market, we are required to have
at least two independent directors on our board of directors. Under Nasdaq rules, the
majority of the members of the board directors need to be independent as of July 31, 2005.
Effective March 3, 2005, Nasdaq revised the rules so that a foreign private issuer (such
as our company) may follow home country practice in lieu of complying with this rule.

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

# Employees

As
of December 31, 2005, we had approximately 929 full-time employees, including 151
employees in engineering, research and development, 384 employees in manufacturing,
operations and technical support, 129 employees in marketing and sales, 146 employees in
administration and finance and 119 in other departments. Of these employees, 387 employees
were based in our facilities in Israel , 251 were employed in the United States, 235 were
employed in Latin America and 62 in Asia, the Far East and other parts of the world. 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. Furthermore, pursuant to such provisions, the wages of most of our employees
are automatically adjusted based on changes in the Israeli CPI. The amount and frequency
of these adjustments are modified from time to time.

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

We
have a number of savings plans in the United States that qualify under Section 401(k) of
the U.S. Internal Revenue Code. Our U.S employees may contribute up to 100% of their
pretax salary, but not more than statutory limits. We contribute one dollar for each
dollar a participant contributes in this plan, in an amount of up to 3% of a
participants earnings and in addition, we contribute fifty cents for each dollar a
participant voluntarily contributes in this plan, up to an additional 3% of a
participants earnings. Matching contributions in 2003, 2004 and 2005 for all the
plans were $ 0.5 million, $ 0.7 million and $ 0.7 million, respectively. Matching
contributions are invested in proportion to each participants voluntary
contributions in the investment options provided under the plan.

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

# Share Ownership

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

# Stock Option Plans

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

As
of December 31, 2005, we had granted options to purchase a total of 134,882 ordinary
shares under the 1995 Plans. The exercise prices for such options vary from $7.8 to
$3,197.5 and all such options expire at various times from November 2003 to February 2013.
As of December 31, 2005, a total of 41,963 options have been exercised under the 1995
Plan.

In
September 2003, we adopted the 2003 Stock Option Plan (Incentive and Restricted Stock
Options), or the 2003 ISO/RSO Plan and the Section 102 Stock Option Plan 2003, or the 2003
Section 102 Plan and collectively, the 2003 Plans. In February 2005, our
shareholders increased the pool for the 2003 Plans by 1,135,000 shares and in December
2005, our shareholders further increased the pool by 3,500,000 shares, such that the 2003
Plans provide for the granting of options of up to an aggregate of 6,135,000 ordinary
shares to our officers, directors, employees or service providers or any of the employees
of service providers of our subsidiaries. As of December 31, 2005, options to purchase a
total of 5,073,141 ordinary shares under the 2003 Plans were outstanding, and 212,586
shares were exercised.

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

The
2003 Plans are administered by the Compensation/Stock Option Committee appointed by our
board of directors. The Stock Option Committee, comprised of Dr. Meridor, Mr. Benjamini,
Mr. Tamir and Dr. Sarid, has broad discretion, subject to certain limitations, to
determine the persons entitled to receive options, the terms and conditions on which
options or rights to purchase are granted and the number of shares subject thereto. The
Stock Option Committee also has discretion to determine the nature of the consideration to
be paid upon the exercise of an option and/or right to purchase granted under the 2003
Plans. Such consideration generally may consist of cash or, at the discretion of the
Board, cash and a recourse promissory note. All grants of options pursuant to the 2003
Section 102 Plan are subject to the approval of the board of directors.

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

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

In
December 2005, our shareholders adopted a new plan, the 2005 Stock Incentive Plan with a
pool of 1.5 million shares. This plan is designed to enable the board of directors to
determine various forms of incentives for all forms of service providers and, when
necessary, adopt a Sub-plan in order to grant specific incentives. Among the incentives
that may be adopted are share options, performance share awards, performance share unit
awards, restructured shares, restricted share unit awards and other share based awards. To
date, we have not made any grants under this plan.

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

The
following table sets forth certain information with respect to the beneficial ownership of
our ordinary shares as of March 1, 2006 (including options exercisable within 60 days of
March 1, 2006) with respect to: (i) each person who is believed by us to be the beneficial
owner of more than 5% of the ordinary shares; (ii) each director or officer who holds more
than 1% of the ordinary shares, and (iii) all directors and officers as a group. Except
where otherwise indicated, we believe, based on information furnished by the owners, that
the beneficial owners of the ordinary shares listed below have sole investment and voting
power with respect to such shares, subject to any applicable community property laws. The
shareholders listed below do not have any different voting rights from any other
shareholders of Gilat, except to the extent that they hold more than 7% and as such, they
will have a right to appoint a director, subject to certain conditions in our Articles of
Association. None of the directors, officers or key executives listed in the Directors and
Senior Management table appearing in Item 6 above, owns 1% or more of Gilats
outstanding share capital.

The
information in this table is based on 22,589,698 ordinary shares outstanding as of March
1, 2006. 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.

|Name and Address                                      | Number of
Ordinary
Shares
Beneficially
Owned | Percent of
Ordinary
Shares
Outstanding
|----------------------------------------------------- | -------------------------------------------- | --------------------------------------
|
|
|
|
|Bank Hapoalim B.M (1)(2)                              |                                              |                                       
|York Capital Management(1)(2)(3)                      |                                              |                                       
|Eliezer Fishman (1)(4)                                |                                              |                                       
|Mivtach Shamir Finance Ltd. (1)(2)                    |                                              |                                       
|All officers and directors as a group (15 persons)(5) |                                              |                                       

---

|(1) | Based
on Schedule 13D filings and reports provided to the Company.
|--- | ------------------------------------------------------------------

|(2) | As
of March 1, 2006, the Company has an outstanding loan from York in the
                    approximate amount of $70.4 million. The loan terms include the right
to a                     warrant to convert the outstanding amount of the loan into
10,429,630 shares as                     of March 1, 2006. The calculation of the number
of shares underlying the warrant                     is subject to change. In addition,
Bank Hapoalim provided York with an option to                     purchase 1,000,809
shares at $6.30 per share for a period of two years. York                     controls
the option right but has agreed to participate in the upside of the
                    option as follows: 35% to Bank Hapoalim, 16.68% to Mr. Amiram
Levinberg, 11.66%                     to his brother, Mr. Joshua Levinberg, 21.66% to two
other individuals and 15%                     remains with York. In addition, York has a
proxy to vote all 2,052,428 owned by                     Bank Hapoalim and an additional
1,250,000 owned by Mivtach Shamir Finance Ltd.                     until July 18, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(3) | York
is an investment fund based in New York with approximately $7.5
                    billion in assets.  York was founded in 1991 and specializes in
value                     oriented and event driven equity and credit
investments.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Mr.
Fishman, directly and through members of the Fishman family, beneficially
                    owns Gilat ordinary shares through the following entities (which hold
Gilat                     ordinary shares directly or indirectly through other
companies): Fishman Family                     Properties Management (1988) Ltd. (FFPM),
Fishman Chains Ltd.                     (FC), Fishman Mifalei Kerur Ltd. (FMK),
E.T. Fishman                     Properties (1998) Ltd. (ETFP), Hashkaot
Kedaiot Ltd.                     (HK), and Fish Et Ltd. (FE), all
of which are                     incorporated in Israel. Mr. Fishman, directly and
through members of the Fishman                     family, is the sole shareholder of
FFPM, ETFP, HK, and FE and owns 97.5% of FC                     and 98% of FMK.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes
all existing directors and executive officers in possession of options
                    and/or shares as of March 1, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

# Related Party
Transactions

# Assignment of Loan
Agreement by Bank Hapoalim to York Capital Management

In
April 2004, we revised the terms of our loan from Bank Hapoalim, to whom we owed the
principal debt amount of $71.4 million. In July 2005, Bank Hapoalim assigned the loan to
York Capital Management. In December 2005, we further revised the terms of this loan.
Please see Item 5: Liquidity and Capital Resources  Financing
Activities.

Any
proceeds paid to us from the exercise of a warrant will be applied to reduce future
installments of the principal, on a pro-rata basis.

# Agreement with SES
Americom

In
March 2003, SES Americom agreed to terminate its transponder agreements with Spacenet Inc.
that relate to StarBand (which is partially owned by Spacenet Inc.) and to enter into a
new transponder capacity agreement directly with StarBand. SES Americom also agreed to
allow Spacenet Inc. to defer an outstanding debt of $3.5 million to 2003, and to defer
payment of certain transponder capacity charges due in 2003 and 2004 with payment of those
deferred charges to commence in 2005. The agreement reduced the aggregate amount payable
to SES Americom in 2003 from $26.9 million to $16.5 million (including the $3.5 million
which was deferred from 2002 to 2003 and paid by Spacenet Inc. in full in 2003). With
respect to the deferred 2003 and 2004 transponder capacity charges, Spacenet Inc. paid
$0.6 million to SES Americom in 2005 as scheduled.

In
addition, we have entered into two development agreements with SES Global S.A. Please see
Item 5: Third Party Funding and Item 8: Significant Changes.

|Mr.
          Bednarek, an executive officer of SES Global S.A., an affiliate of SES
Americom,           served on our board of directors until July 2005.
|----------------------------------------------------------------------------------------------------------------------------------------------------------

# Satlynx Agreement

We
are a party to an investment agreement in Satlynx S.A. with SES. For additional
information, please see Item 4: Strategic Alliances, Joint Ventures and
Acquisitions and Item 8: Significant Changes.

- 71 -

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

In
2003, we entered into a consulting agreement with Israel Literage & Supply Co. Ltd., a
company under the ownership and control of Shlomo Rodav, formerly the Chairman of our
board of directors. This agreement was terminated in July 2005.

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

# Consolidated Statements

See
Item 18: Financial Statements.

# Export Sales

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

# Legal Proceedings

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

In
the first half of 2002, a number of securities class action lawsuits were filed against us
and certain of our officers and directors in the United States District Court for the
Eastern District of New York and in the United States District Court for the Eastern
District of Virginia, and a request to file a class action lawsuit was filed in the
Tel-Aviv, Israel District Court. The class action suits allege violations of the federal
securities laws and claim that we issued material misrepresentations to the market. The
class action suits in the U.S. have been consolidated into a single action in the United
States District Court for the Eastern District of New York and an amended complaint has
been filed. During September, 2004 the plaintiffs filed a motion to further amend the
claim. We filed a motion to dismiss the amended complaint, and on September 19, 2005, the
court dismissed certain of the plaintiffs claims. The plaintiffs have provided us
with a discovery demand and a conference with the plaintiffs has been scheduled for March
to agree on the schedule and scope of the discovery.

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

In
September 2003, Nova Mobilcom S.A., or Mobilcom, filed a lawsuit against Gilat do Brasil
for specific performance of a Memorandum of Understanding which provided for the sale of
Gilat do Brasil, and specifically the GESAC project, to Mobilcom for an unspecified
amount. Gilat do Brasil is vigorously defending itself against the claims presented
therein.

The
Brazilian tax authority has filed a claim against a subsidiary of Spacenet Inc. in Brazil,
for alleged taxes due of approximately $4 million. In January 2004, the subsidiary
received notice of an administrative ruling reducing the amount of the claim, and the
subsidiary filed an appeal of such ruling. In December 2005, this appeal was denied and at
present, the subsidiary faces a payment of taxes in an amount of approximately $6.1
million (the amount has increased due to interest and the exchange rate of the Brazilian
Reias). The subsidiary denies such claim and is at present preparing to file a petition
known as a Ação Anulatória in the State Courts of the
State of São Paulo, Brazil

- 72 -

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In
December 2003 and October 2004, we received tax assessments for the tax years 1998 and
1999-2001, respectively for approximately $45 million plus $7 million in penalties mainly
based on various claims of the Israeli Tax Authorities.  In May 2005, we reached a
settlement agreement in connection with the above. According to the settlement agreement,
the tax assessments for the years 1998-2003 were closed in consideration of our payment of
approximately $6 million, including interest and indexation. In addition, our carry
forward tax losses as of December 31, 2003, were set at $68 million.

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

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

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

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

# Dividend Policy

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

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

# Significant Changes

On
March 1, 2006 Gilat and SES executed an agreement whereby Gilat has agreed to transfer its
remaining 0.17% holdings in Satlynx to SES.  The actual transfer of shares will occur
upon request by SES.  In consideration, as part of this agreement, Gilat will receive
a waiver from SES on any royalty payments which may be due by Gilat to SES in accordance
with development agreements signed between the parties in 2002 and SES will provide a
corporate guarantee to cover Satlynxs obligations towards Gilat.

- 73 -

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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. All of the reported prices have
been adjusted to reflect a twenty for one share reverse stock split which became effective
April 16, 2003.

|                              | Price | Average Daily TradingVolume
|----------------------------- | ----- | ---------------------------
|
|
|
|
|Year Ended December 31, 2001: |       |                            
|                              |       |                            
|Year Ended December 31, 2002: |       |                            
|                              |       |                            
|Year Ended December 31, 2003: |       |                            
|                              |       |                            
|                              |       |                            
|                              |       |                            
|Year Ended December 31, 2004: |       |                            
|                              |       |                            
|First Quarter                 |       |                            
|                              |       |                            
|Second Quarter                |       |                            
|                              |       |                            
|Third Quarter                 |       |                            
|                              |       |                            
|Fourth Quarter                |       |                            
|                              |       |                            
|                              |       |                            
|                              |       |                            
|Year Ended December 31, 2005: |       |                            
|                              |       |                            
|First Quarter                 |       |                            
|                              |       |                            
|Second Quarter                |       |                            
|                              |       |                            
|Third Quarter                 |       |                            
|                              |       |                            
|Fourth Quarter                |       |                            

- 74 -

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|                              | Price | Average Daily TradingVolume
|----------------------------- | ----- | ---------------------------
|
|
|
|Most Recent Six Months:       |       |                            
|                              |       |                            
|August 2005                   |       |                            
|                              |       |                            
|September 2005                |       |                            
|                              |       |                            
|October 2005                  |       |                            
|                              |       |                            
|November 2005                 |       |                            
|                              |       |                            
|December 2005                 |       |                            
|                              |       |                            
|January 2006                  |       |                            
|                              |       |                            
|February 2006                 |       |                            
|                              |       |                            
|March 2006 (through March 16) |       |                            

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

| | Not
applicable.
| | ---------------

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

Our
ordinary shares are quoted on the Nasdaq National Market under the symbol
GILTF.. Our ordinary shares were listed on the NASDAQ National Market in
connection with our initial public offering in December 1993.

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

| | Not
applicable.
| | ---------------

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

| | Not
applicable.
| | ---------------

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

| | Not
applicable.
| | ---------------

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

# Memorandum and Articles
of Association

# Registration and Purposes

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

- 75 -

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

# Amendment of the
Articles of Association

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

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

# Amendment of the
Memorandum

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

# Record Date for Notices
of General Meeting and Other Action

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

# Notice of General
Meetings; Omission to Give Notice

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

# Annual General Meetings
and Special General Meetings

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

- 76 -

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In
2005, we had four shareholders meetings, one annual shareholders meeting and three special
shareholders meetings. At the meeting held in February 2005, the following resolutions
were among those adopted: the nomination of a new external director, Mr. Binjamini, the
approval of increase of the number of shares granted under the 2003 Stock Option Plan, the
nomination of Shlomo Rodav, former chairman of the board of directors as CEO as of July,
2004, the approval of and increase in directors compensation and the approval of an
increase in directors and officers insurance policy coverage. In May 2005, we
held our annual general meeting and the following resolutions were among those adopted:
reelection of the board members and approval of an amendment to the Articles of
Association reducing the minimum quorum of shareholders required at a meeting from 33.3%
to 25%. At the meeting held in August 2005, the following resolutions were among those
adopted: the election of Ms. Leora Meridor, a new external director, the election of five
board members to fill vacancies and the approval of the nomination of Mr. Amiram
Levinberg, Chairman of the board of directors and CEO. In our most recent shareholders
meeting held in December 2005, the following resolutions were among those adopted: an
increase of the authorized share capital of the Company, the approval of amendment to the
Companys March, 2003 loan agreement with York Capital Management (assigned to York
by Bank Hapoalim B.M.), the approval of Mr. Amiram Levinbergs employment agreement
and the approval of an increase in the number of shares granted under the 2003 Stock
Option Plan.

# 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
adjourned meeting was called by a shareholder(s), the quorum in the adjourned meeting
shall be one or more shareholders, present in person or by proxy and holding the number of
shares required to call a meeting.

# Adoption of Resolutions
at General Meetings

Article
28(b) of our Articles of Association provides for voting by a written ballot only. In
addition, Article 28(c), in accordance with the Companies Law, provides that the
declaration of the Chairman of the Meeting as to the results of a vote 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.

- 77 -

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# Election and Removal of
Directors

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

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

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

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

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

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

- 78 -

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

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

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

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

# Alternate Directors

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

# External Directors

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

# Qualification of
Directors

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

# Proceedings of the Board
of Directors

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

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

- 79 -

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

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

# Borrowing Powers

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

# Powers of Chief
Executive Officer

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

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

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

# Transfer of Shares

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

# Acquisition of Shares
Over Certain Thresholds

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

- 80 -

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

# Repurchase of Shares

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

# Foreign Ownership

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

# 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.

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

# Modification of Class
Rights

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

# Interested Parties
Transactions

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

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

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

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

The
approval of our shareholders would be required in addition to the approval of our board of
directors, in (i) any transaction in which the majority of our directors have a personal
interest, and (ii) a private placement of securities that will increase the holdings of a
shareholder that holds five percent or more of our outstanding share capital, or that will
cause any person to become, as a result of the issuance, a holder of more than five
percent of our outstanding share capital.

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

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

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

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

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

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

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

# Exemption,
Indemnification and Insurance of Directors and Officers

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

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:

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| |  | a
breach by the office holder of his fiduciary duty unless the office holder acted in good
faith and had a reasonable basis to believe that the act would not prejudice the company;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
breach by the office holder of his duty of care if such breach was done intentionally or
recklessly;
| | - | ------------------------------------------------------------------------------------------------------

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

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

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

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

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

Israeli
Taxation

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

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

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# Tax Consequences to
Nonresidents of Israel

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

# Capital Gains

Israeli
law imposes a capital gains tax on capital gains derived from the sale of securities and
other Israeli capital assets, including shares in Israeli resident companies, unless a
specific exemption is available or unless a treaty between Israel and the country of the
non-resident provides otherwise. The capital gain or loss amount is equal to the
consideration received by the holder for the shares less the holders tax basis in
the shares. Gains from sales of our ordinary shares will be tax exempted for nonresidents
of Israel if the shares are quoted on the Nasdaq National market or listed for trading on
a stock exchange recognized by the Israeli Ministry of Finance so long as the gains are
not derived through a permanent establishment that the non-resident maintains in Israel.
If our shares are delisted, gains from sales of ordinary shares will be subject to 20%
capital gain tax (25% if the seller is a substantial shareholder, generally a
shareholder with 10% or more of the right to profits, right to nominate a director and
voting rights), on the capital gain derived since December 31, 2002, and certain
withholding obligations may apply unless a reduced rate or an exemption is provided under
any tax treaty applicable to the specific holder.

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

# Dividends

Nonresidents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
These sources of income may include dividends on our ordinary shares. On distribution of
dividends other than bonus shares or stock dividends, income tax is withheld at source, at
the rate of 20% for dividends paid to an individual or a foreign corporation who is not a
substantial share holder, 25% for dividends paid to a substantial shareholder, and 15% for
dividends generated by an approved enterprise, unless in each case 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 stockholders country of residence, the
maximum tax on dividends paid that Gilat is required to withhold is 25%.

# Interest

Nonresidents
of Israel are subject to income tax on income accrued or derived from sources in
Israel.  These sources of income may include passive income, such as interest paid on
our convertible notes. For residents of the United States, under the treaty between Israel
and the U.S., the maximum tax on interest paid to a U.S. resident (as defined in the
treaty) holding our convertible notes that Gilat is required to withhold is 17.5%. For
residents of other countries, unless a different rate is provided in a treaty between
Israel and the country of residence of such holder of our convertible notes, the maximum
tax that Gilat is required to withhold is 25% on all distributions of interest.

# Filing of Tax Returns
in Israel

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

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# Tax Consequences to
Residents of Israel

# Capital Gains

Israeli
law imposes a capital gains tax on capital gains derived from the sale of securities and
other Israeli capital assets, including shares by Israeli residents. The capital gain or
loss amount is equal to the consideration received by the holder for the shares less the
holders tax basis in the shares. Under current law, effective commencing January 1,
2006, gains from sales of ordinary shares incurred after December 31, 2002, are subject to
20% capital gains tax (25% for substantial shareholder) for individuals and Israeli
companies not subject to the Income Tax Law (Inflation Adjustments)  1985 (the
Adjustment Law)and 31% (29% in 2007, 27% in 2008, 26% in 2009 and 25%
in 2010 and thereafter) capital gain tax for Israeli companies subject to the Adjustment
Law if the ordinary shares are quoted on the Nasdaq National market or listed on a stock
exchange recognized by the Israeli Ministry of Finance. The tax rate on capital gains from
publicly traded shares applicable to gains that were realized in 2005, was 15% (in 2003
and 2004 15% for publicly traded shares of Israeli companies and 35% for publicly traded
shares of foreign companies). Gains incurred until December 31, 2002, are exempt from
capital gains tax for so long as (i) the ordinary shares are listed on a stock exchange
recognized by the Israeli Ministry of Finance and (ii) Gilat Qualifies as an Industrial
Company or Industrial Holding Company under the law for Encouragement of Industry (Taxes)-
1969. We believe that we qualify as an Industrial Company under the law for Encouragement
of Industry (Taxes)- 1969. Gains incurred until December 31, 2002 are subject to 36%
capital gains tax for Israeli companies subject to the adjustment law. If our shares are
delisted, gains from sales of ordinary shares will be subject to 20% capital gain tax on
the capital gain derived since December 31, 2002 (25% for substantial shareholder and for
companies subject to the Adjustment Law).Certain withholding obligations may apply on the
sale of Gilat shares.

# Dividends

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

# Interest

Residents
of Israel are subject to income tax on their worldwide income. These sources of income may
include passive income, such as interest paid on our convertible notes. The interest
accrued and paid after January 1, 2006, is generally subject to 20% tax (25% for
substantial shareholder) for individuals and 31% (29% in 2007, 27% in 2008, 26% in 2009
and 25% in 2010 and thereafter) for companies. We may be required to withhold income tax
at a rate of up to 35% on all distributions of interest.

# 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:

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

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

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

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

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

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

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

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

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# Dividends Paid on
Ordinary Shares

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

Subject
to certain limitations, qualified dividend income received by a non-corporate
taxpayer generally is subject to U.S. federal income tax at a reduced maximum tax rate of
15 percent through December 31, 2008. Dividends received with respect to ordinary shares
should qualify for the 15 percent rate provided that either: (i) Gilat is entitled to
benefits under the income tax treaty between the United States and Israel; or (ii) the
ordinary shares currently are readily tradeable on an established securities market in the
U.S. (the Treaty). Gilat believes that it is entitled to benefits under the
Treaty and that the ordinary shares currently are readily tradable on an established
securities market in the U.S. No assurance can be given that the ordinary shares will
remain readily tradable. The rate reduction does not apply to dividends received from
PFICs, see discussion below, or in respect of certain short-term or hedged positions in
common stock or in certain other situations. The legislation enacting the reduced tax rate
contains special rules for computing the foreign tax credit limitation of a taxpayer who
receives dividends subject to the reduced tax rate, see discussion below. U.S. Holders of
ordinary shares should consult their own tax advisors regarding the effect of these rules
in their particular circumstances.

Subject
to complex limitations, any Israeli withholding tax imposed on dividends paid by Gilat
will be a foreign income tax eligible for credit against a U.S. Holders U.S. federal
income tax liability (or, alternatively, for deduction against income in determining such
tax liability).  The limitations set out in the Code include computational rules
under which foreign tax credits allowable with respect to specific classes of income
cannot exceed the U.S. federal income taxes otherwise payable with respect to each such
class of income.  Dividends generally will be treated as foreign-source passive
income or, in the case of certain U.S. Holders, financial services income for United
States foreign tax credit purposes.  U.S. Holders should note that recently enacted
legislation eliminates the financial services income category with respect to
taxable years beginning after December 31, 2006.  Under this legislation, the foreign
tax credit limitation categories will be limited to passive category income
and general category income.  Further, there are special rules for
computing the foreign tax credit limitation of a taxpayer who receives dividends subject
to a reduced tax, see discussion above.  A U.S. Holder will be denied a foreign tax
credit with respect to Israeli income tax withheld from dividends received on the ordinary
shares to the extent such U.S. Holder has not held the ordinary shares for at least 16
days of the 30-day period beginning on the date which is 15 days before the ex-dividend
date or to the extent such U.S. Holder is under an obligation to make related payments
with respect to substantially similar or related property.  Any days during which a
U.S. Holder has substantially diminished its risk of loss on the ordinary shares are not
counted toward meeting the 16-day holding period required by the statute.  The rules
relating to the determination of the foreign tax credit are complex, and you should
consult with your personal tax advisors to determine whether and to what extent you would
be entitled to this credit.

# Sale or Disposition of
Ordinary Shares

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

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

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

|If
Gilat were treated as a PFIC for any taxable year, 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 Gilat is considered a PFIC other than the year
of the dividend payment or disposition would be subject to tax at the highest individual
or corporate tax rate, as the case may be, in effect for that year and an interest charge
would be imposed with respect to the resulting tax liability allocated to each such year,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

- 89 -

---

---



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

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

# Backup Withholding and
Information Reporting

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

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

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

# Documents on Display

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

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

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

- 90 -

---

---



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

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

# General

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

# Exchange Rate Risk
Management

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

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

- 91 -

---

---



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

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

- 92 -

---

---



(*) In December 2005, we revised the
terms of our loan with York. The fair value of the change in the conversion feature of the
loan in the amount of $3.8 million was recorded as a reduction of the loan and an increase
in the shareholders equity. The fair value will be amortized to financial expenses
over the term of the loan.

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

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

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

| | Not
Applicable.
| | ---------------

# PART II

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

| | Not
Applicable.
| | ---------------

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

| | Not
Applicable.
| | ---------------

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

Our
management, including our chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures (as defined in Securities
Exchange Act Rule 13a-15(e)) as of the end of the period covered by this
Form 20.  Based upon that evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our disclosure controls and
procedures were effective to ensure that information required to be disclosed by our
company in reports that we file or submit under the U.S. Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms and that such
information was made known to them by others within the company, as appropriate to allow
timely decisions regarding required disclosure.

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

- 93 -

---

---



# PART III

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

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

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

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

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

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

# Fees Billed by
Independent Auditors

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

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

---

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

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

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

# 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.

- 94 -

---

---



|ITEM 16D: | EXEMPTIONS
FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE
|--------- | --------------------------------------------------------------------------

| | Not
applicable.
| | ---------------

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

# Issuer Purchase of
Equity Securities

In
the year 2005, we did not engage in the purchase of any of our own shares.

|ITEM 17: |  | NOT
APPLICABLE
|-------- |  | --------------

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

The
Consolidated Financial Statements and related notes required by this item are contained on
pages F-1 through F-61 hereof.

|                                                                       |     
|---------------------------------------------------------------------- | ----
|
|
|
|
|Index to Consolidated Financial Statements                             | PAGE
|Reports of Independent Registered Public Accounting Firm               | F-2 
|Consolidated Balance Sheets                                            | F-3 
|Consolidated Statements of Operations                                  | F-5 
|Consolidated Statements of Changes in Shareholders' Equity             | F-6 
|Consolidated Statements of Cash Flows                                  | F-8 
|Notes to Consolidated Financial Statements                             | F-11
|Report of Independent Auditors with respect to consolidated subsidiary | F-65

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

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

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

|2.1 |  | Form
of 4.00% Convertible Subordinated Note due 2012.  Previously filed as Exhibit T3C to the
Registration        Statement on Form F-3 (No. 022-38667) which Exhibit is incorporated
herein by reference. 4.1    Agreement between the Company and Bank Hapoalim B.M. dated
March 6, 2003.  Previously filed as Exhibit 4.1 to our        Annual Report on Form 20-F
for the fiscal year ending December 31, 2002, which Exhibit is incorporated herein by
       reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Amendment
to the Loan Agreement with Bank Hapoalim dated April 4, 2004. Previously filed as Exhibit
4.3 to our        Annual Report on Form 20-F for the fiscal year ending December 31,
2004, which Exhibit is incorporated herein by        reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Amendment
to the Loan Agreement with York dated December 27, 2005.
|--- |  | ------------------------------------------------------------------

|4.4 |  | Sublease
and Master Deed of Lease dated as of March 28, 2001 by and among BP III Leasco, LLC as
Sublessor, BP        Tysons, LLC as Landlord and Spacenet Real Estate Holdings, LLC as
Sublessee and Master Tenant. Previously filed as        Exhibit 4.7 to Gilat's Annual
Report on Form 20-F for the fiscal year ending December 31, 2000, which Exhibit is
       incorporated herein by reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 95 -

---

---



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

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

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

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

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

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

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

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

- 96 -

---

---



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

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

Date:
  March 23, 2006

- 97 -

---

---



# GILAT SATELLITE
NETWORKS LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2005

# IN U.S. DOLLARS

# INDEX

|                                                                        | Page       
|----------------------------------------------------------------------- | -----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm                 | F-2        
|                                                                       
|Consolidated Balance Sheets                                             | F-3 - F4   
|                                                                       
|Consolidated Statements of Operations                                   | F-5        
|                                                                       
|Consolidated Statements of Changes in Shareholders' Equity (Deficiency) | F-6 - F-7  
|                                                                       
|Consolidated Statements of Cash Flows                                   | F-8 - F-10 
|                                                                       
|Notes to Consolidated Financial Statements                              | F-11 - F-65



---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# GILAT SATELLITE
NETWORKS LTD.

We
have audited the accompanying consolidated balance sheets of Gilat Satellite Networks Ltd.
(the Company) and its subsidiaries as of December 31, 2004 and 2005, and the
related consolidated statements of operations, changes in shareholders equity
(deficiency) and cash flows for each of the three years in the period ended December 31,
2005. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements, based on our
audits. We did not audit the financial statements of a consolidated subsidiary, whose
statements reflect total assets of approximately 2.4% and 3.0% as of December 31, 2004 and
2005, respectively, and total revenues of approximately 11.7% and 12.5% for the years
ended December 31, 2004 and 2005, respectively, of the related consolidated totals. Those
financial statements were audited by other auditors, whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for this subsidiary, is
based solely on the reports of the other auditors.

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

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

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

|                  |                                 
|----------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel  | KOST FORER GABBAY & KASIERER    
|February 12, 2006 | A Member of Ernst & Young Global
|                  |                                 

F - 2

---

---



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

|                                                                                | December 31,
|------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                          |             
|                                                                                |             
|CURRENT ASSETS:                                                                 |             
|Cash and cash equivalents                                                       |             
|Short-term bank deposits                                                        |             
|Short-term restricted cash                                                      |             
|Restricted cash held by trustees                                                |             
|Trade receivables (net of allowance for doubtful accounts: 2004 - $ 14,506;     |             
|2005 - $ 12,311)                                                                |             
|Inventories                                                                     |             
|Other current assets                                                            |             
|                                                                                |             
|                                                                                |             
|Total current assets                                                            |             
|                                                                                |             
|                                                                                |             
|LONG-TERM INVESTMENTS AND RECEIVABLES:                                          |             
|Long-term restricted cash                                                       |             
|Long-term restricted cash held by trustees                                      |             
|Severance pay fund                                                              |             
|Long-term trade receivables, receivables in respect of capital leases and other |             
|receivables                                                                     |             
|                                                                                |             
|                                                                                |             
|                                                                                |             
|                                                                                |             
|                                                                                |             
|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 - 3

---

---



|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                                        |             
|Current maturities of long-term convertible loan from a related party        |             
|Trade payables                                                               |             
|Accrued expenses *)                                                          |             
|Short-term advances from customer held by trustees                           |             
|Other accounts payable *)                                                    |             
|                                                                             |             
|                                                                             |             
|Total current liabilities                                                    |             
|                                                                             |             
|                                                                             |             
|LONG-TERM LIABILITIES:                                                       |             
|Accrued severance pay                                                        |             
|Long-term advances from customer held by trustees                            |             
|Long-term loans, net                                                         |             
|Long-term convertible loan from a related party, net                         |             
|Accrued interest related to restructured debt                                |             
|Other long-term liabilities *)                                               |             
|Excess of losses over investment in affiliates                               |             
|Convertible subordinated notes                                               |             
|                                                                             |             
|                                                                             |             
|Total long-term liabilities                                                  |             
|                                                                             |             
|                                                                             |             
|COMMITMENTS AND CONTINGENCIES                                                |             
|                                                                             |             
|SHAREHOLDERS' EQUITY :                                                       |             
|Share capital -                                                              |             
|Ordinary shares of NIS 0.2 par value: Authorized - 37,500,000 and 60,000,000 |             
|shares as of December 31, 2004 and 2005, respectively; Issued and            |             
|outstanding - 22,312,487 and 22,556,298 shares as of December 31, 2004 and   |             
|2005, respectively                                                           |             
|Additional paid-in capital                                                   |             
|Accumulated other comprehensive income (loss)                                |             
|Accumulated deficit                                                          |             
|                                                                             |             
|                                                                             |             
|Total shareholders' equity                                                   |             
|                                                                             |             
|                                                                             |             
|Total liabilities and shareholders' equity                                   |             
|                                                                             |             

|*) | Includes
the following balances resulting from transactions with related parties                as
of December 31, 2004 and 2005; accrued expenses  $ 2,540 and                $ 2,684,
respectively; other accounts payable  $ 2,094 and                $ 0,
respectively; and other long-term liabilities  $ 2,900 and                $ 0,
respectively.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 4

---

---



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

|                                                                        | Year ended December 31,
|----------------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                                               |                        
|Products *)                                                             |                        
|Services *)                                                             |                        
|                                                                        |                        
|                                                                        |                        
|                                                                        |                        
|                                                                        |                        
|Cost of revenues:                                                       |                        
|Products                                                                |                        
|Services *)                                                             |                        
|                                                                        |                        
|                                                                        |                        
|                                                                        |                        
|                                                                        |                        
|                                                                        |                        
|Gross profit                                                            |                        
|Research and development expenses, net *)                               |                        
|Selling, marketing, general and administrative expenses *)              |                        
|Impairment of goodwill                                                  |                        
|Impairment of tangible and intangible assets                            |                        
|Restructuring charges                                                   |                        
|Gain from derecognition of liability                                    |                        
|                                                                        |                        
|                                                                        |                        
|Operating income (loss)                                                 |                        
|Financial expenses, net *)                                              |                        
|Gain from restructuring of debts                                        |                        
|Other income (expenses)                                                 |                        
|Gain from written-off investments in affiliated and other companies     |                        
|                                                                        |                        
|                                                                        |                        
|Income (loss) before taxes on income                                    |                        
|Taxes on income                                                         |                        
|                                                                        |                        
|                                                                        |                        
|Income (loss) after taxes on income                                     |                        
|Equity in earnings of affiliated companies                              |                        
|Minority interest in losses of a subsidiary                             |                        
|                                                                        |                        
|                                                                        |                        
|Income (loss) before cumulative effect of a change in an accounting     |                        
|principle                                                               |                        
|Gain 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 earnings 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                                                                 |                        
|                                                                        |                        

|*) | Includes
the following income (expenses) resulting from transactions with                related
parties for the years ended December 31, 2003, 2004 and 2005: revenues
               from products $ 7,126, $ 2,336 and $ 1,205, respectively;
               revenues from services  $ 415, $ 528 and $ 416,
               respectively; cost of services  $ (14,444), $ (16,802) and
               $ (8,349) respectively; research and development expenses, net                $
1,450, $ 2,917 and $ 1,543, respectively; selling, marketing,                general and
administrative expenses  $ (35), $ (642) and                $ (515), respectively;
financial income (expenses), net  $ 22,                $ (1,786) and $ (3,759),
respectively.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 5

---

---



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

|                                                           | Number ofOrdinaryshares(in thousands) | Sharecapital | Additionalpaid-incapital | Accumulatedothercomprehensiveincome (loss) | Accumulateddeficit | Totalcomprehensiveincome (loss) | Totalshareholders'equity(deficiency)
|---------------------------------------------------------- | ------------------------------------- | ------------ | ------------------------ | ------------------------------------------ | ------------------ | ------------------------------- | ------------------------------------
|
|
|
|
|Balance as of January 1, 2003                              |                                       |              |                          | 1,192                                      |                    | $                               | 70                                  
|Issuance of shares as a result of restructuring of debt on |                                       |             
|March 14, 2003                                             |                                       |              |                          | 11,795                                     |                    |                                 | 500                                 
|Issuance of shares as a result of restructuring of debt on |                                       |             
|November 10, 2003                                          |                                       |              |                          | 9,209                                      |                    |                                 | 409                                 
|Exercise of options, net                                   |                                       |              |                          | 29                                         |                    |                                 | 1                                   
|Stock compensation related to options issued in a          |                                       |             
|subsidiary                                                 |                                       |              |                          | -                                          |                    |                                 | -                                   
|Stock compensation related to repricing of options issued  |                                       |             
|to an employee                                             |                                       |              |                          | -                                          |                    |                                 | -                                   
|Stock compensation related to options issued to a          |                                       |             
|consultant                                                 |                                       |              |                          | -                                          |                    |                                 | -                                   
|Comprehensive income - Foreign currency translation        |                                       |             
|adjustments                                                |                                       |              |                          |                                            |                    |                                 |                                     
|Net income                                                 |                                       |              |                          | -                                          |                    |                                 | -                                   
|                                                           |                                       |              |                          |                                            |                    |                                 |                                     
|Total comprehensive income                                 |                                       |              |                          |                                            |                    |                                 |                                     
|                                                           |                                       |              |                          |                                            |                    |                                 |                                     
|                                                           |                                       |             
|Balance as of December 31, 2003                            |                                       |              |                          | 22,225                                     |                    |                                 | 980                                 
|                                                           |                                       |             
|Exercise of options, net                                   |                                       |              |                          | 87                                         |                    |                                 | 4                                   
|Stock compensation related to purchased options in a       |                                       |             
|subsidiary                                                 |                                       |              |                          | -                                          |                    |                                 | -                                   
|Stock compensation related to options issued to a          |                                       |             
|consultant                                                 |                                       |              |                          | -                                          |                    |                                 | -                                   
|Gain from extinguishment of Bank Hapoalim loan             |                                       |              |                          | -                                          |                    |                                 | -                                   
|Foreign currency translation adjustments from              |                                       |             
|the disposal of a subsidiary                               |                                       |              |                          | -                                          |                    |                                 | -                                   
|Comprehensive loss - Foreign currency translation          |                                       |             
|adjustments                                                |                                       |              |                          | -                                          |                    |                                 | -                                   
|Net loss                                                   |                                       |              |                          | -                                          |                    |                                 | -                                   
|                                                           |                                       |              |                          |                                            |                    |                                 |                                     
|Total comprehensive loss                                   |                                       |              |                          |                                            |                    |                                 |                                     
|                                                           |                                       |              |                          |                                            |                    |                                 |                                     
|Balance as of December 31, 2004                            |                                       |              |                          | 22,312                                     |                    |                                 | 984                                 
|                                                           |                                       |              |                          |                                            |                    |                                 |                                     

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

F - 6

---

---



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

|                                                    | Number ofOrdinaryshares(in thousands) | Sharecapital | Additionalpaid-incapital | Accumulatedothercomprehensiveincome (loss) | Accumulateddeficit | Totalcomprehensiveincome (loss) | Totalshareholders'equity(deficiency)
|--------------------------------------------------- | ------------------------------------- | ------------ | ------------------------ | ------------------------------------------ | ------------------ | ------------------------------- | ------------------------------------
|
|
|
|
|                                                    |                                       |              |                          |                                            |                    |                                 |                                     
|Balance as of December 31, 2004                     |                                       |              |                          | 22,312                                     |                    | $                               | 984                                 
|                                                    |                                       |             
|Exercise of options, net                            |                                       |              |                          | 244                                        |                    |                                 | 11                                  
|Stock compensation related to options               |                                       |              |                          | -                                          |                    |                                 | -                                   
|Fair value of change in conversion feature          |                                       |             
|of a related party convertible debt                 |                                       |              |                          | -                                          |                    |                                 | -                                   
|Foreign currency translation adjustments from       |                                       |             
|the disposal of a subsidiary                        |                                       |              |                          | -                                          |                    |                                 | -                                   
|Comprehensive income - Foreign currency translation |                                       |             
|adjustments                                         |                                       |              |                          | -                                          |                    |                                 | -                                   
|Net loss                                            |                                       |              |                          | -                                          |                    |                                 | -                                   
|                                                    |                                       |              |                          |                                            |                    |                                 |                                     
|Total comprehensive loss                            |                                       |              |                          |                                            |                    |                                 |                                     
|                                                    |                                       |              |                          |                                            |                    |                                 |                                     
|Balance as of December 31, 2005                     |                                       |              |                          | 22,556                                     |                    | $                               | 995                                 
|                                                    |                                       |              |                          |                                            |                    |                                 |                                     

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

F - 7

---

---



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

|                                                                  | Year ended December 31,
|----------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                             |                        
|Net income (loss)                                                 |                        
|Adjustments required to reconcile net income (loss) to net cash   |                        
|provided by operating activities:                                 |                        
|Depreciation and amortization                                     |                        
|Gain from restructuring of debt                                   |                        
|Non cash cumulative effect relating to a subsidiary               |                        
|Loss (gain) from disposal of subsidiaries (b)                     |                        
|Loss from disposal of subsidiary (a)                              |                        
|Stock compensation relating to options                            |                        
|Stock compensation related to option in a subsidiary              |                        
|Stock compensation relating to repricing of options issued to an  |                        
|employee                                                          |                        
|Impairment of goodwill                                            |                        
|Impairment of intangible assets                                   |                        
|Gain from long-term note                                          |                        
|Impairment of property and equipment and other tangible assets    |                        
|Equity in earnings of affiliated companies                        |                        
|Accrued severance pay, net                                        |                        
|Interest accrued on bank deposits                                 |                        
|Interest accrued on short and long-term restricted cash           |                        
|Exchange rate on long-term loans                                  |                        
|Exchange differences on loans to employees                        |                        
|Minority interest in losses of a subsidiary                       |                        
|Capital loss from disposal of property and equipment              |                        
|Deferred income taxes, net                                        |                        
|Decrease (increase) in trade receivables, net                     |                        
|Decrease (increase) in inventories                                |                        
|Decrease in other assets (including short-term, long-term and     |                        
|deferred charges)                                                 |                        
|Increase (decrease) in trade payables                             |                        
|Decrease in accrued expenses                                      |                        
|Increase (decrease) in other accounts payable and other long-term |                        
|liabilities                                                       |                        
|Increase (decrease) in advances from customer held by trustees    |                        
|(including long-term)                                             |                        
|                                                                  |                        
|                                                                  |                        
|Net cash provided by operating activities                         |                        
|                                                                  |                        
|                                                                  |                        
|Cash flows from investing activities:                             |                        
|Purchase of property and equipment                                |                        
|Return of investment                                              |                        
|Purchase of minority shares of rStar                              |                        
|Disposal of subsidiaries (a ; b)                                  |                        
|Consolidation of StarBand (c)                                     |                        
|Proceeds from long-term note                                      |                        
|Investment in short-term bank deposits                            |                        
|Proceeds from short-term bank deposits                            |                        
|Proceeds from disposal of property and equipment                  |                        
|Loans to employees- net                                           |                        
|Investment in short-term and long-term restricted cash            |                        
|Proceeds from short-term and long-term restricted cash            |                        
|Investment in restricted cash held by trustees                    |                        
|Proceeds from restricted cash held by trustees                    |                        
|Investment in other assets                                        |                        
|                                                                  |                        
|                                                                  |                        
|Net cash used in investing activities                             |                        
|                                                                  |                        
|                                                                  |                        

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

F - 8

---

---



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

|                                                             | Year ended December 31,
|------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from financing activities:                        |                        
|Exercise of options, net                                     |                        
|Short-term bank credit, net                                  |                        
|Proceeds from long-term loans                                |                        
|Repayments of long-term loans                                |                        
|Repayments of long-term convertible loan                     |                        
|                                                             |                        
|                                                             |                        
|Net cash 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:                                  |                        
|Classification between property and equipment and            |                        
|inventories                                                  |                        
|                                                             |                        
|                                                             |                        
|Conversion of convertible subordinated notes, net            |                        
|(see Note 9a)                                                |                        
|                                                             |                        
|                                                             |                        
|Arrangement with SES Americom (see Note 9a)                  |                        
|                                                             |                        
|                                                             |                        
|Gain from extinguishment of Bank Hapoalim loan - classified  |                        
|as additional paid-in capital (see Note 9c)                  |                        
|                                                             |                        

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 endedDecember 31,
2005
|--------------------------------------------------------------------------------- | ---------------------------
|
|
|
|
|(a)   Disposal of subsidiary consolidated in previous periods (see also Note 1f): |                            
|                                                                                  |                            
|Assets and liabilities of the subsidiary at date of deconsolidation:              |                            
|                                                                                  |                            
|Working capital (excluding cash and cash equivalents)                             |                            
|Property and equipment, net                                                       |                            
|Loss on disposal of subsidiary                                                    |                            
|                                                                                  |                            
|                                                                                  |                            
|                                                                                  |                            
|                                                                                  |                            

|                                                                                    | Year ended
December 31,
2004
|----------------------------------------------------------------------------------- | ----------------------------
|
|
|
|
|(b)   Disposal of subsidiaries consolidated in previous periods (see also Note 1e): |                             
|                                                                                    |                             
|Assets and liabilities of the subsidiaries at date of deconsolidation:              |                             
|                                                                                    |                             
|Working capital (excluding cash and cash equivalents)                               |                             
|Loss on disposal of subsidiaries                                                    |                             
|                                                                                    |                             
|                                                                                    |                             
|                                                                                    |                             
|                                                                                    |                             

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

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        
|                                                  
|                                                  

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

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

| | Gilat
Satellite Networks Ltd. (the Company) and its wholly-owned and majority-owned
subsidiaries (the Group) is a leading provider of products and services for
satellite-based communications networks. The Company designs, develops, manufactures,
markets and sells products and provides services that enable complete end-to-end
telecommunications and data networking solutions, based on very small aperture terminal (VSAT)
satellite earth stations and related central station (hub) equipment. The
Companys headquarters and research and development facilities are located in Petach
Tikva Israel. In 2005, the Company operated under two business units. During the third
quarter of 2005, the Company further refined its segment reporting by dividing the
Spacenet segment into two segments, and the Companys 2005 financial statements
reflect operations under three business units: (i) Gilat Network Systems, a provider of
network systems and associated professional services to service providers and operators;
(ii) Spacenet, which provides managed services of data for enterprises, businesses and
internet connectivity for consumers, primarily in the United States; and (iii) Spacenet
Rural Communications, which provides telephone and internet access as an operator of
networks in rural communities, primarily in Latin America. For a description of principal
markets and customers, see Note 14.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 24, 2004, the Companys ordinary shares commenced trading on the Tel Aviv
Stock Exchange in addition to the Nasdaq National Market.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | b. | York
Capital Management LP:
| | -- | ---------------------------

| | In
July 2005, Bank Hapoalim assigned its Gilat loan to York Capital Management LP. (York).
Bank Hapoalim also provided York with an option to purchase 1,000,809 of the Companys
Ordinary shares at $ 6.30 per share for a period of two years. In addition, York was
given a proxy to vote all 2,052,428 shares owned by Bank Hapoalim and an additional
1,250,000 shares owned by Mivtach Shamir Finance Ltd. until July 18, 2007. Following the
above, York is considered a related party. At that time, six out of the seven board
members of the Company resigned and were replaced by new board members. In addition, the
Companys CEO and Chairman of the board resigned and Mr. Amiram Levinberg, a
co-founder of the Company, rejoined the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | StarBand
Communications Inc:
| | -- | ----------------------------

| | The
subsidiary StarBand Communications Inc. is a North American broadband satellite internet
service provider (StarBand).
| | ---------------------------------------------------------------------------------------------------------------------------

F - 11

---

---



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

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

| | On
May 31, 2002, StarBand filed a voluntary petition for reorganization under Chapter 11 of
the U.S Bankruptcy Code. As of December 31, 2002, the Group held approximately 34.9% and
the carrying amount of the investment in StarBand amounted to zero. In November 2003,
StarBand emerged from Chapter 11 proceedings and implemented a reorganization plan. As
part of StarBands plan of reorganization, and in settlement of all claims against
StarBand by its banking lenders and the Company in accordance therewith, StarBands
bank debts and approximately $ 84 million of debt to the Company were converted to
equity. As of the date of StarBands emergence from Chapter 11, the Company was
issued Common Stock representing 49.1% of StarBands issued shares. The remaining
stock was issued to three Israeli banks (the banks).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). The objective of FIN 46 is to improve
financial reporting by companies involved with variable interest entities. A variable
interest entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting rights
or (b) has equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss
from the variable interest entitys activities or entitled to receive a majority of
the entitys residual returns or both. The consolidation requirements of FIN 46
apply to variable interest entities created after January 31, 2003. The consolidation
requirements apply to entities established before January 31, 2003, in the first fiscal
year or interim period ending after March 15, 2004. Since StarBand was established before
January 31, 2003, FIN 46 was not applicable as of December, 31, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
emergence from Chapter 11 and as of December 31, 2003, the Company determined that it did
not control StarBand since it did not hold the majority of the voting interest of
StarBand and it could not gain control over StarBand, except through acquisition of
shares from other shareholders. As such, as of December 31, 2003, StarBand was accounted
for under the equity method of accounting in accordance with APB 18, the Equity
Method of Accounting for Investments in Common Stock.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2004, the Company evaluated the applicability of FIN 46 on its investment
in StarBand. In accordance with FIN 46, StarBand was considered a Variable Interest
Entity (VIE).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
StarBand is considered a VIE, the new consolidation model under FIN 46 applies. The
Company performed an analysis on which it allocated the expected losses and expected
residual returns to the Company and to the other investors in StarBand using expected
cash flows derived by projecting possible cash flows and assigning each projection with a
probability weight. Through its analysis, the Company concluded that it absorbs the
majority of StarBands expected losses and receives the majority of the residual
return. Accordingly, the Company believed that it is the primary beneficiary of StarBand,
and therefore StarBand was consolidated into the Companys financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---



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

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

| | Following
is a condensed balance sheet of StarBand as of January 1, 2004, the date StarBand was
consolidated for the first time:
| | --------------------------------------------------------------------------------------------------------------------------------

| |  | January 1,2004
| |  | --------------
|
|
|
|
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               
| |  |               

| | According
to the transition provision of FIN 46, the net amount added to the balance sheet of the
Company and the amount of previously recognized interest in StarBand should both be
recognized as an accumulated effect of an accounting change. The accumulated effect as of
January 1, 2004 was a gain of $ 0.6 million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, negative goodwill of approximately $ 11.6 million was recorded as a result of
the consolidation of StarBand, which offset StarBands non-current assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the Company purchased the remaining 50.9% of StarBand shares then held by
certain Banks in consideration for $ 0.6 million. In addition, it was stipulated
that in the event that certain events occur before December 31, 2007, including, the sale
of StarBand shares, the sale of substantially all of StarBands assets to a third
party, the merger with a third party or the dissolution of StarBand, then the Company
shall pay the Banks an amount equal to 50% of the consideration that would be received by
the Company, directly or indirectly, as a result of such events.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | rStar
Corporation:
| | -- | ------------------

| | rStar
Corporation (rStar) is a holding company of most of the Companys
service entities in Latin America. As of August 2, 2002, the Group held approximately 85%
of the outstanding shares of rStar, then a public company traded on the NASDAQ National
Market.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---



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

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

| | Pursuant
to the agreement with rStar, in the event StarBand Latin America did not reach certain
net income levels in the two years in the period ending June 2004, rStar shareholders
would be entitled to receive in each of these two years, a cash consideration in the
amount of $ 2.5 million or $ 5 million per year, respectively, subject to those
results (the special distribution). The Company determined that it was
probable that the special distribution would need to be paid for the second year and as
such, made a provision for $ 5 million for this contingent liability in 2002 and an
additional provision of $ 5 million for contingent liabilities with respect to the
minority shareholders of rStar in 2003. As of December 31, 2002, the Companys
holdings in rStar was 85%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2003, in accordance with SFAS No.142, Goodwill and Other Intangible Assets(SFAS
142), the Company recorded an impairment of rStar goodwill in the amount of $ 5
million, in operating expenses (see note 10b).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
November 25, 2003, the Company entered into an agreement with certain rStar minority
shareholders to acquire an additional 9.25% of rStar shares (9,123,555 shares) for $ 0.60
per share in cash. In addition, at that time, the Company agreed to pay $ 950,000 to
certain of the minority shareholders, who had been directors in rStar in the past, in
consideration of their waiver of the Companys obligation to pay for directors and
officers insurance until 2006. Since this amount was paid to the minority shareholders as
former directors and not as shareholders, this amount was recorded as an operating
expense.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the aforementioned acquisition, the Company held more than 90% of rStars Common
Stock. As such, on April 7, 2004, the Company completed a short-form merger with rStar,
by acquiring the remaining 5,398,745 shares for $ 0.60 per share in cash, pursuant
to which the Company became the 100% owner of all outstanding shares of rStar. Concurrent
with the short-form merger, the following transactions occurred:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | rStar
purchased the vested stock options of its CEO (see Note 8c) in           consideration of
$ 440,000 ($ 0.60 less the exercise price for each           option).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Immediately
following the consummation of the acquisition, a Form 15 notice of deregistration under
the reporting provisions of the Securities Exchange Act of 1934 was filed with the SEC
and rStars Common Shares were subsequently delisted by NASDAQ.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---



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

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

| | The
Company accounted for the acquisition of the remaining minority interest in rStar based
on the purchase method of accounting in accordance with SFAS No. 141, Business
Combination (SFAS 141). The Company used the Discounted Cash Flow method to
evaluate the value of the purchased shares of rStar.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to this method, the value was approximately $ 1.1 million. The consideration paid by
the Company for the shares purchased from the minority interest holders was approximately
$ 8.7 million. The difference between the consideration for the shares and the value
of the shares, in the amount of $ 7.6 million was attributed to the settlement of
the $ 10 million contingent liabilities described above. The reversal of the $ 10
million accrual against the payment for the settlement, net of the insurance payment and
consideration paid for the employees options resulted in a gain of $ 0.2 million,
which was recorded as a gain from derecognition of a liability.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Furthermore,
the Company recorded negative goodwill in the amount of $ 1.7 million, representing
the excess of minority interest in the Companys books over the value of the
minority held Common Shares. The negative goodwill was allocated to reduce the fair value
of the assets purchased.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Servicio
Satelital S.A. and Spacenet International Services Inc.:
| | -- | -----------------------------------------------------------------

| | In
September 2004, the Company closed an agreement for the sale of Spacenet International
Services Inc. and its only subsidiary, Servicio Satelital S.A., an Argentinean company.
The consideration received was $ 0.6 million which was paid upon the closing and an
additional of $ 0.5 million which is being paid in installments through September
2006, $ 0.3 million of which was received during 2005. The Company recorded a
capital gain (loss) in connection with this transaction in the amount of approximately $ (0.2)
million and $ 0.3 million, as collection was made, in 2004 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Deterministic
Networks Inc.:
| | -- | ----------------------------

| | In
September 2005, the Company sold its ownership in this California-based subsidiary for an
immaterial amount. The Company recorded a capital loss of $ 0.2 million associated
with this transaction.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---



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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES
|------- | - | -------------------------------

| | The
consolidated financial statements have been prepared in accordance with generally
accepted accounting principles in the United States (U.S. GAAP).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of estimates:
| | -- | -----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Financial
statements in U.S. dollars:
| | -- | -------------------------------------

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

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

| | The
financial statements of foreign subsidiaries, whose functional currency has been
determined to be their local currency, have been translated into dollars. Assets and
liabilities have been translated using the exchange rates in effect at the balance sheet
date. Statements of operations amounts have been translated using a specific exchange
rate for each transaction. The resulting translation adjustments are reported as a
component of shareholders equity in accumulated other comprehensive income (loss).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Principles
of consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements include the accounts of the Company and its wholly
owned, majority-owned and controlled subsidiaries. The accounts for VIEs as described by
FIN 46 and related interpretations are included in the consolidated financial statements.
Intercompany balances and transactions, including profits from intercompany sales not yet
realized outside the Group, have been eliminated upon consolidation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 16

---

---



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

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

| | e. | Short-term
restricted cash:
| | -- | ---------------------------

| | Short-term
restricted cash is primarily invested in certificates of deposit, which mature within one
year. It is used as collateral for the lease of the Groups offices, a sale and
lease back transaction and performance guarantees to customers and bears weighted average
interest as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | December 31,
| |  | ------------
|
|
|
|
| |  |             
| |  |             

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

| | Short-term
and long-term restricted cash held by trustees is primarily invested in certificates of
deposit, which mature within one year. As of year end, 96% of the total amount is linked
to the dollar and 4% is linked to the Colombian Peso. The amount held by trustees bears
interest at rates of 3.75% and 5.33%, respectively, and is released based upon
performance milestones as stipulated in the Groups agreements with the government
of Colombia.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Inventories:
| | -- | ------------

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

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

| | Raw
materials, parts and supplies  with the addition of allocable indirect 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Finished
products  calculated on the basis of direct manufacturing costs with the addition
of allocable indirect manufacturing costs.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | h. | Long-term
restricted cash:
| | -- | --------------------------

| | Long-term
restricted cash is primarily invested in certificates of deposit, which mature in more
than one year, is linked to the dollar and bears an annual weighted average interest rate
of 1.8 % and 3.63% as of December 31, 2004 and 2005, respectively. This long-term
restricted cash is used as collateral for the lease of the Groups offices, a sale
and lease back transaction and performance guarantees to customers and loans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---



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

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

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

| | In
these consolidated financial statements, affiliated companies are companies in which the
Group holds 20% or greater equity interest (which are not subsidiaries) and where the
Group can exercise significant influence over operating and financial policies of the
affiliate. The investment in affiliated companies is accounted for by the equity method.
Profits on intercompany sales, not realized outside the Group, were eliminated.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Groups investments in affiliates are reviewed for impairment, in accordance with
APB 18, whenever events or changes in circumstances indicate that the carrying amount of
an investment may not be recoverable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
Groups investments in other companies are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an investment may not be
recoverable in accordance with APB 18. Any impairment loss is recognized in the
consolidated statement of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | l. | Property
and equipment, net:
| | -- | ----------------------------

| | Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful lives of the assets as
follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                    | Years                                        
| | ---------------------------------- | ---------------------------------------------
|
|
|
|
| | Buildings                          | 50                                           
| | Computers and electronic equipment | 3 - 8                                        
| | Office furniture and equipment     | 5 - 17                                       
| | Vehicles                           | 5 - 7                                        
| | Leasehold improvements             | Over the term of the lease or the useful life
| |                                    | of the improvements, whichever is shorter.   

| | Equipment
leased to others under operating leases is carried at cost less accumulated depreciation
and depreciated using the straight-line method over the useful life of the assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---



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

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

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

| | Intangible
assets are stated at amortized cost.
| | -----------------------------------------------

| | The
assets are amortized using the straight-line method over their estimated useful lives,
which are five to fifteen years, in accordance with SFAS 142.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
charges represent costs related to the deferred revenues. Such costs are recognized when
the related revenues are recognized.
| | --------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Any
impairment loss is recognized in the consolidated statement of operations (see Note 10b).
| | ---------------------------------------------------------------------------------------------

| | o. | Goodwill:
| | -- | ---------

| | Goodwill
represents the excess of the cost over the fair value of the net assets of businesses
acquired.
| | --------------------------------------------------------------------------------------------------------

| | SFAS
142 requires goodwill to be tested for impairment at least annually or between annual
tests in certain circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Goodwill is tested for impairment by
comparing the fair value of each of the Companys reporting units with its carrying
value. Fair values are determined using discounted cash flows, market multiples and
market capitalization. Significant estimates used in the methodologies include estimates
of future cash flows, future short-term and long-term growth rates, weighted average cost
of capital and estimates of market multiples. Any impairment loss is recognized in the
consolidated statement of operations (see Note 10b).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---



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

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

| | p. | Revenue
recognition:
| | -- | --------------------

| | The
Group generates revenues mainly from the sale of products and services for
satellite-based communications networks. Sale of products includes mainly the sale of
VSATs and hubs. Service revenues include access to and communication via satellites (space
segment), installation of network equipment, telephone services, internet services,
consulting, on-line network monitoring, network maintenance and repair services. The
Group sells its products primarily through its direct sales force and indirectly through
resellers. Sales consummated by the Groups sales force and sales to resellers are
considered sales to end-users.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from product sales are recognized in accordance with SEC Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition (SAB No. 104), when delivery has
occurred, persuasive evidence of an agreement exists, the vendors fee is fixed or
determinable, no further obligation exists and collectability is probable. Generally the
Group does not grant rights of return. Service revenues are recognized ratably over the
period of the contract or as services are performed.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

F - 20

---

---



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

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

| | q. | Warranty
costs:
| | -- | ---------------

| | Generally
the Company provides product warranties for periods between 12 to 18 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, 2003, 2004 and 2005 were
immaterial.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Research
and development expenses:
| | -- | ----------------------------------

| | Research
and development expenses, net of grants received, are charged to expenses as incurred.
| | -----------------------------------------------------------------------------------------------

| | s. | Grants:
| | -- | -------

| | The
Company received royalty-bearing grants and non-royalty-bearing grants from the
Government of Israel, the U.S.-Israel Science and Technology Foundation (USISTF),
SES Global S.A (see Note 7d) 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 amounted to $ 5.1 million, $ 5.3 million and $ 3.0
million in 2003, 2004 and 2005, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------

| | t. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | The
Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees (APB
25) and FASB Interpretation (FIN) No. 44, Accounting for Certain
Transactions Involving Stock Compensation (FIN 44) in accounting for
its employee stock option plans. Under APB 25, when the exercise price of the Companys
stock options is less than the market price of the underlying shares on the date of
grant, a compensation expense is recognized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company applies SFAS No. 123, Accounting for Stock Based Compensation(SFAS
123) and EITF 96-18, Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF
96-18) with respect to options issued to non-employees. SFAS 123 requires use of an
option valuation model to measure the fair value of the options on the date of grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted the disclosure provisions of SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure (SFAS 148), which amended
certain provisions of SFAS 123. The Company continues to apply the provisions of APB 25
in accounting for stock-based compensation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---



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

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

| | Pro
forma information regarding the Companys net income (loss) and net earnings (loss)
per share is required under SFAS 123 and has been determined as if the Company had
accounted for its employee share options under the fair value method of SFAS 123. The
fair value of these options is amortized over their vesting period and estimated at the
date of grant using a Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 3.0% for 2003 and 2004 and 4.2% for
2005; a dividend yield of 0.0% for each of those years; a volatility factor of the
expected market price of the Companys Ordinary Shares of 65.2% for 2003, 57.4% for
2004 and 47.6% for 2005; and a weighted average expected life of the option of 3 years
for 2003 and 2004 and 5.5 years in 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average of the fair value of options granted for which the exercise price on the
grant date equals the market price, was $ 2.49, $ 1.66 and $ 2.92 during
2003, 2004 and 2005, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average of the fair value of options granted for which the exercise price on the
grant date was higher than the market price, was $ 1.39 and $ 0.89 during 2003
and 2004, respectively. In 2005, no such grants were made.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, the Company granted option for which the exercise price on the grant date was lower
than the market price. The weighted average of the fair value of this option was $ 3.05.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Compensation
cost for awards with pro rata vesting is valued using a single estimated expected life
for each vested portion, and such costs are amortized using an accelerated method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 22

---

---



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

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

| |  | Year ended December 31,
| |  | -----------------------
|
|
|
|
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        

| | u. | 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 some
portion or all of the deferred tax assets will not be realized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Concentrations
of credit risks:
| | -- | -------------------------------

| | Financial
instruments that potentially subject the Group to concentrations of credit risk consist
principally of cash and cash equivalents, short-term bank deposits, short-term and
long-term restricted cash, short-term and long-term restricted cash held by trustees,
trade receivables, short-term and long-term receivables relating to capital leases and
long-term trade receivables. The majority of the Groups cash and cash equivalents,
short-term bank deposits, and short-term and long-term restricted cash are invested in
dollars with major banks in Israel and in the United States. Such deposits in the United
States may be in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Groups
investments are financially sound and, accordingly, minimal credit risk exists with
respect to these investments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---



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

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

| | The
Group also has restricted cash held by trustees, which is invested in U.S. dollar
deposits and in Colombian Peso deposits with major banks in Colombia and in the U.S. As
of December 31, 2005, restricted cash held by the trustees amounted to approximately
$ 20.3 million. The Company is entitled to receive the cash held by the trustee in
stages based upon operational milestones. The cash held in trust is reflected in the
Companys balance sheet as Restricted cash held by trustees. If the
Company does not meet certain milestones, or if the government of Colombia terminates the
contracts unilaterally, the Company may be unable to receive this restricted cash.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trade
receivables, short-term and long-term receivables relating to capital leases and
long-term trade receivables of the Group are derived from sales to major customers
located in the U.S., Europe, Far East and South America (mainly one customer in Peru and
one customer in Brazil in the amount of $ 12.0 million and $ 6.8 million,
respectively). The Group performs ongoing credit evaluations of its customers and obtains
letters of credit and bank guarantees for certain receivables. An allowance for doubtful
accounts is determined with respect to those amounts that the Group has determined to be
doubtful of collection and a general allowance is provided to cover additional potential
exposures.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
significant portion of the Groups restricted cash held by trustees, trade
receivables and long-term trade receivables is from three countries in Latin America
 Colombia, Peru and Brazil. Any instability in the political or economic situation
or otherwise in those countries, could have a significant adverse impact on the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group has no significant off-balance-sheet concentration of credit risk such as foreign
exchange contracts, option contracts or other foreign hedging arrangements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | w. | Employee
related benefits:
| | -- | --------------------------

| | Severance
Pay
| | -------------

| | The
Companys liability for severance pay for its Israeli employees is calculated
pursuant to Israeli severance pay law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the balance sheet date. Employees
whose employment is terminated by the Company or who are otherwise entitled to severance
pay in accordance with Israeli law or labor agreements are entitled to one months
salary for each year of employment or a portion thereof. The Companys liability for
all of its Israeli employees is partly provided by monthly deposits for insurance
policies and the remainder by an accrual. The value of these policies is recorded as an
asset in the Companys consolidated balance sheet.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
deposited funds made for the Companys employees include profits accumulated up to
the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of
the obligation pursuant to Israeli severance pay law or labor agreements. The value of
the deposited funds is based on the cash surrendered value of these policies, and
includes profits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expenses for the years ended December 31, 2003, 2004 and 2005, amounted to
approximately $ 6.8 million, $ 3.4 million and $ 2.0 million, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---



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

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

| | The
severance pay expenses for the year 2003 include expenses in an amount of $ 3.2
million as per the settlement agreement with the retired management (see Note 10b).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 401K
profit sharing plans
| | -------------------------

| | The
Company has a number of savings plans in the United States that qualify under Section
401(k) of the Internal Revenue Code. U.S employees may contribute up to 15% or 100% of
their pretax salary, but not more than statutory limits. The Company contributes either
a) one dollar for each dollar a participant contributes in this plan, in an amount of up
to 3% of a participants earnings and in addition, it contributes fifty cents for
each dollar a participant contributes in this plan, for an additional 3% of a participants
earnings or b) 25% of the first 6% a participant contributes in this plan. Matching
contributions in 2003, 2004 and 2005 for all the plans were $ 0.5 million, $ 0.7
million and $ 0.7 million, respectively. Matching contributions are invested in
proportion to each participants voluntary contributions in the investment options
provided under the plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | x. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
following methods and assumptions were used by the Group in estimating their fair value
disclosures for financial instruments:
| | ----------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of cash and cash equivalents, short-term restricted cash, restricted
cash held by trustees, trade receivables, short-term bank credit and trade payables
approximate their fair value due to the short-term maturity of such instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of the Groups long-term borrowing arrangements, long-term trade
receivables and long-term restricted cash approximate their fair value. The fair value
was estimated using discounted cash flow analysis, based on the Groups incremental
borrowing rates for similar borrowing arrangements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the convertible subordinated notes, which was determined according to
market value, and the carrying amount of the Companys convertible subordinated
notes was $ 10.1 million and $ 16.2 million as of December 31, 2004,
respectively and $ 10.0 million and $ 16.3 million as of December 31, 2005,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | y. | Net
earnings (loss) per share:
| | -- | ------------------------------

| | Basic
net earnings (loss) per share are computed based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net earnings (loss) per share are
computed based on the weighted average number of Ordinary shares outstanding during each
year, plus dilutive potential Ordinary shares considered outstanding during the year, in
accordance with SFAS No. 128, Earnings Per Share.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---



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

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

| | The
difference between the weighted average number of shares used in computing basic net
earnings per share and the weighted average number of shares used in computing diluted
net earnings per share for the year ended December 31, 2003 is derived from potential
Ordinary shares attributable to the convertible subordinated notes and stock options. For
2004 and 2005, the shares attributable to the convertible subordinated notes, stock
options and warrant outstanding, have been excluded from the calculation of the diluted
net loss per Ordinary share because such securities were anti-dilutive.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the year ended December 31, 2003, there was an adjustment to net income in computing
diluted earnings per share to exclude interest expenses related to the convertible
subordinated notes in the amount of $ 1.4 million. In the years ended December 31,
2004 and 2005, there were no adjustments to net loss in computing diluted loss per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
reconciliation between the numerators and denominators of the basic and diluted earning
per share (EPS) for net earnings is as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------

|                    | Year ended December 31,
|------------------- | -----------------------
|
|
|
|
|Net Income (Loss)   |                        
|                    |                        
|Basic EPS:          |                        
|Net earnings (loss) |                        
|attributable to     |                        
|common stock        |                        
|                    |                        
|Effect of Dilutive  |                        
|Securities:         |                        
|Stock options and   |                        
|convertible notes   |                        
|                    |                        
|                    |                        
|Diluted EPS:        |                        
|Net earnings (loss) |                        
|attributable to     |                        
|common stock        |                        
|and assumed         |                        
|option exercises    |                        
|                    |                        

| | Convertible
subordinated notes, outstanding stock options and warrants to purchase 3,487,320 Ordinary
shares in 2003, 9,990,282 Ordinary shares in 2004 and 13,390,669 Ordinary shares in 2005
were outstanding, but were not included in the computation of diluted earnings per share
because a) the Company had a loss; or b) the exercise prices of the convertible
subordinate notes, outstanding stock options and warrant were greater than the average
market price of the Ordinary shares and, therefore, the effect would have been
anti-dilutive.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---



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

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

| | z. | Impact
of recently issued accounting standards:
| | -- | -----------------------------------------------

| | In
November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, Inventory
Costs, an Amendment of ARB No. 43, Chapter 4. (SFAS No. 151). SFAS No.
151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, to clarify
that abnormal amounts of idle facility expense, freight handling costs and wasted
materials (spoilage) should be recognized as current-period charges. In addition, SFAS
No.151 requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning after September 15,
2005. As of December 31, 2005, the Company does not expect that the adoption of SFAS No.
151 will have a material effect on its financial position or results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2005, the FASB issued Statement of Financial Accounting Standard No. 154 (SFAS
No. 154), Accounting Changes and Error Corrections, a replacement of
APB No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS No. 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections. APB No. 20
previously required that most voluntary changes in accounting principles be recognized by
including in net income for the period of change the cumulative effect of changing to the
new accounting principle. SFAS No. 154 requires retroactive application to prior periodsfinancial
statements of a voluntary change in accounting principles unless it is impracticable.
SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Statement
123(R) permits public companies to adopt its requirements using one of two methods:
| | ---------------------------------------------------------------------------------------------

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

F - 27

---

---



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

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

| | A
modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures
all prior periods presented.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company plans to adopt Statement 123(R) using the modified prospective method. effective
January 1, 2006.
| | -------------------------------------------------------------------------------------------------------------

| | As
permitted by Statement 123, prior to January 1, 2006 the Company accounted for
share-based payments to employees using Opinion 25s intrinsic value method and, as
such, generally recognized no compensation cost for employee stock options. Accordingly,
the adoption of Statement 123(R)s fair value method will have a significant impact
on the Companys result of operations, although it will have no impact on the
Company overall financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted Statement 123(R) in prior periods, the
impact of that Standard would have approximated the impact of Statement 123 as described
in the disclosure of pro forma net income and earnings per share in Note 2t to the
consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share Based
Payment (SAB 107). SAB 107 provides the SECs staff position
regarding the application of Statement 123(R) and contains interpretive guidance relating
to the interaction between Statement 123(R) and certain SEC rules and regulations, and
also provides the SEC staffs view regarding the valuation of share-based payment
arrangements for public companies. SAB 107 highlights the importance of disclosures made
relating to the accounting for share-based payment transactions. The Company evaluated
the expected term of the options granted in 2005 in accordance with the guidance of SAB
107.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Reclassification:
| | -- | -----------------

| | Certain
2003 and 2004 figures have been reclassified to conform to the 2005 presentation.
| | -----------------------------------------------------------------------------------------

|NOTE 3: |  | INVENTORIES
|------- | - | -----------

| | a. | Inventory:
| | -- | ----------

| |  | December 31,
| |  | ------------
|
|
|
|
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             

| | b. | Inventory
write-offs totaled $ 6.4 million, $ 2.0 million and $ 0.6 million in           2003, 2004
and 2005, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------

F - 28

---

---



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

|NOTE 4: |  | INVESTMENTS IN AFFILIATED COMPANIES AND EXCESS OF LOSSES OVER INVESTMENTS
|------- | - | -------------------------------------------------------------------------

| | a. | Excess
of losses over investments in affiliated companies is comprised of the
          following:
| | -- | --------------------------------------------------------------------------------------------------

| |  | December 31,
| |  | ------------
|
|
|
|
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             

| | b. | Investment
in Satlynx:
| | -- | ----------------------

| | As
of January 1, 2003, the Group held 50% of the outstanding shares of Satlynx S.A. (Satlynx),
a company that provides two-way satellite broadband communications services to
enterprises, consumers and Small-office home-office (Soho) users in Europe.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2003, Alcatel Space and Skybridge LP, subsidiaries of Alcatel, invested certain
intangible assets and committed to provide certain services to Satlynx, including
technical, engineering and marketing support,  8 million in cash and in addition
in-kind contributions, in exchange for approximately 10% of Satlynx (decreasing the
Companys ownership in Satlynx to approximately 45%). In February and March 2004,
Alcatel Space and Skybridge invested in Satlynx additional in-kind contributions and
 7 million in cash. Subsequent to these transactions, the Company held
approximately 40.6% of Satlynxs issued shares.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2005, following a restructuring of Satlynxs obligations, the Companys
holdings were reduced to 17%. In December 2005, the Companys shareholdings were
further reduced to 0.17%, following a conversion by SES Global S.A. of loans provided to
Satlynx.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2004, the Company analyzed whether Satlynx could finance its activities without
additional financial support from other parties and concluded that the equity investment
at risk was not greater than the expected losses of the entity. Accordingly, the Company
believes that Satlynx is a VIE, as defined in FIN 46.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
Satlynx was considered a VIE, the Company performed an analysis in which it allocated the
expected losses and expected residual returns to the Company and to the other investors
in Satlynx using expected cash flows derived by projecting possible cash flows and
assigning each projection with a probability weight. Through its analysis, the Company
concluded it does not absorb the majority of Satlynxs expected losses and does not
receive the majority of the residual return. Accordingly, the Company believes that it is
not the primary beneficiary of Satlynx, and therefore Satlynx should not be consolidated
into the Companys financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---



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

|NOTE 4: |  | INVESTMENTS IN AFFILIATED COMPANIES AND EXCESS OF LOSSES OVER INVESTMENTS (Cont.)
|------- | - | ---------------------------------------------------------------------------------

| | In
accordance with EITF 89-7 (as was codified into EITF 01-2) and APB 18, the Company has
determined that it does not control Satlynx for the following reasons: (i) the Company
owned approximately 45%, 40.6% ,17.0% and 0.17% of the outstanding shares, in June 2003,
March 2004, April 2005 and December 2005, respectively, which is less than a majority of
the shares; (ii) the CEO of Satlynx has been appointed by SES Global S.A (the other major
shareholder); and (iii) the shareholders agreement entered into between the Company and
SES Global S.A provides SES Global S.A with certain veto and management rights which
enable SES Global S.A to participate in significant financial and operating decisions
that would normally be made in the ordinary course of business. As such, SES Global S.A.
has the ability to block significant business decisions that the Company might otherwise
choose to undertake, and therefore the Company ceased to consolidate its European
operations as of May 1, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognized equity profits (losses), including collection of amounts previously
reserved, in the amount of ($ 1.6) million, $ 1.2 million and $ 0.4 million in
the years ended December 31, 2003, 2004 and 2005, respectively. During the above years,
the Company did not record any amount on account of its shares in the affiliates
losses
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| | a. | Composition
of property and equipment, grouped by major classifications, is as           follows:
| | -- | -------------------------------------------------------------------------------------------------

| |  | December 31,
| |  | ------------
|
|
|
|
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             

| | *) | The
accumulated depreciation of equipment leased to others as of December 31,           2004
and 2005 is $ 14.3 million and $ 19.0 million, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Depreciation
expenses totaled $ 23.9 million, $ 30.0 million and           $ 17.7 million in
2003, 2004 and 2005, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------

| | c. | As
for impairment of property and equipment and other charges, see Note 10b.
| | -- | ----------------------------------------------------------------------------

| | d. | As
for pledges and securities, see Note 12g.
| | -- | --------------------------------------------

F - 30

---

---



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

|NOTE 6: |  | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
|------- | - | -------------------------------------------

| | a. | Composition
of intangible assets and deferred charges, grouped by major           classifications, is
as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------

| |  | Weightedaverageamortizationperiod | December 31,                                 
| |  | --------------------------------- | ---------------------------------------------
|
|
|
|
| |  |                                   | Cost:                                        
| |  |                                   | Identifiable intangible assets resulting from
| |  |                                   | acquisitions of a subsidiary                 
| |  |                                   | Customer acquisition costs                   
| |  |                                   | Other                                        
| |  |                                   |                                              
| |  |                                   |                                              
| |  |                                   |                                              
| |  |                                   | Accumulated amortization and provision for   
| |  |                                   | impairment                                   
| |  |                                   |                                              
| |  |                                   |                                              
| |  |                                   | Amortized cost                               
| |  |                                   |                                              
| |  |                                  
| |  |                                   | Deferred charges                             
| |  |                                   |                                              
| |  |                                  
| |  |                                   |                                              
| |  |                                   |                                              

| | b. | Amortization
expenses amounted to $ 2.4 million, $ 1.7 million and           $ 1.4 million
for the years ended December 31, 2003, 2004 and 2005,           respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | As
for impairment of intangible assets and deferred charges, see Note 10b.
| | -- | --------------------------------------------------------------------------

| | d. | Estimated
amortization expenses for the following years is as follows:
| | -- | ----------------------------------------------------------------------

| | Year ending December 31, | U.S. dollarsIn thousands
| | ------------------------ | ------------------------
|
|
|
|
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         

F - 31

---

---



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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES
|------- | - | -----------------------------

| | a. | On
March 29, 2001, Spacenet Inc. completed a transaction for the sale and
          leaseback of its corporate headquarters building. The sale price of the
property           was approximately $ 31.5 million net of certain fees and
commissions.           Concurrently with the sale, Spacenet Inc. entered into an
operating leaseback           contract for a period of fifteen years at an initial annual
rent of           approximately $ 3.5 million plus escalation. The capital gain
resulting           from the sale and leaseback amounting to $ 5.6 million was
deferred and is           being amortized over the 15-year term of the lease. In
accordance with the lease           terms, Spacenet Inc. made a security deposit
consisting of a $ 5.5 million           fully cash collateralized letter of credit
for the benefit of the lessor. The           lease is accounted for as an operating lease
in accordance with SFAS 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,
2005, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Grosscommitments | Receivablesfrom subleases | Netcommitments
| |  | ---------------- | ------------------------- | --------------
|
|
|
|
| |  |                  | 2006                      |               
| |  |                  | 2007                      |               
| |  |                  | 2008                      |               
| |  |                  | 2009                      |               
| |  |                  | 2010 and thereafter       |               
| |  |                  |                           |               
| |  |                  |                           |               
| |  |                  |                           |               
| |  |                  |                           |               

| | Gross
rent expenses and income from subleases were $ 7.2 million and $ 1.2,
respectively in 2003, $ 8 million and $ 1.5 million, respectively in 2004 and $ 6.4
million and $ 0.9 million, respectively in 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Out
of the above commitment, $ 1.6 million is included as restructuring accrual in other
accounts payable and other long-term liabilities. Some of the Groups lease
agreements do not include renewal options.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Commitments
with respect to space segment services:
| | -- | ---------------------------------------------------

| | All
the required space segment services necessary to meet the terms of the current customer
contracts are obtained from either SES Americom or from unrelated third parties under
contracts ranging from one to twelve years (see also Note 9a).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---



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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | Future
minimum payments due for space segment services mainly to SES Americom, (a related party
until July 2005), subsequent to December 31, 2005, are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, | U.S. dollarsin thousands
| | ------------------------ | ------------------------
|
|
|
|
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         

| | Space
segment services expenses, mainly to SES Americom, totaled $ 18.6 million, $ 27.4 million
and $ 24.2 million in 2003, 2004 and 2005, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
June 2003, the Company entered into development agreements with SES Global           S.A,
(a related party until July 2005). Under the agreements, SES Global S.A
          invested an aggregate of $ 6 million in research which was performed by
the           Company. The Company is required to pay SES Global S.A a 10% royalty per
outdoor           unit sold for up to the $ 6 million invested by SES Global S.A and
          thereafter, the royalties decrease to 5% per unit. Royalties are payable for
          sales of product units which include components developed under the agreements.
          As of December 31, 2005, the Company has finalized the development underling
the           agreements but has not yet generated any sales relating to such product
units.           As such, no royalties have been paid or accrued. See Notes 13a and 15.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In
December 2003 and October 2004, the Company received initial tax assessments
          for the tax years 1998 and 1999-2001, respectively, for approximately $ 45
          million plus $ 7 million in penalties based on various claims of the
          Israeli Tax Authorities. In May 2005, the Company reached a settlement
agreement           in connection with the above. According to the settlement agreement,
the           Companys tax assessments for the years 1998-2003 were settled for
          approximately $ 6 million, including interest and indexation out of which
          $ 1.2 million was expensed in 2005. In addition, carry forward tax losses
          as of December 31, 2003, were set at $ 65 million reduced from $ 115
          million. Such amount was fully covered with a valuation allowance. The Israeli
          Tax Authorities and the Tax Authorities in the jurisdictions in which the Group
          operates might raise additional claims, which might result in payment of
          additional taxes. The Company believes that it has adequate provisions to cover
          those exposures in accordance with SFAS 5.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | The
Company has received notice from the Israeli Stamp Tax Authorities           requiring
that it disclose all documentation which may be subject to Stamp Tax           duties
from June 1, 2003 to date. The Authorities right to demand Stamp           Tax duty
is pending deliberation by Israels Supreme Court. The Company           intends to
challenge any demands for payments received from the Stamp Tax           Authorities
should such demands be received. The Company believes that it has           adequate
provisions to cover those exposures in accordance with SFAS 5.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---



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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | g. | In
2003, the Company entered into a consulting agreement with Israel Literage
               & Supply Co. Ltd., a company under the ownership and control of Shlomo
               Rodav, then serving as Chairman of the Board of Directors of the Company.
This                agreement was terminated on July 18, 2005 and as of such date,
neither Israel                Literage & Supply Co. nor Shlomo Rodav are related
parties. The agreement                specified management services to be provided to the
Company through Mr. Rodav.                Pursuant to that agreement, Israel Literage
& Supply Co. Ltd. received: (i)                $ 25,000 per month; (ii) an
annual bonus of 2.5% of the net profits after                tax for each fiscal year
beginning in 2003; and (iii) participation in the                Companys employee
stock option and bonus plans. In addition, Shlomo Rodav                was granted
150,000 options exercisable at $ 5.00 per share over a                three-year
vesting period (see Note 9e).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, the Companys shareholders approved additional payments to be made to Israel
Literage & Supply Co. Ltd. for services rendered to the Company by Shlomo Rodav in
his capacity as its Chief Executive Officer from July 1, 2004 through July 18, 2005. The
compensation approved was an additional monthly payment of $ 25,000 for the period
beginning July 1, 2004 and through July 18, 2005, and a $ 300,000 bonus for each of
2004 and 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2003, 2004 and 2005, as a result of the above agreements, the Company recorded an expense
in the amount of $ 1.4 million, $ 1.0 million and $ 1.0 million, respectively,
which is included in selling, marketing, general and administrative expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Legal
claims:
| | -- | -------------

| | 1. | In
the first half of 2002, a number of securities class action lawsuits were           filed
against the Company and certain of the Companys officers and           directors in
the United States District Court for the Eastern District of New           York and in
the United States District Court for the Eastern District of           Virginia, and a
request to file a class action lawsuit was filed in the           Tel-Aviv, Israel
District Court. The class action suits allege violations of the           federal
securities laws and claim that the Company issued material           misrepresentations
to the market. The class action suits in the U.S. have been           consolidated into a
single action in the United States District Court for the           Eastern District of
New York and an amended complaint has been filed. During           September 2004, the
plaintiffs filed a motion to further amend the claim. The           Company has filed a
motion to dismiss the amended complaint, and a decision was           rendered on
September 19, 2005, dismissing certain of the plaintiffs           claims. The
plaintiffs have provided the Company with a discovery demand. A           conference with
the plaintiffs has been scheduled for March 2006 to agree on the           schedule and
scope of the discovery.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Israeli court granted a motion to stay the proceedings of the Israeli
action pending the outcome of the U.S. class action proceeding. The Company believes the
allegations against it in the class action suits are without merit and are contesting
them vigorously.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---



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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | 2. | In
September 2003, Nova Mobilcom S.A. (Mobilcom) filed a lawsuit
          against Gilat do Brasil, a wholly-owned subsidiary of the Company, for specific
          performance of a memorandum of understanding which provided for the sale of
          Gilat do Brazil, and specifically the GESAC project, to Mobilcom for an
          unspecified amount. The Company does not believe that this claim has any merit,
          and the Company is vigorously defending itself against the claims presented
          therein.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
2003, the Brazilian Tax Authority filed a claim against a subsidiary of
          Spacenet Inc. in Brazil, for alleged taxes due in the amount of approximately
          $ 4.0 million. The subsidiary received notice of a lower administrative
          ruling against it in this regard, and it filed an administrative appeal of the
          ruling. In December 2005, this appeal was denied and at present, the
          subsidiarys exposure is a payment of taxes in an amount of approximately
          $ 6.1 million (the amount has increased due to interest and the exchange
          rate of the Brazilian Reias). The subsidiary denies such claims and is at
          present preparing to file a petition known as a Ação
          Anulatória in the State Courts of the State of São Paulo,
          Brazil.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Various
claims against companies within the Group, some of which are in           litigation,
have been alleged by former employees for commissions owed, wrongful
          termination and severance in the aggregate amount of approximately $ 1.6
          million. The Company believes that such claims are without merit and will
defend           against them vigorously.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | From
time to time, the Company receives claims that it may be infringing           patents,
copyrights or other intellectual property rights owned by third           parties. The
Company does not believe it is infringing any intellectual property           rights of
third parties and intends to vigorously dispute such claims.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Certain
claims have been alleged, in the past three years, against the Group in           the
aggregate amount of approximately $ 5.7 million, for items such as           agent
commissions, compliance issues and breach of contract. The Company           believes
that such claims are without merit and will defend against them           vigorously.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with SFAS 5, the Company has accrued approximately $ 2.6 million and $ 4.1
million as of December 31, 2004 and 2005, respectively, for the expected implications of
such legal actions claims alleged against the Group.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Pledges
and securities  see Note 12g.
| | -- | --------------------------------------

| | j. | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---



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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | At
December 31, 2005, the aggregate amount of bank guarantees provided in order to secure
the Groups performance obligations is approximately $15.4 million, comprised mainly
of performance guarantees provided on behalf of the Companys subsidiary in Peru in
an amount of approximately $9.1 million. The Group has restricted cash as collateral for
these guarantees in an amount of approximately $7.4 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Group has provided corporate and bank guarantees for certain leases
throughout the world, lines of credit and capital lease agreements for an aggregate
amount of approximately $21.5 million. The Group has restricted cash as collateral for
these guarantees in an amount of approximately $5.7 million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | From
time to time, the Company provides corporate guarantees to guarantee the performance of
the Group, including a currently outstanding guarantee for projects in Colombia of
approximately $ 60.1 million. The Company has not recorded any liability for the above
amounts, as the Company expects that the performance will be acceptable. No guarantees
have ever been exercised against the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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: |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | a. | Share
capital:
| | -- | --------------

| | Ordinary
shares confer upon their holders voting rights, the right to receive cash dividends and
the right to share in excess assets upon liquidation of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005, the Company increased its authorized share capital by 22,500,000 Ordinary
shares to 60,000,000 Ordinary shares.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | b. | Stock
Option Plans:
| | -- | -------------------

| | The
Company has three stock option plans, the 1995 and the 2003 Stock Option and Incentive
Plans and the 2005 Stock Incentive Plan. The 1995 Plan was amended in 1997, 1998 and 1999
and has expired though there are still options outstanding under this Plan. Under the
2003 Plan, options may be granted to employees, officers, directors and consultants of
the Group. In 2005, the shareholders approved two increases in the number of options
available for grant of the 2003 Plan for an aggregate of 4,635,000 shares to a total of
6,135,000 shares in the pool. As of December 31, 2005, an aggregate of 849,273 Ordinary
shares of the Company are still available for future grant from the 2003 Stock Option
Incentive Plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---



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

|NOTE 8: |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | Options
granted under the 1995 and 2003 Plans generally vest quarterly over 2 to 4 years. The
options expire 10 years from the date of grant. Any options, which are forfeited or
canceled before expiration, become available for future grants. The exercise price per
share under the 1995 Plan was not less than the market price of an Ordinary share at the
date of grant. The exercise price for the 2003 Plan is the higher of (i) $ 5.00 per
share; and (ii) the market value of the shares as of the date of the option grant, unless
otherwise provided in the stock option agreement. No compensation expenses in connection
with options that were granted to employees have been charged against income in the years
ended December 31, 2003, 2004 and 2005, except with respect to $ 95,000 in 2005 and
as discussed in (c), (d) and (h) below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005, the Companys shareholders approved the adoption of a new plan, the
2005 Stock Incentive Plan with a number of options available for grant of 1,500,000
shares. This Plan is designed to enable the board of directors to determine various forms
of incentives for all forms of service providers and, when necessary, adopt a sub-plan in
order to grant specific incentives. Among the incentives that may be adopted are share
options, performance share awards, performance share unit awards, restricted shares,
restricted share unit awards and other share-based awards. To date, the Company made any
grants under this Plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the Plans as of December 31, 2003, 2004 and 2005, and changes
during the years ended on those dates, is presented below:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Year ended December 31,
| |  | -----------------------
|
|
|
|
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        

F - 37

---

---



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

|NOTE 8: |  | -
SHAREHOLDERS EQUITY (Cont.)
|------- | - | ------------------------------

| | The
options outstanding as of December 31, 2005, have been separated into ranges of exercise
price as follows:
| | --------------------------------------------------------------------------------------------------------------

| | Ranges ofexerciseprice | Optionsoutstandingas ofDecember 31,2005 | Weightedaverageremainingcontractuallife | Weightedaverageexerciseprice | Optionsexercisableas ofDecember 31,2005 | Weightedaverageexerciseprice ofexercisableoptions
| | ---------------------- | --------------------------------------- | --------------------------------------- | ---------------------------- | --------------------------------------- | -------------------------------------------------
|
|
|
|
| |                        |                                         | $ 5.0                                   |                              |                                         |                                                  
| |                        |                                         | $ 5.36-5.61                             |                              |                                         |                                                  
| |                        |                                         | $ 5.77                                  |                              |                                         |                                                  
| |                        |                                         | $ 5.97-6.55                             |                              |                                         |                                                  
| |                        |                                         | $ 6.77                                  |                              |                                         |                                                  
| |                        |                                         | $ 6.89-9.2                              |                              |                                         |                                                  
| |                        |                                         | $ 22.2-79                               |                              |                                         |                                                  
| |                        |                                         | $ 240.4-3,197.5                         |                              |                                         |                                                  
| |                        |                                         |                                         |                              |                                         |                                                  
| |                        |                                        
| |                        |                                         |                                         |                              |                                         |                                                  
| |                        |                                         |                                         |                              |                                         |                                                  

| | c. | In
August 2003, rStar granted 2.8 million options of rStar Common stock to its
          former CEO in accordance with the terms of his employment agreement. The
          exercise price was $ 0.16 per share of Common stock. rStar followed APB 25
          as variable plan and compensation expense of $ 764,000 was recorded in the
          year ended December 31, 2003, using the accelerated method of accounting
          for incentive stock options. The Company recorded the amount in its equity
          accounts as stock compensation related to options issued in a subsidiary. The
          compensation expense was included in selling, marketing, general and
          administrative expenses. As part of the acquisition of the minority interest of
          rStar, rStar purchased the vested options of its former CEO (see Note 1d), in
          consideration of $ 440,000 ($ 0.60 less the exercise price for each
          option). The difference between the $ 764,000 compensation expenses and
the           cash consideration was recorded as a reduction of selling, marketing,
general           and administrative expenses.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
2003, the Company reduced the weighted exercise price of 29,016 options           granted
to its then CFO as part of a separation agreement from $ 88.6 to           $ 1.26
per share. As a result, the Company recorded compensation expenses           of $ 91,000,
which is included in selling, marketing, general and           administrative expenses in
accordance with APB 25 and FIN 44. The Companys           former CFO exercised
those options in September and December 2003.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---



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

|NOTE 8: |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | e. | In
2003, the Company granted 150,000 stock options to its former Chairman of           the
Board of Directors, who was at that time a related party, in accordance with
          the terms of his consultancy agreement. The exercise price is $ 5.00 per
          share. The Company accounted for these options under the fair value method of
          SFAS 123 and EITF 96-18. The fair value of these options was estimated using a
          Black-Scholes option-pricing model with the following weighted-average
          assumptions for 2003, 2004 and 2005: risk-free interest rates of 3%, dividend
          yields of 0%, volatility factor of the expected market price of the
          Companys Ordinary shares of 84%, and a weighted-average expected life of
          the options of three and half years. Changes in the fair value of the options
          prior to completion of performance are reflected as an adjustment to the
expense           to be included in future periods over the vesting period. In 2003, 2004
and           2005, the Company recorded compensation expenses of $ 233,000,
          $ 207,000 and $ 17,000, respectively which are included in selling,
          marketing, general and administrative expenses. All options shall expire over a
          period ending on July 2008.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | In
2003, the Company granted 225,000 stock options to its former CEO in           accordance
with the terms of his employment agreement. The exercise price was           $ 5.00
per share. The options were treated under APB 25 as a variable plan.           No
compensation expense was recorded in the years ended December 31, 2003 and           2004
since the market price of the underlying shares was lower than the exercise
          price of the option. All such options vested upon the former CEOs
          separation from the Company in July 2004. All options shall expire if not
          earlier exercised by July 14, 2007.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | In
2005, the Company recruited new management and as part of their recruitment
          package, an aggregate of 2,445,000 options were granted under the 2003 Stock
          Plan. At the same time, additional executives were granted options for an
          aggregate of 490,000 shares under the 2003 Stock Plan. These options are
          included in the details of b above.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | In
August 2005, the Companys shareholders approved the accelerated           vesting
of all of the options granted to non-employee directors in an aggregate           amount
of 90,330 shares. The compensation expenses in connection with the           accelerated
vesting were approximately $ 26,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Dividends:
| | -- | ----------

| | 1. | In
the event that cash dividends are declared by the Company, such dividends           will
be declared and paid in Israeli currency. Under current Israeli           regulations,
any cash dividend in Israeli currency paid in respect of Ordinary           shares
purchased by non-residents of Israel with non-Israeli currency, may be           freely
repatriated in such non-Israeli currency, at the exchange rate prevailing           at
the time of repatriation.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Pursuant
to the terms of a credit line from a bank (see Note 12g), the Company           is
restricted from paying cash dividends to its shareholders without initial
          approval from the bank.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

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---



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

|NOTE 9: |  | RESTRUCTURING OF DEBTS
|------- | - | ----------------------

| | a. | In
March 2003, the Company completed a plan of arrangement with its bank           lenders,
holders of the Companys convertible subordinated notes, and           certain other
creditors (the arrangement). The arrangement resulted           in an
increase of share capital and additional paid-in capital of approximately           $ 55.2
million, net of expenses in the amount of $ 2.8 million and a           gain of
approximately $ 185.6 million, net of related expenses in the           amount of
approximately $ 11.9 million and $ 5.7 million in tax           expenses. The
related expenses included settlement payments to outgoing           management in the
amount of $ 2.4 million and debenture issuing expenses in           the amount of $ 4.1
million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the arrangement, the Company amended the following agreements, as detailed herein:
| | ---------------------------------------------------------------------------------------------

| | 1. | 4.25%
convertible subordinated notes due in 2005 (the old notes):
| | -- | -------------------------------------------------------------------

| | Under
an offering memorandum issued at the end of February 2000, the Company issued in March
2000, $ 350 million principal amount of 4.25% convertible subordinated notes due
2005, traded in the United States on the Private Offerings, Resales and Trading through
Automated Linkages (PORTAL) market and due March 15, 2005. As part of the
arrangement, the Company converted the old notes into equity and new notes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
exchange for the old notes, which had a principal amount of $ 350 million plus $ 12
million in accrued interest, the Company issued (i) 10,104,195 Ordinary shares and (ii) $ 83.3
million in principal amount of 4.00% convertible notes due in 2012, also called new
notes. The Company pays interest on the new notes semi-annually in arrears on
April 1 and October 1 of each year, beginning on April 1, 2005. The first interest
payment was payable for the period from January 1, 2005 to April 1, 2005. Prior to
January 1, 2005, interest was accrued and compounded semi-annually. The Company agreed to
pay $ 2.5 million of the principal amount of the new notes on each of April 1 and
October 1, in both 2010 and 2011, and the remaining principal amount at maturity. The new
notes are convertible at the option of the holder into the Companys Ordinary shares
at a conversion price of $ 17.4 per Ordinary share at any time after one year from
the date of issuance of the new notes and before close of business on October 1, 2012,
unless the new notes have been converted pursuant to a mandatory conversion clause.
Commencing January 1, 2005, the Company may, at its option, require the conversion right
to be exercised under certain circumstances set forth in the indenture. The collateral
for the new notes is a second priority security interest consisting of a floating charge
on all of the Companys assets and a pledge of all of the shares of Spacenet Inc., a
wholly owned subsidiary of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
interest of the holders of the new Notes in the collateral is subordinated to the
security interest granted for the benefit of the lending banks. As of December 31, 2004
and 2005, the outstanding amount of the New Notes is $ 16.2 million and $ 16.3
million, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---



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

|NOTE 9: |  | RESTRUCTURING OF DEBTS (Cont.)
|------- | - | ------------------------------

| | 2. | Bank
Hapoalim:
| | -- | --------------

| | Of
the $ 102 million in principal amount due from the Company to Bank Hapoalim in six
semi-annual payments until July 2, 2005, (i) $ 25.5 million was converted into
924,430 Ordinary shares of the Company, (ii) $ 5.1 million was converted into new
notes of the same principal amount, and (iii) the remaining debt of $ 71.4 million
remains as a loan on revised terms. To secure repayment of the loan, the Company granted
a first priority security interest in favor of Bank Hapoalim consisting of a floating
charge over all the Companys assets and pledged all of the shares of Spacenet Inc.
held by the Company. These liens are pari passu with the charges granted in the framework
of the arrangement with Bank Leumi and Discount Bank. Following the arrangement, Bank
Hapoalim is considered a related party.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Bank
Leumi:
| | -- | -----------

| | Under
the arrangement, Bank Leumi revised the terms of the restructured loan, which was
previously due in one installment at October 30, 2003, to include principal payments in
the amount of $ 1 million annually during each of 2003 and 2004, and principal
payments of $ 4 million annually during each of the years 2005 through 2011. The
loan bears interest at the six-month LIBOR rate plus 2.5%, and is secured by a first
priority charge on the Companys real estate property located in Petach Tikva,
Israel. In addition, Bank Leumi agreed to maintain its line of credit utilized for
performance guarantees for the Companys benefit and for its direct and indirect
subsidiaries in the then existing aggregate amount of $ 15 million for at least one
year terminated in March 2004, subject to the limitation that continued availability of
the line of credit may be affected by the overall collateral made available by the
Company in support of credit used by the Company in the future for the issuance of
guarantees. To secure the line of credit of Bank Leumi, the Company granted to Bank Leumi
a second priority charge on its real estate property in Petach Tikva, Israel, which is
pari passu with the charges granted to Discount Bank.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Bank
Discount:
| | -- | --------------

| | Under
the arrangement, Bank Discount agreed to maintain its performance guarantees for the
Companys benefit and its subsidiaries in the then existing amount of $ 11
million for at least one year ending in March 2004. The Companys obligations to
Bank Discount are secured by a second priority charge on its real estate property in
Petach Tikva, Israel, which is pari passu with the second priority charge granted to Bank
Leumi.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---



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

|NOTE 9: |  | RESTRUCTURING OF DEBTS (Cont.)
|------- | - | ------------------------------

| | 5. | SES
Americom:
| | -- | -------------

| | Under
the arrangement, the Company entered into a new agreement with SES Americom (a related
party until July 2005), and its major supplier of satellite transponder capacity.
According to the agreement, SES Americom agreed to allow Spacenet Inc. to defer payments
of certain transponder capacity charges due in 2003 and 2004, with payments of those
deferred charges to commence in 2005. As part of this agreement, the Company issued to
SES Americom 713,052 Ordinary shares of the Company equal to approximately 5.5% of the
Companys Ordinary shares. The agreement reduced the Companys liability to SES
Americom with respect to its transponder agreements with Spacenet Inc., which related to
StarBand, from an aggregate amount of $ 26.9 million to be paid in 2003 to an
aggregate amount of $ 13.5 million. In addition, a $ 3.5 million payment was
deferred from 2002 to 2003. In 2002, the Company recorded a provision for the settlement
in the amount of $ 5.7 million, representing the fair value of the Ordinary shares
issued at the closing date of the arrangement. This amount was reduced to $ 3.4
million at the closing date of the arrangement to reflect the actual fair value of the
shares issued. The amounts are included in the statements of operations as equity in
earnings (losses) of affiliated companies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of March 7, 2005, SES Americom is no longer a reporting shareholder. and as of July 2005,
SES Americom is no longer a related party.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Other
creditors:
| | -- | ----------------

| | Under
the arrangement, the Company also restructured its debt with respect to an outstanding
loan of approximately $ 6.5 million. The revised terms of the loan included the
conversion of $ 1.3 million into 53,386 Ordinary shares and a change of the terms of
the remaining loan in an amount of $ 5.2 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Except
for the arrangement with Bank Leumi, the Company accounted for the troubled debt
restructuring included in the arrangement on the basis of Combination of Types of
Restructuring and on the basis of Modification of Terms pursuant to Statement of the
Financial Accounting Standard (SFAS) No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings, Emerging Issues Task Force (EITF)
Issue No. 02-4, Debtors Accounting for a Modification or an Exchange of Debt
Instruments in Accordance with FASB Statement No. 15, Accounting by Debtors and Creditors
for Troubled Debt Restructurings and SFAS No. 145, Rescission of SFAS No. 4,
44 and 64, Amendment of SFAS No. 13, and Technical Corrections. As a result of the
arrangement, the Company recorded the shares issued at their fair value in its
shareholders equity at the date of the closing.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company recorded the estimated future interest payments to be made in
connection with the repayments of the new notes and the loans in its consolidated balance
sheet and recognized a gain from restructuring of debts in the amount of approximately $ 185.6
million. This amount is net of related expenses in the amount of $ 11.9 million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---



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

|NOTE 9: |  | RESTRUCTURING OF DEBTS (Cont.)
|------- | - | ------------------------------

| | b. | In
November 2003, the Company completed a restructuring through conversion of           debt
to equity with its holders of the new notes issued as part of the           arrangement.
Under this restructuring, through conversion of debt to equity, the           Company
issued an exchange offer to exchange the new notes for Ordinary shares           of the
Company with a new conversion ratio, of 125 Ordinary shares for each           $ 1,000
of new notes in principal converted. Out of the $ 91.8 million           carrying
amount of the new notes as of the date of the closing, which included           $ 3.0
million accrued interest, $ 76.0 million, which included           $ 2.3
million of accrued interest, was converted to 9,208,270 Ordinary           shares, and
the remainder is presented as convertible subordinated notes in the
          consolidated balance sheet.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounted for this debt restructuring through conversion of debt to equity on the
basis of grant of equity interest in full settlement pursuant to SFAS 15, EITF 02-4 and
SFAS 145. As a result of the arrangement, the Company recorded the Ordinary shares issued
at their fair value in its shareholders equity at the date of the closing. In
addition, the Company recognized an additional gain from the restructuring of debt in the
amount of approximately $ 58.6 million, which included the respective part of
accrued interest that was accrued as a result of the first round of the restructuring of
debt and net of related expenses in the amount of $ 0.2 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
April 2004, the Company further revised the terms of its loan from Bank
          Hapoalim, to which it owed a principal debt amount of $ 71.4 million. The
          new loan terms reduced the principal installments due on July 1, 2005 and
          January 1, 2006 from $ 4.463 million to $ 1 million and $ 1.5
          million, respectively, with the remainder due for payment in 2012. Other
          principal payments for $ 4.463 million due semi-annually thereafter remain
          unchanged and the last installment of $ 15.3 million is due on July 2,
          2012. In addition, under the revised loan terms, the interest on the loan was
          reduced from a six-month LIBOR rate plus 2.5% to be paid semi-annually with
          principal installments to the following new terms: (i) for each interest period
          commencing from April 1, 2004 until March 31, 2008, interest due shall be
          six-month LIBOR plus 2% per annum, and (ii) for each interest period commencing
          from April 1, 2008 until the final maturity date, interest due shall be
          six-month LIBOR plus 1.5% per annum.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for the Bank Hapoalim agreement to amend the interest rates, defer
principal payments and modify certain covenants, the bank was entitled to provide the
Company with written instructions to issue a warrant or warrants for the purchase of its
Ordinary shares (the Warrant). The Warrant is issuable to Bank Hapoalim or to
third parties as designated by Bank Hapoalim (each a Holder). The maximum
exercise amount that may be paid under the Warrant will be equal to the then outstanding
balance on the loan owed by the Company to Bank Hapoalim. The Warrant can be issued at
any time at the request of Bank Hapoalim between July 1, 2004 and June 30, 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---



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

|NOTE 9: |  | RESTRUCTURING OF DEBTS (Cont.)
|------- | - | ------------------------------

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

| | 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 is a related
party, the extinguishment gain of approximately $ 15.5 million was recorded as an
equity contribution.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | 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, 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 resigned and a co-founder of the Company rejoined the
Company.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In
December 2005, the Company further and York revised the terms of the loan.           The
new loan terms defer $ 19.35 million in principal payments due in
          installments from January 5, 2006 through January 1, 2008. The new payment
          schedule provides that: (i) no principal payments will be due in 2006, 2007 or
          January 2008 (with those payments being deferred until July 2012) (ii)
          approximately $ 4.5 million will be paid on July 1, 2008; (iii)
          approximately $ 9 million will be paid in semi-annual installments on
          January 1 and July 1 of 2009, 2010 and 2011; (iv) approximately $ 4.5
          million will be paid on January 1, 2012; and (v) approximately $ 34.5
          million will be paid on July 1, 2012. In addition, the amendment modified the
          terms of the Warrant described above for the period until September 30, 2006.
          The amendment lowered and set the exercise price of the Warrant to $ 6.75
          per share until September 30, 2006. In addition, during this period, the
Company           has been granted the right to require the conversion of the outstanding
loan           from York at the same exercise price in the event that the closing share
price           of the Companys Ordinary shares as published by NASDAQ over twenty
          consecutive trading days will exceed $ 9.00, provided that the aggregate
          trading volume during this period is a minimum of 1,700,000 Ordinary shares.
          Beginning October 1, 2006, the exercise price of the Warrant will revert to the
          original terms detailed above.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

---

---



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

|NOTE 9: |  | RESTRUCTURING
OF DEBTS (Cont.)
|------- | - | ------------------------------

| | 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 Warrant immediately
before and after the modification in the amount of $ 3.8 million was recorded as a
fair value of change in conversion feature of a related party convertible debt and
increase to shareholders equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 10: |  | RESTRUCTURING
CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES
|-------- | - | ---------------------------------------------------------------

| | a. | Restructuring
charges:
| | -- | ----------------------

| | 1. | In
2001, the Group recorded restructuring charges of approximately $ 30.3
          million, pursuant to restructuring plans committed to by management, of which
in           2001, 2002, 2003, 2004 and 2005, $ 13.0 million, $ 7.4 million,
          $ 0.7 million , $ 0.1 million and $ 0 million were paid in cash,
          respectively, $ 6.6 million, $ 0 million, $ 0 million, $ 0.9
          million and $ 0.2 million were treated as a non-cash expense, respectively
          and $ 1.4 million was accrued as a short-term liability as of December 31,
          2005. The restructuring charges consist of employee termination benefits
          associated with involuntary termination of approximately 650 employees
including           potential claims, compensation to certain suppliers and customers,
costs           associated with termination of lease commitments in respect of premises
occupied           by the Group and other costs. The terminations resulted from the Groups
          strategy to reduce costs and improve profitability.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Restructuring
charges were accounted for in accordance with EITF 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring) (EITF 94-3) and SAB No. 100,
Restructuring and Impairment Charges.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                            | Restructuring
charges in the
year ended
December 31,
2001 | Accrued
liability as of
December 31,
2005
| | ------------------------------------------ | --------------------------------------------------------- | -----------------------------------------
|
|
|
|
| | Employee terminations, including potential |                                                           |                                          
| | claims                                     |                                                           |                                          
| | Termination of lease commitments           |                                                           |                                          
| | Compensation to customers and suppliers    |                                                           |                                          
| | Other                                      |                                                           |                                          
| |                                            |                                                           |                                          
| |                                            |                                                           |                                          
| |                                            |                                                           |                                          
| |                                            |                                                           |                                          
| |                                            |                                                           |                                          

F - 45

---

---



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

|NOTE 10: |  | RESTRUCTURING
CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES (Cont.)
|-------- | - | -----------------------------------------------------------------------

| | 2. | In
June 2003, the Group recorded additional restructuring charges of           approximately
$ 3.9 million, of which in 2003, $ 1.6 million was paid in           cash, $ 0.6
million was treated as a non-cash expense and $ 1.7           million was accrued as
short-term and long-term liabilities. In 2004, $ 0.2           million was treated
as a non-cash expense. In 2005, $ 0.6 million was           treated as a non-cash
expense. The restructuring costs consist of employee           termination benefits
associated with involuntary termination of 88 employees and           compensation to
certain suppliers. The terminations resulted from the           Groups strategy to
further reduce costs and improve profitability.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Restructuring
charges were accounted for in accordance with SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized and measured, initially
at fair value, only when the liability is incurred; thereby, nullifying EITF 94-3, that
required a liability for an exit cost to be recognized at the date of an entitys
announcement and commitment to an exit plan. The adoption of SFAS 146 resulted in
delaying recognition for certain types of costs as compared to the provisions of EITF
94-3, especially for facility closure costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Restructuring
charges in the
year ended
December 31,
2003 | Accrued
liability as of
December 31,
2005
| | -------------------------------- | --------------------------------------------------------- | -----------------------------------------
|
|
|
|
| | Employee terminations            |                                                           |                                          
| | Termination of lease commitments |                                                           |                                          
| | Other                            |                                                           |                                          
| |                                  |                                                           |                                          
| |                                  |                                                           |                                          
| |                                  |                                                           |                                          
| |                                  |                                                           |                                          
| |                                  |                                                           |                                          

| | 3. | As
of January 2004, the Company consolidated StarBand (see Note 1c) and as a
          result, a restructuring reserve balance of $ 1.7 million was consolidated into
          the Groups financial statements. In 2004, $ 0.9 million was paid in cash,
          $ 0.7 million was treated as a non-cash expense and $ 0.1 million was accrued
as           short-term liabilities.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---



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

|NOTE 10: |  | RESTRUCTURING
CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES (Cont.)
|-------- | - | -----------------------------------------------------------------------

| | b. | Write-offs
and other significant charges:
| | -- | -----------------------------------------

| | 1. | In
2003, negative market conditions continued to impact the Groups orders
          globally and in particular in the United States. Furthermore, the Group
          concluded the arrangement to restructure its debt with creditors, bank lenders
          and note holders in March 2003. At that time, the Groups management went
          through significant changes, with the resignation of the Companys former
          CEO and President. In June 2003, new management imposed an additional set of
          lay-offs and budget cuts and embarked on an effort to streamline the
          Groups operations in order to increase efficiency and reduce costs. In
          November 2003, the Group concluded a restructuring through conversion of debt
to           equity by closing an exchange offer pursuant to which the majority of
holders of           the Companys new notes converted the notes into equity (see
Note 9). As a           result of the above, in 2003, the Companys management
recorded the           following charges:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | Restructuring
charges of approximately $ 3.9 million (see a above).
| | -- | -------------------------------------------------------------------

| | b) | Impairment
of tangible, goodwill and intangible assets as follow:
| | -- | -----------------------------------------------------------------

| | 1) | Property
and equipment in an amount of approximately $ 18.1 million. The           impairments are
included as impairment of tangible and intangible assets in the           consolidated
statement of operations.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Goodwill
in the amount of $ 5.0 million relating to the closing of the rStar           acquisition
on August 2, 2002. The impairment was recorded to reduce the           carrying value of
goodwill to its implied fair value and was prompted by a           decrease in the
projected income of rStar. The impairment was recorded as           impairment of
goodwill in operating expenses.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Intangible
assets in an amount of approximately $ 5.6 million. The           impairment is
included in impairment of tangible and intangible assets in the           consolidated
statement of operations.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | Impairment
of long-lived assets to be disposed of in an amount of $ 3.2           million in
connection with the Companys plan to dispose of its subsidiary           in
Argentina. The impairment is included in impairment of tangible and           intangible
assets in the consolidated statements of operations.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 2. | In
2004, the Company decreased the carrying value of an asset and recorded an
          impairment of property and equipment in an amount of approximately $ 2.2
          million, as a result of decreased future undiscounted cash flows from a certain
          customer and in accordance with SFAS 144. The impairment is included as
          impairment of tangible and intangible assets in the consolidated statement of
          operations.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 47

---

---



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

|NOTE 11: |  | TAXES
ON INCOME
|-------- | - | ---------------

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

| | 1. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959:
| | -- | ------------------------------------------------------------------------------

| | The
Company has been granted an Approved Enterprise status for nine investment
programs in the alternative program, by the Israeli Government under the Law for
Encouragement of Capital Investments, 1959 (the Law).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the Company is a foreign investors company, as defined by the
above-mentioned law, it is entitled to a ten-year period of benefits, for enterprises
approved after April 1993. The main tax benefits from the said status are a tax exemption
for two to four years and a reduced tax rate (based on the percentage of foreign
shareholding in each tax year) on income from all of its Approved Enterprises,
for the remainder of the benefit period. These tax benefits are subject to a limitation
of the earlier of 12 years from commencement of operations, or 14 years from receipt of
approval. The periods of benefits of the approved enterprises will expire between 2005
and 2009.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
tax-exempt profits earned by the Companys Approved Enterprises are
distributed to shareholders, such distributions would be taxed at the corporate tax rate
applicable to such profits as if the Company had not elected the alternative program of
benefits (depending on the level of foreign investment in the Company), currently between
15% to 25% for an Approved Enterprise.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is entitled to claim accelerated depreciation with respect to equipment used by
Approved Enterprises during the first five years of the operations of these
assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above mentioned benefits is dependent upon the Company fulfilling the
conditions stipulated by the Law, regulations published 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Law came into effect (the Amendment) and
has significantly changed the provisions of the Law. The Amendment limits the scope of
enterprises which may be approved by the Investment Center by setting criteria for the
approval of a facility as an Approved Enterprise, such as provisions
generally requiring that at least 25% of the Approved Enterprise income will
be derived from export. Additionally, the Amendment enacted major changes in the manner
in which tax benefits are awarded under the Law so that companies no longer require
Investment Center approval in order to qualify for tax benefits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---



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

|NOTE 11: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | However,
the Law provides that terms and benefits included in any certificate of approval already
granted will remain subject to the provisions of the Law as they were on the date of such
approval. Therefore, the Companys existing Approved Enterprises programs
will generally not be subject to the provisions of the Amendment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than an Approved Enterprise during the benefit period is
subject to tax at the regular corporate tax rate. Until December 31, 2003, the corporate
tax rate was 36%. In June 2004 and in July 2005, the Knesset (Israels
parliament) adopted amendments to the Income Tax Ordinance (No.140 and Temporary
Provision), 2004 and (No.147), 2005 respectively, which determine, among other things,
that the corporate tax rate is to be gradually reduced as follows: 34% in 2005, 31% in
2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Measurement
of results for tax purposes under the Income Tax (Inflationary           Adjustments)
Law, 1985:
| | -- | ------------------------------------------------------------------------------------------------------------

| | Under
this law, results for tax purposes are measured and reflected in terms of earnings in
NIS. As explained in Note 2b, the financial statements are measured in U.S. dollars. The
annual changes in the NIS / dollar exchange rate causes a further difference between
taxable income and the income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the difference between the cost of assets and liabilities in the
reporting currency and their tax base.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
Law for the Encouragement of Industry (Taxes), 1969:
| | -- | --------------------------------------------------------

| | The
Company is an industrial company as defined by this law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation, as prescribed by
regulations published under the Inflationary Adjustments Law, and amortization of
patents, certain other intangible property rights and deduction of share issuance
expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Non-Israeli
subsidiaries:
| | -- | -------------------------

| | Non-Israeli
subsidiaries are taxed based on tax laws in their countries of residence.
| | -------------------------------------------------------------------------------------

| | c. | Carryforward
tax losses and credits:
| | -- | ------------------------------------

| | At
December 31, 2005, the Company had operating loss carry forwards for Israeli income tax
purposes of approximately $ 62.3 million, which may be offset against future taxable
income indefinitely.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49

---

---



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

|NOTE 11: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | In
addition, the Group had carryforward tax losses relating to non-Israeli subsidiaries,
mainly in the U.S. Utilization of U.S. net operating losses may be subject to substantial
annual limitation due to the change in ownership provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitations may result in
the expiration of net operating losses before utilization. In connection with the debt
restructurings described in Note 9, the Company expects the expiration or deferral of a
significant portion of these carryforward tax losses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Deferred
income taxes:
| | -- | ----------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Groups deferred tax
liabilities and assets are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                                                 | December 31,
| | -- | ----------------------------------------------- | ------------
|
|
|
|
| | 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 liabilities                    |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Domestic                                        |             
| |    | Foreign                                         |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| | 2. | Deferred taxes are included in the consolidated |             
| |    | balance sheets, as follows:                     |             
| |    |                                                 |             
| |    | Current liabilities                             |             
| |    | Non-current liabilities                         |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             

F - 50

---

---



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

|NOTE 11: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | 3. | As
of December 31, 2005, the Group decreased the valuation allowance by
          approximately $ 9.8 million resulting from decrease in other temporary
          differences offset by the increase in carry forward tax losses. Management
          currently believes that it is more likely than not that the deferred tax
          regarding the loss carry forwards and other temporary differences for which
          valuation allowance was provided will not be realized in the foreseeable
future.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Reconciling
items between the statutory tax rate of the Company and the           effective tax rate:
| | -- | -----------------------------------------------------------------------------------------------------

| |                                                  | Year ended December 3
| | ------------------------------------------------ | ---------------------
|
|
|
|
| | Income (loss) before taxes, as reported in the   |                      
| | consolidated statements of operation             |                      
| |                                                  |                      
| |                                                  |                      
| | Statutory tax rate                               |                      
| |                                                  |                      
| |                                                  |                      
| | Theoretical tax benefit (expenses) on the above  |                      
| | amount at the Israeli statutory tax rate         |                      
| | Debt restructuring arrangements                  |                      
| | Write-off of investments and capital losses      |                      
| | Currency differences                             |                      
| | Tax adjustment in respect of different tax rates |                      
| | and "Approved Enterprise" status (1)             |                      
| | Reduction in deferred taxes due to reduction in  |                      
| | future tax rates                                 |                      
| | Changes in valuation allowance                   |                      
| | Forfeiture of carry forward tax losses ***)      |                      
| | Taxes paid in respect of prior years             |                      
| | Nondeductible expenses and other permanent       |                      
| | differences                                      |                      
| |                                                  |                      
| |                                                  |                      
| |                                                  |                      
| |                                                  |                      

| |     |                                        |  |  |  
| | --- | -------------------------------------- |  |  | -
|
|
|
|
| |     |                                        |  |  |  
| | (1) | Per share amounts (basic) of the tax   |  |  |  
| |     | benefit results from the exemption     |  |  | $
| |     |                                        |  |  |  
| |     |                                        |  | 
| |     | Per share amounts (diluted) of the tax |  | 
| |     | benefit results from the exemption     |  |  | $
| |     |                                        |  |  |  
| |     |                                        |  |  |  

| | *) | Included
is the effect of certain foreign net operating loss carry forwards,           amounting
to $ 125,812, expected to be lost due to local tax regulatory           limitations
resulting from change of control.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | ***) | See
Note 7e
| | ---- | -----------

F - 51

---

---



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

|NOTE 11: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

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

| |                                          | Year ended December 31,
| | ---------------------------------------- | -----------------------
|
|
|
|
| | Provision for income tax:                |                        
| | Tax expenses related to restructuring of |                        
| | debts                                    |                        
| | Other current tax expenses               |                        
| | Tax expenses related to previous years   |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| | Deferred income taxes:                   |                        
| | Deferred tax expenses related to         |                        
| | restructuring of debts                   |                        
| | Other deferred income taxes              |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| | Domestic                                 |                        
| | Foreign                                  |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        

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

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

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

F - 52

---

---



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

|NOTE 12: |  | 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                                              |             
| | Other                                                  |             
| |                                                        |             
| |                                                        |             
| |                                                        |             
| |                                                        |             
| |                                                        |             

| | b. | 1. | 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                                  |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| |                                                    |             

| | 2. | The
following amounts represent the unbilled amounts of the long-term           receivables
as of December 31, 2005:
| | -- | --------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, | U.S. dollars
in thousands
| | ------------------------ | -------------------------
|
|
|
|
| | 2007                     |                          
| | 2008                     |                          
| | 2009                     |                          
| | 2010 and thereafter      |                          
| |                          |                          
| |                          |                          
| |                          |                          
| |                          |                          
| |                          |                          
| | Unearned interest income |                          
| |                          |                          
| |                          |                          
| |                          |                          
| |                          |                          

F - 53

---

---



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

|NOTE 12: |  | 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, 2005, are as follows (including unearned interest income in the amount of $ 1.6
million):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                     | Capital
lease | Operating
lease | Total
| | ------------------- | ------------- | --------------- | -----
|
|
|
|
| | 2006                |               |                 | $    
| | 2007                |               |                 |      
| | 2008                |               |                 |      
| | 2009                |               |                 |      
| | 2010 and thereafter |               |                 |      
| |                     |               |                 |      
| |                     |               |                
| |                     |               |                 | $    
| |                     |               |                 |      
| |                     |               |                 |      

| | The
net investments in capital lease receivables as of December 31, 2005, are $ 18.2 million.
Total revenues from capital and operating leases amounted to $ 16.8 million, $ 5.7
million and $ 5.7 million in the years ended December 31, 2003, 2004 and 2005,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |                             | Weighted average
interest rate |  | 
| | --------------------------- | ------------------------------ |  | 
|
|
|
|
| | In dollars                  |                                |  | 
| | In NIS and other currencies |                                |  | 
| |                             |                                |  | 
| |                             |                                | 
| | Total                       |                                |  | 
| |                             |                                |  | 

F - 54

---

---



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

|NOTE 12: |  | SUPPLEMENTARY
BALANCE SHEET INFORMATION (Cont.)
|-------- | - | -----------------------------------------------

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

| |                                                          | December 31,
| | -------------------------------------------------------- | ------------
|
|
|
|
| | Taxes payable                                            |             
| | Deferred revenue                                         |             
| | Payroll and related employees accruals                   |             
| | Provision for vacation pay                               |             
| | Advances from customers                                  |             
| | Current maturities of long-term liabilities with respect |             
| | to capital lease agreements                              |             
| | VAT payable                                              |             
| | Deferred taxes                                           |             
| | Other                                                    |             
| |                                                          |             
| |                                                          |             
| |                                                          |             
| |                                                          |             
| |                                                          |             

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

| |                           |  | Interest rate for |             | December 31,
| | ------------------------- |  | ----------------- | ----------- | ------------
|
|
|
|
| | Restructured loans (a):   |  |                   |             |             
| | Loan from Bank Leumi      |  |                  
| | (b)(d)(g)                 |  |                   | U.S. dollar |             
| | Other long-term loans (e) |  |                   | U.S. dollar |             
| |                           |  |                   |             |             
| |                           |  |                  
| |                           |  |                   |             |             
| |                           |  |                   |             |             
| | Other loans:              |  |                  
| | Loans from a bank (f)     |  |                   |            |             
| | Loans from a bank         |  |                   | U.S. dollar |             
| | Other long-term loans     |  |                   | U.S. dollar |             
| | Other long-term loans     |  |                   | U.S. dollar |             
| |                           |  |                   |             |             
| |                           |  |                  
| |                           |  |                   |             |             
| |                           |  |                   |             |             
| |                           |  |                  
| |                           |  |                   |             |             
| | Less - current maturities |  |                   |             |             
| |                           |  |                   |             |             
| |                           |  |                  
| |                           |  |                   |             |             
| |                           |  |                   |             |             
| |                           |  |                   |             |             

F - 55

---

---



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

|NOTE 12: |  | SUPPLEMENTARY
BALANCE SHEET INFORMATION (Cont.)
|-------- | - | -----------------------------------------------

g.       
          Long-term convertible loan:

| |                                   |  | Interest rate for |             | December 31,
| | --------------------------------- |  | ----------------- | ----------- | ------------
|
|
|
|
| |                                   |  |                   |             |             
| | Loan from Bank                    |  |                   |             |             
| | Hapoalim / York   (a) (b) (c) (h) |  |                   | U.S. dollar |             
| | Less - fair value of              |  |                  
| | change in conversion              |  |                  
| | feature of a related              |  |                  
| | party convertible debt            |  |                   |             |             
| | Less - current maturities         |  |                   |             |             
| |                                   |  |                   |             |             
| |                                   |  |                  
| |                                   |  |                   |             |             
| |                                   |  |                   |             |             
| |                                   |  |                   |             |             

| | (a) | In
March 2003, the Company concluded a restructuring process reaching an           agreement
with the banks and other creditors, which revised the loan terms. In           April 2004
and in December 2005, the Company further revised the terms of York           loan (see
Note 9).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | In
addition to existing security interests in their favor, the Company granted           the
banks referred to in Note 9, a first priority security interest consisting           of a
floating charge on all of the Companys assets and a pledge on           Spacenet
Inc. shares owned by the Company. The Company granted a second priority
          security interest in the same collateral to the holders of the new notes.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | As
of December 31, 2005, the Company is in compliance with its covenants.
| | --- | -------------------------------------------------------------------------

| | (d) | The
Company granted the lender a first priority security interest of           approximately $ 24
million in its facilities in Israel.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------

| | (e) | Spacenet
Inc. granted the lender a security interest of approximately $ 3.6           million in
certain of its computers, machinery and hub equipment.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | A
Dutch subsidiary of the Company entered into a mortgage and loan agreement           with
a German bank. The amount of the mortgage as of December 31, 2005, is
          collateralized by the subsidiarys facilities in Germany.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) | In
order to secure credit lines provided by the Banks, the Company granted the
          Banks a second priority security charge on its facilities. As of December 31,
          2005, the Company used approximately $ 13.2 million of those credit lines.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h) | In
July 2005, Bank Hapoalim assigned its loan to the Company to York (see           further
discussion in Note 1b).
| | --- | -------------------------------------------------------------------------------------------------------------------

F - 56

---

---



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

|NOTE 12: |  | SUPPLEMENTARY
BALANCE SHEET INFORMATION (Cont.)
|-------- | - | -----------------------------------------------

| | h. | Long-term
debt maturities for loans after December 31, 2005, are as follows:
| | -- | ----------------------------------------------------------------------------

| | Year ending December 31, | U.S dollars
in thousands
| | ------------------------ | ------------------------
|
|
|
|
| | 2006                     |                         
| | 2007                     |                         
| | 2008                     |                         
| | 2009                     |                         
| | 2010 and thereafter      |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         
| |                          |                         

| | i. | Long-term
debt maturities for convertible loan after December 31, 2005, are as           follows:
| | -- | -------------------------------------------------------------------------------------------------

| | Year ending December 31,                  | U.S dollars
in thousands
| | ----------------------------------------- | ------------------------
|
|
|
|
| | 2006                                      |                         
| | 2007                                      |                         
| | 2008                                      |                         
| | 2009                                      |                         
| | 2010 and thereafter                       |                         
| |                                           |                         
| |                                           |                         
| |                                           |                         
| | Less - fair value of change in conversion |                         
| | feature of a related party convertible    |                         
| | debt                                      |                         
| |                                           |                         
| |                                           |                         
| |                                           |                         
| |                                           |                         
| |                                           |                         

| | Interest
expenses on the long-term loans amounted to $ 3.0 million, $ 3.8 million and $ 6.6
million for the years ended December 31, 2003, 2004 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 57

---

---



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

|NOTE 12: |  | SUPPLEMENTARY
BALANCE SHEET INFORMATION (Cont.)
|-------- | - | -----------------------------------------------

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

| |                                                     | December 31,
| | --------------------------------------------------- | ------------
|
|
|
|
| | Deferred revenue                                    |             
| | Liability for space segment                         |             
| | Restructuring charges (see Note 10a)                |             
| | Long-term liability in respect of OCS agreement *)  |             
| | Deferred taxes                                      |             
| | Long-term liabilities with respect to capital lease |             
| | agreements **)                                      |             
| | Other                                               |             
| |                                                     |             
| |                                                     |             
| |                                                     |             
| |                                                     |             
| |                                                     |             

| | *) | In
October 2001, the Company filed a request with the Office of the Chief
          Scientist in the Israeli Ministry of Industry and Trade (the OCS)
          for the commitment to pay all royalties arising from future sales with respect
          to previous OCS grants. The Company recorded expenses in the amount of $ 3.4
          million payable over the years 2003 to 2006, bearing variable interest of the
          Accountant Generals index and limited to the change in the CPI. The
amount           was recorded in selling, marketing, general and administrative expenses.
This           agreement enables the Company to participate in a new OCS program under
which it           would be eligible to receive future research and development grants
for generic           research and development projects without any royalty repayment
obligations. The           amount payable as of December 31, 2005, is $ 1.1 million
presented in accrued           expenses.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | Future
lease payments in respect of capital lease agreements:
| | --- | -------------------------------------------------------------

| | Year ending December 31,                | U.S dollars
in thousands | 
| | --------------------------------------- | ------------------------ | 
|
|
|
|
| | 2006                                    |                          | 
| | 2007                                    |                          | 
| |                                         |                          | 
| |                                         |                          | 
| | Present value of minimum lease payments |                          | 
| |                                         |                          | 

F - 58

---

---



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

|NOTE 13: |  | SELECTED
STATEMENTS OF OPERATIONS DATA
|-------- | - | --------------------------------------

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

| |                            | Year ended December 31,
| | -------------------------- | -----------------------
|
|
|
|
| | Total cost                 |                        
| | Less:                      |                        
| | Royalty bearing grants *)  |                        
| | Non-royalty bearing grants |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        

| | *) | Including
funding from SES Global S.A (see Notes 7d and 15).
| | -- | ------------------------------------------------------------

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

| |                            | Year ended December 31,
| | -------------------------- | -----------------------
|
|
|
|
| | Selling and marketing (1)  |                        
| | General and administrative |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        

| | (1) | Including
shipping expenses in the amounts of $ 2.4 million, $ 1.7 million and           $ 1.6
million for the years ended December 31, 2003, 2004 and 2005,           respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | 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   |                        
| |                              |                        
| |                              |                        

| | As
for the increase in bad debts provision and write-off, see Note 10b.
| | -----------------------------------------------------------------------

F - 59

---

---



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

|NOTE 13: |  | SELECTED
STATEMENTS OF OPERATIONS DATA (Cont.)
|-------- | - | ----------------------------------------------

| | d. | Financial
expenses, net:
| | -- | ------------------------

| |                                             | Year ended December 31,
| | ------------------------------------------- | -----------------------
|
|
|
|
| | Income:                                     |                        
| | Interest on cash equivalents, bank deposits |                        
| | and restricted cash                         |                        
| | Interest with respect to capital lease      |                        
| | Other (mainly foreign exchange gains and    |                        
| | losses)                                     |                        
| |                                             |                        
| |                                             |                        
| |                                             |                        
| |                                             |                        
| | Expenses:                                   |                        
| | Interest on convertible subordinated notes  |                        
| | Amortization of issuance costs of           |                        
| | convertible subordinated notes              |                        
| | Interest with respect to short-term bank    |                        
| | credit and trade payables and other         |                        
| | Interest with respect to long-term loans    |                        
| | Interest with respect to capital lease      |                        
| | Other (mainly foreign exchange gains and    |                        
| | losses)                                     |                        
| |                                             |                        
| |                                             |                        
| |                                             |                        
| |                                             |                        
| |                                             |                        
| |                                             |                        
| |                                             |                        

F - 60

---

---



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

|NOTE 14: |  | CUSTOMERS,
GEOGRAPHIC AND SEGMENTS INFORMATION
|-------- | - | ----------------------------------------------

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

| | a. | Revenues
by geographic areas:
| | -- | -----------------------------

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

| |                                   | Year ended December 31,
| | --------------------------------- | -----------------------
|
|
|
|
| | United States                     |                        
| | South America and Central America |                        
| | (except Brazil)                   |                        
| | Asia                              |                        
| | Africa                            |                        
| | Brazil                            |                        
| | Europe *)                         |                        
| | Other                             |                        
| |                                   |                        
| |                                   |                        
| |                                   |                        
| |                                   |                        

| |    |                                         |  |  |  
| | -- | --------------------------------------- |  |  | -
|
|
|
|
| |    |                                         |  |  |  
| | *) | Including revenues from related parties |  |  |  
| |    | as follows:                             |  | 
| |    | StarBand                                |  |  | $
| |    | Satlynx                                 |  |  |  
| |    |                                         |  |  |  
| |    |                                         |  | 
| |    |                                         |  |  | $
| |    |                                         |  |  |  
| |    |                                         |  |  |  

| | b. | During
2003, 2004 and 2005, the Company did not have any customers with           revenues
exceeding 10% of total revenues.
| | -- | ---------------------------------------------------------------------------------------------------------------------------

F - 61

---

---



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

|NOTE 14: |  | CUSTOMERS,
GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)
|-------- | - | ------------------------------------------------------

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

| |               | December 31,
| | ------------- | ------------
|
|
|
|
| | Israel        |             
| | Latin America |             
| | United States |             
| | Europe        |             
| | Other         |             
| |               |             
| |               |             
| |               |             
| |               |             
| |               |             

| | d. | Information
on operating segments:
| | -- | ----------------------------------

| | Operating
Segments:
| | -------------------

| | 1) | General:
| | -- | --------

| | In
December 2004, the Companys board approved a re-organization of its business under
two separate reportable business segments effective January 1, 2005. During the years
ended December 31, 2003 and 2004, the Company operated under a single reportable business
segment. During the third quarter of 2005, the Company further refined its segment
reporting by dividing the Spacenet segment into two segments, and the Companys 2005
financial statements reflect operation under three business units: (i) Gilat Network
Systems, a provider of network systems and associated professional services to service
providers and operators; (ii) Spacenet, which provides managed data services for
enterprises, businesses and internet connectivity for consumers, primarily in the United
States; and (iii) Spacenet Rural Communications, which provides telephone and internet
access as an operator of networks in rural communities, primarily in Latin America. The
following provides proforma information about the Companys business during 2003 and
2004, as if its business had operated under the new business segments. The financial
information was extracted from the consolidated results reported for those years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys reportable segments are differentiated by whether the nature of the
transaction is dominated by an equipment sale (a Gilat Network Systems transaction) or by
the operation of an enterprise or consumer network (a Spacenet Inc. transaction) or by
the operation of a rural network in Latin America (a Spacenet Rural Communications
transaction). Segments are managed separately and can be described as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 62

---

---



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

|NOTE 14: |  | CUSTOMERS,
GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)
|-------- | - | ------------------------------------------------------

| | Gilat
Network Systems (GNS): GNS focuses on sales of solutions to operators by
provision of its proprietary and/or DVB-RCS standard VSAT technology and hybrid
solutions. The business of GNS reflects the generation of revenue from sales of the
Companys satellite-based networking equipment, professional services and
applications. The charges to customers for satellite networking products, applications or
professional services vary with the number of sites, the location of sites, installation
services required and the types of technologies and protocols employed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Spacenet:
Spacenets business consists of business activity as an operator of communications
networks for the provision of telephony, data and Internet services to its customers,
primarily in the Americas. The charges to customers for networking services vary with the
type of operations provided, the length of the contract, the amount of satellite capacity
and the types of technologies and protocols employed.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Spacenet
Rural Communications: The business of Spacenet Rural Communications is comprised of
several government-sponsored rural projects for telephony and/or internet and data
connectivity. To date, this business segment has satellite-based rural telephony and
internet access solutions in remote areas in Latin America.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Information
on the reportable segments:
| | -- | ---------------------------------------

| | a) | The
measurement of the reportable operating segments is based on the same
          accounting principles applied in these financial statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | When
reported by segment, the results of Spacenet Inc. and Spacenet Rural
          Communication are presented based upon transfer prices. The consolidation line
          reflects the intercompany profits that have been realized in order to adjust
the           transfer price to the Companys cost.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 63

---

---



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

|NOTE 14: |  | CUSTOMERS,
GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)
|-------- | - | ------------------------------------------------------

| | c) | Financial
data relating to reportable operating segments:
| | -- | ---------------------------------------------------------

| |                              | Year ended December 31, 2003
| | ---------------------------- | ----------------------------
|
|
|
|
| | Revenues:                    |                             
| | External revenues            |                             
| | Internal revenues            |                             
| |                              |                             
| |                              |                             
| |                              |                             
| |                              |                             
| |                              |                             
| | Impairment of tangible and   |                             
| | intangible assets            |                             
| |                              |                             
| |                              |                             
| | Impairment of goodwill       |                             
| |                              |                             
| |                              |                             
| | Restructuring charges        |                             
| |                              |                             
| |                              |                             
| | Financial income (expenses), |                             
| | net                          |                             
| |                              |                             
| |                              |                             
| | Write-off of investments in  |                             
| | affiliated companies and     |                             
| | other companies              |                             
| |                              |                             
| |                              |                             
| | Income (loss) before taxes   |                             
| | on income                    |                             
| |                              |                             
| |                              |                             
| | Taxes on income              |                             
| |                              |                             
| |                              |                             
| | EBITDA *)                    |                             
| |                              |                             
| |                              |                             
|
|
| |                              |                             
| | Revenues:                    |                             
| | External revenues            |                             
| | Internal revenues            |                             
| |                              |                             
| |                              |                             
| |                              |                             
| |                              |                             
| |                              |                             
| | Impairment of tangible and   |                             
| | intangible assets            |                             
| |                              |                             
| |                              |                             
| | Financial income (expenses), |                             
| | net                          |                             
| |                              |                             
| |                              |                             
| | Income (loss) before taxes   |                             
| | on income                    |                             
| |                              |                             
| |                              |                             
| | Taxes on income              |                             
| |                              |                             
| |                              |                             
| | EBITDA *)                    |                             
| |                              |                             

| | *) | EBITDA
is defined as operating income (loss) before interest, taxation,           depreciation
and amortization excluding write-off of inventories, impairment of           goodwill,
impairment of tangible and intangible assets, restructuring charges           and gain
from derecognition of liability
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 64

---

---



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

|NOTE 14: |  | CUSTOMERS,
GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)
|-------- | - | ------------------------------------------------------

| |                   |  |  |   |        |   |   |        |   |   |        |   |   |         |   |   |         |  
| | ----------------- |  |  | - | ------ | - | - | ------ | - | - | ------ | - | - | ------- | - | - | ------- | -
|
|
| |                   |  | 
| | Revenues:         |  | 
| | External revenues |  |  | $ | 86,196 |   | $ | 40,557 |   | $ | 82,642 |   | $ | -       |   | $ | 209,395 |  
| | Internal revenues |  |  |   | -      |   |   | -      |   |   | 15,611 |   |   | (15,611 | ) |   | -       |  
| |                   |  |  |   |        |   |   |        |   |   |       
| |                   |  | 
| |                   |  |  | $ | 86,196 |   | $ | 40,557 |   | $ | 98,253 |   | $ | (15,611 | ) | $ | 209,395 |  
| |                   |  |  |   |        |   |   |        |   |   |       
| |                   |  | 
| | Financial income  |  | 
| | (expenses), net   |  |  | $ | 1,481  |   | $ | (338   | ) | $ | (3,820 | ) | $ | -       |   | $ | (2,677  | )
| |                   |  |  |   |        |   |   |        |   |   |       
| |                   |  | 
| | Income (loss)     |  | 
| | before taxes on   |  | 
| | income            |  |  | $ | (8,726 | ) | $ | (482   | ) | $ | 1,680  |   | $ | 6,538   |   | $ | (990    | )
| |                   |  |  |   |        |   |   |        |   |   |       
| |                   |  | 
| | Taxes on income   |  |  | $ | 4      |   | $ | 1,856  |   | $ | 1,266  |   | $ | -       |   | $ | 3,126   |  
| |                   |  |  |   |        |   |   |        |   |   |       
| |                   |  | 
| | EBITDA *)         |  |  | $ | (112   | ) | $ | 10,803 |   | $ | 11,601 |   | $ | (1,792  | ) | $ | 20,500  |  
| |                   |  |  |   |        |   |   |        |   |   |       
| |                   |  |  |   |        |  

| | *) | EBITDA
is defined as operating income (loss) before interest, taxation,           depreciation
and amortization excluding write-off of inventories, impairment of           goodwill,
impairment of tangible and intangible assets, restructuring charges           and gain
from derecognition of liability.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 15: |  | SUBSEQUENT
EVENTS (UNAUDITED)
|-------- | - | -----------------------------

| | On
March 1, 2006, the Company and SES Americom executed an agreement whereby the Company has
agreed to transfer its remaining 0.17% holdings in Satlynx to SES Americom. The actual
transfer of shares will occur upon request by SES Americom. In consideration, as part of
this agreement, the Company will receive a waiver from SES Americom on any royalty
payments which may be due to SES Americom in accordance with development agreements
signed between the parties in 2002 and SES Americom will provide a corporate guarantee to
cover Satlynxs obligations towards the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

F - 65

---

---



# INDEPENDENT
AUDITORS REPORT

To the Board of Directors

# STARBAND COMMUNICATIONS
INC.

We have audited the accompanying
balance sheets of StarBand Communications Inc. as of December 31, 2005 and 2004, and the
related statements of operations, shareholders equity (deficit) and cash flows for
the years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of StarBand Communications Inc. as of December 31, 2005 and 2004, and the results
of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

MAYER HOFFMAN MCCANN P.C.
Bethesda, Maryland
January 19, 2006



---

---