---

---

As filed with the Securities and Exchange Commission on April 9, 2008

# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

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

# or

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

# For the fiscal year
ended December 31, 2007

# or

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

# For the transition
period from __________ to __________

# or

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

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

# Commission file
number: 0-21218

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

ISRAEL  (Jurisdiction of incorporation or organization)

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

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

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

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

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

1

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---

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:

# 39,747,279 Ordinary
Shares, NIS 0.20 par value per share.

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

Yes  o No x

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

Yes  o No x

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

Yes                 x                       No o

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

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

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

Item 17 o Item 18           x

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

Yes o No x

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

2

---

---

# INTRODUCTION

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

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

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

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

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

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

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



---

---

Our
consolidated financial statements appearing in this annual report are prepared in U.S.
dollars and in accordance with U.S. generally accepted accounting principles, or U.S.
GAAP. All references in this annual report to dollars or $ are to
U.S. dollars and all references in this annual report to NIS are to New
Israeli Shekels. The representative exchange rate between the NIS and the dollar as
published by the Bank of Israel onApril 7, 2008 was NIS 3.64 per
$1.00.

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

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



---

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# TABLE OF CONTENTS

|         |                                                                              | Page
|-------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|Part I   |                                                                              |     
|        
|Item 1   | Identity of Directors, Senior Management and Advisers                        | 1   
|Item 2   | Offer Statistics and Expected Timetable                                      | 1   
|Item 3   | Key Information                                                              | 1   
|         | Selected Consolidated Financial Data                                         | 1   
|         | Risk Factors                                                                 | 3   
|Item 4   | Information on the Company                                                   | 16  
|Item 4A  | Unresolved Staff Comments                                                    | 31  
|Item 5   | Operating and Financial Review and Prospects                                 | 31  
|Item 6   | Directors and Senior Management                                              | 49  
|Item 7   | Major Shareholders and Related Party Transactions                            | 58  
|Item 8   | Financial Information                                                        | 60  
|Item 9   | The Offer and Listing                                                        | 62  
|Item 10  | Additional Information                                                       | 63  
|Item 11  | Quantitative and Qualitative Disclosures about Market Risk                   | 82  
|Item 12  | Description of Securities Other than Equity Securities                       | 82  
|        
|Part II 
|        
|Item 13  | Defaults, Dividends, Arrearages and Delinquencies                            | 82  
|Item 14  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 83  
|Item 15  | Controls and Procedures                                                      | 83  
|Item 15T | Controls and Procedures                                                      | 84  
|Item 16  | [Reserved]                                                                   | 84  
|Item 16A | Audit Committee Financial Expert                                             | 84  
|Item 16B | Code of Ethics                                                               | 84  
|Item 16C | Principal Accounting Fees and Services                                       | 84  
|Item 16D | Exemptions from the Listing Standards for Audit Committees                   | 85  
|Item 16E | Purchase of Equity Securities by the Issuer and AffiliatedPurchasers         | 85  
|        
|Part III
|        
|Item 17  | Financial Statements                                                         | 85  
|Item 18  | Financial Statements                                                         | 85  
|Item 19  | Exhibits                                                                     | 86  



---

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# PART I

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

Not
Applicable.

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

Not
Applicable.

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

# Selected Consolidated
Financial Data

The
selected consolidated statement of operations data set forth below for the years ended
December 31, 2007, 2006 and 2005, and the selected consolidated balance sheet data as of
December 31, 2007 and 2006 are derived from our audited consolidated financial statements
that are included elsewhere in this Report. These financial statements have been prepared
in accordance with U.S. generally accepted accounting principles or U.S. GAAP. The
selected consolidated statement of operations data set forth below for the years ended
December 31, 2004 and 2003 and the selected consolidated balance sheet data as of December
31, 2005, 2004 and 2003 are derived from our audited consolidated financial statements
that are not included in this Annual Report filed on Form 20F.

The
selected consolidated financial data set forth below should be read in conjunction with
Item 5: Operating and Financial Review and Prospects and the Consolidated
Financial Statements and Notes thereto included in Item 18 in this annual report on Form
20-F for the year ended December 31, 2007.

1

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

2

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

# RISK FACTORS

# Risks Relating to Our
Business

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

While
we achieved net income of approximately $10.1 million in 2007 and of approximately $
10.5 million in 2006 we incurred losses of 3.7 million in 2005 and we have an
accumulated deficit of $635.0 million. We can not assure you that we can continue to
operate profitably in the future. If we do not sustain profitability, the viability of
our company will be in question and our share price could decline.

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

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

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

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

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

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

3

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

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

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

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

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

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

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

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

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

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

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

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

In
recent years, a significant portion of our revenues has been derived from large-scale
contracts with foreign governments and agencies, including those in Peru, Russia, Colombia
and Mexico. Agreements with the governments in these countries typically include
unilateral early termination clauses and other risks such as the imposition of new
government regulations and taxation that could pose additional financial burdens on us. In
addition, the foreign exchange risks in these countries are often significant due to
possible fluctuations in local currencies relative to the U.S. dollar. We do not have a
policy of hedging specific contracts. In some cases we hedge the risks involved in our
general operations in Israel and in our subsidiaries abroad. Any termination of business
in any of the aforementioned countries or any instability in the exchange rates could have
a significant adverse impact on our business.

In
November 2002, we were awarded two large projects by the Colombian government,
including the installation and operation of approximately 550 telecenters to provide
Internet connectivity and telephony services in cities and towns throughout Colombia and a
second site of approximately 3,300 public rural satellite telephony network. The original
total value of the contracts was approximately $72 million and the remaining value of
the contracts, which are being held in restricted cash, is approximately
$24.0 million as of December 31, 2007. Thus far, $15 million of such amount has
become due. If we do not meet certain minimum equity requirements or indicators, the
Colombian government may assert that we are in breach of our contract with them and
withhold release of all such restricted cash. At present, $15 million has not been
released by the Colombian Government due to claims by the government that we have not met
certain operating indicators. We are currently negotiating with the Colombian government
certain amendments to these contracts. Any early unilateral termination by the Colombian
government could have a significant adverse impact on our operating results.

4

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

The
network communications market, to which our products and services are targeted, is
characterized by rapid technological changes, new product introductions and evolving
industry standards. If we fail to stay abreast of significant technological changes, our
existing products and technology could be rendered obsolete. Historically, we have
enhanced the applications of our existing products to meet the technological changes and
industry standards. For example, in 2007 we announced the forthcoming release of our
SkyEdge II product, which supports higher performance and more efficient use of the space
capacity, based on advanced technologies such as DVB-S2 ACM. Our success is dependent upon
the acceptance of this new product into the market, our ability to continue to develop new
products, applications and services and meet developing market needs.

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

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

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

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

The
majority of our business in 2007 was generated from recurring customers, and, as a result,
the termination or non-renewal of our contracts could have a material adverse effect on
our business, financial condition and operating results. Some of our existing contracts
could be terminated due to any of the following reasons, among others:

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

5

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

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

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

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

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

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

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

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

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

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

6

---

---

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

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

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

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

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

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

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

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

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

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

7

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

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

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

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

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

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

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

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

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

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

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

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

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.

8

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

9

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

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

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

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

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

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

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

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

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

10

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

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

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

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

# Risks Related to
Ownership of Our Ordinary Shares

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

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

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

As
of March 31, 2008, York Capital Management, or York, and entities affiliated with them
beneficially own or vote approximately 20% of our outstanding ordinary shares. As a
result, York may have a substantial influence over all matters that require approval by
our shareholders, including the election of directors and approval of significant
corporate transactions. As a result, corporate actions might be taken even if other
shareholders oppose them. This concentration of ownership might also have the effect of
delaying or preventing a change of control of our company that other shareholders may view
as beneficial.

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

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

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

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

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

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

We
May Be Adversely Affected if the Proposed Merger is Not Completed

On
March 31, 2008 we announced the signing of an Agreement and Plan of Merger  to be
acquired for an aggregate value of $475 Million in an all cash transaction by a consortium
of private equity investors. There is no assurance that the conditions to the completion
of the merger will be satisfied. In the event that the merger is not completed, we may be
subject to several risks including the following: the current market price of our ordinary
shares may reflect a market assumption that the merger will occur and a failure to
complete the merger could result in a decline in the market price of our ordinary shares;
managements attention from our day to day business may be diverted; uncertainties
with regard to the merger may adversely affect our relationships with our employees,
suppliers and customers; and we may be required to pay significant transaction costs
related to the merger.

# Risks Related To
Regulatory Matters

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

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

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

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

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

12

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

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

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

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404, which started in connection
with our 2006 Annual Report on Form 20-F, have resulted in increased general and
administrative expense and a diversion of management time and attention, and we expect
these efforts to require the continued commitment of resources. Section 404 of the
Sarbanes-Oxley Act requires us to provide (i) managements annual review and
evaluation of our internal control over financial reporting and (ii) starting 2007, a
statement by management that its independent registered public accounting firm has issued
an attestation report on our internal control over financial reporting, in connection with
the filing of the Annual Report on Form 20-F for each fiscal year. We have documented and
tested our internal control systems and procedures and have made improvements in order for
us to comply with the requirements of Section 404. While our assessment of our internal
control over financial reporting resulted in our conclusion that as of December 31,
2007, our internal control over financial reporting was effective, we cannot predict the
outcome of our testing in future periods. If we fail to maintain the adequacy of our
internal controls, we may not be able to ensure that we can conclude on an ongoing basis
that we have effective internal controls over financial reporting. Failure to maintain
effective internal controls over financial reporting could result in investigation or
sanctions by regulatory authorities, and could have a material adverse effect on our
operating results, investor confidence in our reported financial information, and the
market price of our ordinary shares.

# Risks Related to Our
Location in Israel

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

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

13

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There
has been an increase in unrest and terrorist activity in Israel, which began in September
2000 and which has continued with varying levels of severity through 2007. The future
effect of this deterioration and violence on the Israeli economy and our operations is
unclear. The election of representatives of the Hamas movement to a majority of seats in
the Palestinian Legislative Council in January 2006 resulted in an escalation in violence
among Israel, the Palestinian Authority and other groups. In July 2006, extensive
hostilities began along Israels northern border with Lebanon and to a lesser extent
in the Gaza Strip. In June 2007, there was an escalation in violence in the Gaza Strip
resulting in Hamas effectively controlling the Gaza Strip and a further escalation in
violence has occurred during the first few months of 2008. Ongoing violence between Israel
and the Palestinians as well as tension between Israel and the neighboring Syria and
Lebanon may have a material adverse effect on our business, financial conditions and
results of operations.

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

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

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

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

Most
of our revenues are in dollars or are linked to the dollar, while a portion of our
expenses, principally salaries and related personnel expenses, are in NIS. Therefore, our
NIS related costs, as expressed in U.S. dollars, are influenced by the exchange rate
between the U.S. dollar and the NIS. During 2007, the NIS appreciated against the U.S.
dollar, which resulted in a significant increase in the U.S. dollar cost of our NIS
expenses. We are also exposed to the risk that the rate of inflation in Israel will exceed
the rate of devaluation of the NIS in relation to the dollar or that the timing of this
devaluation lags behind inflation in Israel. This would have the effect of increasing the
dollar cost of our operations. In the past, the NIS has devalued against foreign
currencies, generally reflecting inflation rate differentials. We cannot predict any
future trends in the rate of inflation in Israel or the rate of devaluation or
appreciation of the NIS against the dollar. If the dollar cost of our operations in Israel
increases, our dollar-measured results of operations will be adversely affected.

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

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

14

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

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

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

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

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

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

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

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

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

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

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

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

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

15

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

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

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

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

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

# OUR BUSINESS

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

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

16

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

Gilat Network Systems, or GNS,
is a provider of VSAT-based networks and associated professional services, including
turnkey and management services, to telecom operators worldwide. According to the 2007
COMSYS VSAT Report, prepared by Communications Systems Limited, or COMSYS, a leading
satellite industry research firm, we are the second-largest manufacturer of VSATs, with a
23.5% market share of shipped VSATs and the leading provider to the international market
(comprised of all countries other then the U.S. and Canada). We also provide industry
specific solutions for cellular backhaul, governments, business continuity and disaster
recovery. In the year ended December 31, 2007, we derived approximately 54% of our
revenues from GNS. GNSs representative customers include StarOne in Brazil,
Optus in Australia, China Unicom, Bharti in India, Global Teleport in Russia, Telkom in
South Africa and AT&T in Europe.

Spacenet Inc. provides
satellite and hybrid terrestrial network services to enterprise, government, small
office/home office, or SOHO, and residential customers in the U.S. Spacenet provides three
primary lines of service: custom networks, commercial grade service known as Connexstar,
and StarBand service. According to the COMSYS report, we have a 19.5% market share of U.S.
VSAT enterprise sites. In the year ended December 31, 2007, we derived approximately 34%
of our revenues from Spacenet. Spacenets representative customers include Dollar
General, Goodyear, Intercontinental Hotels Group, Valero, Sunoco and Kroger.

Spacenet Rural Communications, or
SRC, provides telephony, Internet and data services primarily for rural communities in
emerging markets in Latin America under projects that are subsidized by government
entities. We believe that we are the largest rural satellite telecom provider in Latin
America, and currently have approximately 16,000 operational sites. In the year ended
December 31, 2007, we derived approximately 12% of our revenues from SRC.

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

We
have diversified revenue streams that result from both sales of products and services. In
the year ended December 31, 2007, approximately 55% of our revenues were derived from
product sales and approximately 45% of our revenues were derived from services. Our
service revenues are derived from long-term contracts of three to six years, which provide
stability and visibility into future revenues. As of December 31, 2007, we had a
backlog of $202 million for equipment and multi-year service contracts. During the
same period, we derived 33.9% of our revenues from the U.S., 26.9% from South and Central
America, 14.0% from Asia, 12.3% from Africa and 12.9% from Europe.

We
were incorporated in Israel in 1987 and shipped our first generation VSAT in 1989. Since
then, we have been among the technological leaders in the VSAT industry. Our continuous
investment in research and development has resulted in the development of new and
industry-leading VSAT products and our intellectual property portfolio includes 60 issued
patents (27 U.S. and 33 foreign). As of December 31, 2007, we had approximately 970
employees, including approximately 160 persons engaged in research, development and
engineering activities.

# Industry Overview

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



17

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

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

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

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

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

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

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

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

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

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

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

18

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

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

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

According
to the COMSYS report, the VSAT equipment market generated approximately $950 million
of revenues in 2006, which represents a compound annual growth rate of approximately 18%
from 2003 to 2006 According to a Northern Sky Research report from 2007, the number of
VSAT sites is expected to grow at a compounded annual growth rate, or CAGR, of
approximately 19.4% through 2011.

According
to the COMSYS report, the VSAT service market generated approximately $4.6 billion
worth of revenues in 2006, which represents an annual growth rate of approximately 9% from
2003 to 2006. According to the Northern Sky Research report, the global broadband
satellite services market is expected to have a CAGR of approximately 10.7% through 2011.

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

Enterprise
and Business. This market includes large companies and organizations, government
entities, small medium enterprises, or SMEs, and SOHO end users. For enterprises, VSAT
networks offer network connectivity and deliver applications such as networks within
corporations (known as corporate intranets), Internet connections for voice, data and
video (known as broadband), transaction-based connectivity to enable on-line data delivery
such as point-of-sale (credit and debit card authorization), inventory control and real
time stock exchange trading. According to the Northern Sky Research report, global
enterprise and SME IP VSAT sites will grow from approximately 780,000 in 2006 to
1.45 million sites in 2011. This represents a CAGR of 13.2%.

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

Consumer.           The
consumer market consists of residential users. These users require a           high-speed
internet connection that enables the transmission of data, audio and           video,
similar to a digital subscriber line, or DSL, or cable modem service.           According
to the Northern Sky Research report, in 2006 83% of these sites were           located in
North America.

19

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# Our Competitive Strengths

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

Market
leadership in large and growing markets. Since our inception, we have sold
more than 670,000 VSATs to customers in over 85 countries. Our customer base includes a
large number of satellite-based communications service providers and operators worldwide.
In addition, we provide satellite-based communication services primarily to enterprises in
the U.S. and we are the largest satellite communications service provider to rural
communities in Latin America. The large installed base of our VSAT equipment also provides
opportunities for new and incremental sales to existing customers. According to the 2007
COMSYS report, our global market share to the enterprise market was approximately 23.5%,
based on the number of terminals shipped, making us the second largest VSAT manufacturer
in the world for this segment.

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

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

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

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

Diversified
revenue streams and customer base. For the year ended December 31, 2007,
55% of our revenues were generated from products and 45% of our revenues were generated
from services. Our product sales are generally independent equipment orders which often
generate maintenance contracts and additional opportunities for future product sales. Our
service sales are characterized by long-term contracts that provide a recurring revenue
base. In the year ended December 31, 2007, our three business units, GNS, Spacenet and
SRC, accounted for 54%, 34% and 12% of our revenues, respectively. We are not overly
dependant on any single customer, project or geographic region and no single customer
accounted for more than 10% of our revenues.

20

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Strong
financial position. Our strong financial position allows us to compete
effectively with other companies in our industry. We had nine consecutive quarters of
revenue growth and improved profitability, excluding the impairment of tangible assets
recorded in the fourth quarter of 2007 related to our operations in Colombia. As of
December 31, 2007, our total cash increased to $200.0 million from $182.6 million as
of December 31, 2006 (total cash includes cash and cash equivalents, held to maturity
marketable securities, restricted cash and restricted cash held by trustees less short
terms bank credits) and we reduced our debt to $40.4 million as of December 31, 2007,
from $45.2 million at December 31, 2006.

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

# Our Growth Strategy

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

Enhance
our leadership position in our core markets. We are expanding our position
in the VSAT market through the development of new products, solutions and services within
our target markets. Through the development of our SkyEdge single platform product and our
end-to-end solution offerings, we are focused on providing innovative products and
services required by our customers and end-users. In 2008, we will increase of investment
in research and development by approximately $3 million. This expense will focus on
reducing our hub costs and expanding our product portfolio with new product offerings.

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

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

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

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

21

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

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

# Our Business Units

Gilat
Network Systems

Overview

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

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

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

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

GNS
is headquartered in Petah Tikva, Israel and has 13 offices worldwide, with approximately
485 employees. In the year ended December 31, 2007, GNS had revenues of
$171.4 million, including sales of $18.4 million to Spacenet and SRC.

Products
and Solutions

SkyEdge
Family of Products

Our
SkyEdge platform is based on a single hub with multiple VSATs to support a variety of
services and applications. Our advanced access scheme and quality of service
implementation enables delivering high quality services in an efficient manner.

In
2007, we announced the launch of the SkyEdge II system which provides higher performance
and is more efficient in terms of space capacity than our SkyEdge. The SkyEdge family of
products can support triple play services, such as wireline quality voice, video, and data
on the same platform. In addition, multiple network topologies can be deployed with the
same platform. This enables an improved user-experience and reduced operating expenses.

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We
currently offer the following VSAT products. All of these products are connected to an
outdoor RF unit which is mounted on a dish antenna:

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

Solutions

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

23

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We
currently offer the following solutions:

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

Turnkey
Implementation Capabilities

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

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

Manufacturing,
Customer Support and Warranty

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

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

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

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

24

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

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

GNS
Customers and Markets

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

Enterprise
and service providers use our networks for broadband, Internet, voice, data and video
connectivity for applications such as credit card authorizations, online banking,
corporate intranet, interactive distance learning, lottery transactions, retail
point-of-sale, inventory control and Supervisory Control and Data Acquisition, or SCADA,
services. Examples are Grupo Elektra one of Latin Americas leading specialty
retailers and financial service companies, and HCL in India, a service provider whose end
users include stock brokerage firms.

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

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

GNS
Sales and Marketing

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

Spacenet Inc.

Overview

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

Spacenets
equipment and services are currently deployed at more than 100,000 business, government
and residential locations in the U.S. Our customers include Dollar General, Goodyear,
Intercontinental Hotels Group, Kroger , Sunoco and Valero. The 2007 COMSYS report ranked
Spacenet as the second largest satellite network service provider in North America for the
enterprise/government market, with a19.5% market share, which is more than five (5) times
larger than the third-ranked provider. Our market includes WAN services for retail,
energy, financial services, hospitality and government customers, as well as Internet
access services for SOHO and residential customers.

25

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Spacenet
is based in McLean, Virginia, and has approximately 245 employees. In the year ended
December 31, 2007, Spacenet had revenues of $95.4 million.

Services

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

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

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

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

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

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Network
Operations and Customer Support

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

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

Spacenet
Sales and Marketing

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

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



Spacenet
Rural Communications

Overview

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

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SRC
has offices in Peru and Colombia and employs approximately 243 persons. In the year ended
December 31, 2007 SRC had revenues of $34.2 million.

SRC
Services and Solutions

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

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

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

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

Customer
Support Operations

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

SRC
Customers and Markets

Public
Rural Telecom Services:

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

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

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VSAT
Services to Telecom Operators:

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

Enterprise
and Government Agencies:

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

SRC
Sales and Marketing

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

# Competition

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

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

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

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# Geographic Distribution
of our Business

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

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

|(1) | Including
revenues from a related party of 0.8% for the year ended December 31, 2005.
|--- | -------------------------------------------------------------------------------------

Capital
Expenditures and Divestitures. In 2005, 2006 and 2007, our property and equipment
purchases amounted to approximately $3.6 million , $6.5 million and $9.3 million,
respectively. These amounts do not include the reclassification of inventory to property
and equipment made during 2005, 2006 and 2007 in the amount of approximately $7.3 million,
$9.2 million and $2.2 million, respectively. In 2005, we completed the sale of
Deterministic Networks Inc. to some of its employees, we purchased the remaining shares of
StarBand and our shareholdings in Satlynx were diluted from approximately 40.6% to 0.17%.
On March 1, 2006 we and SES executed an agreement whereby we transferred our remaining
0.17% interest in Satlynx to SES. As part of this agreement, we received a waiver from SES
on any royalty payments which may be payable by us to SES in accordance with development
agreements signed between the parties in 2002 and SES provided a corporate guarantee to
cover Satlynxs obligations to us.

Backlog

Our
2007 year-end backlog for equipment sales and revenues from multi-year service contracts
for our VSAT products was approximately $202 million, down from approximately $209 million
at year-end 2006. 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.

# Facilities

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

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

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

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

We
believe our facilities to be adequate for our needs.

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

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

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

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

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

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

# Financial Background

In
July 2005, Bank Hapoalim assigned an outstanding Company loan in the amount of
$71.4 million held by it to York Capital Management LP. The terms of the loan
included a right to receive warrants for the purchase of our ordinary shares. The
aggregate maximum exercise amount to be paid under the warrants was equal to the
outstanding balance on the loan payable by us, including accrued interest.

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

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

# General

The
selected financial information as of December 31, 2007, December 31, 2006 and
December 31, 2005 have been derived from our consolidated audited financial statements,
which include all adjustments consisting of normal recurring accruals that we consider
necessary for a fair presentation of the financial position and the results of operations
for these periods. Our financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S.

# Financial Statements in
U.S. dollars

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

# Critical Accounting
Policies and Estimates

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

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

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

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

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

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

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

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

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

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

The
Company adopted the provisions of FIN 48 as of January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized a $ 1,309,000 increase in liability for
unrecognized tax positions which was accounted with a corresponding increase to the
January 1, 2007 balance of accumulated deficit. As of January 1, 2007, liabilities for
unrecognized tax positions in accordance with FIN 48 amounted to $ 5,435,000.

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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 small portion of
general allowance which we have provided to cover additional potential exposures. If the
financial condition of our customers deteriorates, resulting in their inability to make
payments, additional allowances may be required. These estimates are based on historical
bad debt experience and other known factors. If the historical data we used to determine
these estimates does not properly reflect future realization, additional allowances may be
required.

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

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

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

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

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

In
accordance with the guidelines of FASB 144, Accounting for the impairment or
disposal of long lived assets, in 2007, the Company concluded that the carrying
amount of its long lived network assets group in Colombia exceeded their fair value and
recorded an impairment of $12.2 million.

Most
of the activity of Spacenet Rural in Colombia consists of operating subsidized projects
for the government (the Compartel Projects). In accordance with these
projects, the Colombian government transferred approximately $70 Million to trust
accounts. The money is released from the trusts based on a schedule of payments and
meeting certain operational milestones. As of December 31, 2007, approximately $51 million
has been released from the trusts to the Company. As of December 31, 2007, and
approximately $24 million is being held in trust with respect to these projects, of which
approximately $15.3 million has become due and is not being released from the trusts as
certain operational milestones imposed by the Colombian government have not been fully
met. The Colombian government and the Company have agreed to renegotiate certain terms of
the contracts, including the operational milestones going forward, so that they better
reflect the current telecom and business environment in Colombia. In order to guarantee
our performance under the Compartel projects, we secured insurance from a local insurance
company in Colombia. We have provided the insurance company with various corporate
guarantees guaranteeing our performance for in excess of $50 million.

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During
2007, the Company deferred revenues related to the Compartel Projects in the amount of
approximately $6.4 million in order to ensure that accumulated revenues recognized from
the Compartel Projects will not exceed the accumulated amounts already released from the
trust. In general, we recognize revenues for these projects on a straight line basis,
relative to the beginning of operation and for the period that service is required to be
provided. The deferred revenues relate to periods for which we have already provided
service but, due to the current restriction on release of the payments from the trusts in
which the payments are held, these amounts have not been released from restricted cash.

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

In
July 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 utilizes a two-step approach for
evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that
a tax position, based solely on its technical merits, is more-likely-than-not to be
sustained upon examination. Measurement (step two) is only addressed if step one has been
satisfied (i.e., the position is more-likely-than-not to be sustained) otherwise a full
liability in respect of a tax position not meeting the more-than-likely-than-not criteria
is recognized. Under step two, the tax benefit is measured as the largest amount of
benefit, determined on a cumulative probability basis, that is more-likely-than-not to be
realized upon ultimate settlement.

FIN
48 applies to all tax positions related to income taxes subject to FAS 109. This includes
tax positions considered to be routine as well as those with a high degree of
uncertainty. FIN 48 has expanded disclosure requirements, which include a tabular roll
forward of the beginning and ending aggregate unrecognized tax benefits as well as
specific detail related to tax uncertainties for which it is reasonably possible the
amount of unrecognized tax benefit will significantly increase or decrease within twelve
months.

We
adopted the provisions of FIN 48 as of January 1, 2007. As a result of the implementation
of FIN 48, we recognized a $ 1,309 increase in liability for unrecognized tax positions
which was accounted with a corresponding increase to the January 1, 2007 balance of
accumulated deficit. As of January 1, 2007, liabilities for unrecognized tax positions in
accordance with FIN 48 amounted to $ 5,435.

Interest
associated with uncertain tax positions is classified as financial expenses in the
financial statements and penalties as general and administrative expenses. Our policy for
interest and penalties related to income tax exposures was not impacted as a result of the
adoption of the recognition and measurement provisions of FIN 48.

35

---

---

Accounting
for Stock-Based Compensation. On January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standard (SFAS) No. 123(R),
Share-Based Payment, which requires us to measure all employee stock-based
compensation awards using a fair value method and recognize such expense in our
consolidated financial statements. We adopted SFAS 123(R) using the modified
prospective transition method, which requires the application of the accounting standard
starting from January 1, 2006. We estimate the fair value of stock options granted
using the Black-Scholes option pricing model. Prior to the adoption of SFAS 123(R),
we accounted for equity-based awards to employees and directors using the intrinsic value
method in accordance with APB No. 25, Accounting for Stock Issued to
Employees (APB 25) as allowed under SFAS 123. Non-cash share-based
compensation of $1.3 million was recorded in 2007. As of December 31, 2007, there was
$1.2 million of total unrecognized compensation cost related to non-vested
share-based awards granted under our stock option plans. That cost is expected to be
recognized over a weighted average period of 1.2 years.

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

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

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

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

36

---

---

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

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

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

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

37

---

---

# Research and Development
Expenses:

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

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

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

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

Selling
and marketing expenses increased by approximately $1.9 million in the year ended
December 31, 2007, compared to 2006. This increase is attributable mainly to increased
expenses in GNS associated with our increased revenues in 2007.

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

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

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

38

---

---

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

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

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

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

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

39

---

---

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

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

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

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

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

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

40

---

---

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

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

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

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

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

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

41

---

---

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

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

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

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

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

# 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 varying sales prices and margins.

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

42

---

---

Our
business historically has not been affected by seasonal variations.

# Liquidity and Capital
Resources

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

As
of December 31, 2007, we had cash and cash equivalents of $122.8 million,
short-term bank deposits and held to maturity marketable securities of $45.6 million,
short-term and long-term restricted cash of $13.4 million, short-term and long-term
restricted cash held in trustees accounts of $24.0 million and short-term bank
credits of $5.8 million. As of December 31, 2006, we had cash and cash equivalents of
$149.5 million, short-term and long-term restricted cash of $11.5 million,
short-term and long-term restricted cash held in trustees accounts of
$22.8 million and short-term bank credits of $1.2 million.

The
$24.0 million of restricted cash held in a trustees account relates to funds
collected from two of our large projects in Colombia, which are divided into seven
different regions and contracts. The release of these funds from the trust is dependent
both on a schedule of payments and on the achievement of operational milestones. However,
in the event that we do not meet certain milestones, or if the contracts are terminated
unilaterally by the government of Colombia, we may be unable to receive this restricted
cash. At present these agreements and the operational milestones are being re-negotiated.

As
of December 31, 2007, our accumulated debt was approximately $40.4 million, comprised
of long-term loans of $24.1 million and convertible subordinates notes of
approximately $16.3 million.

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

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

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

43

---

---

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

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

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

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

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

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

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

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

# Contractual Obligations

As
of December 31, 2007, our short and long term obligations were as follows:

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

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

44

---

---

# Off Balance Sheet
Arrangements

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

As
of December 31, 2007, the aggregate amount of bank guarantees outstanding in order to
secure our various performance obligations was approximately $12.1 million, comprised
mainly of performance guarantees provided on behalf of our subsidiary in Peru in an amount
of approximately $7.7 million. We have restricted cash as collateral for these
guarantees in an amount of approximately $1.2 million.

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

# Impact of Inflation and
Currency Fluctuations

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

The
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 2007, there was inflation in Israel of 3.4% and the U.S Dollar
depreciated in relation to the NIS at a rate of 9.1%, from NIS 4.225 per $1 on
December 31, 2006 to NIS 3.846 per $1 on December 31, 2007. In the period ending in
December 31, 2006 deflation in Israel was 0.1% while the U.S. dollar depreciated in
relation to the NIS at a rate of 8.2%. 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 or if evaluation of the NIS against the U.S.dollar continues, our results of operations may be materially
adversely affected. In 2007 and 2008, in order to limit these risks, we entered into
hedging agreements to cover certain of our NIS to US Dollar exchange rate exposures.

Regarding
the changes in the value of other foreign currencies in relation to the U.S. dollar, our
monetary balances that are not linked to the U.S. dollar impacted our financial expenses
during 2007 and 2006. 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.

45

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# Effective Corporate Tax
Rate

On
January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the
tax reform, resident companies are subject to Israeli tax on income accrued or derived in
Israel or abroad. In addition, the concept of a controlled foreign corporation
was introduced, according to which an Israeli company may become subject to Israeli taxes
on certain income of a non-Israeli subsidiary if the subsidiarys primary source of
income is passive income (such as interest, dividends, royalties, rental income or capital
gains). The tax reform also substantially changed the system of taxation of capital gains.
Following the reform, the capital gains tax rate applicable to us was decreased from 36%
to 25%, while the allocation of the gain between the two periods is proportional to the
holding periods until December 31, 2002, and after December 31, 2002. In 2006
and in 2007, the tax reform did not have any material effect on our liquidity, financial
condition or results of operations.

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

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

According
to the Amendment, tax-exempt income generated under the provisions of the Amendment will
be subject to taxes upon distribution or liquidation and we may be required in the future
to record deferred tax liabilities with respect to such tax-exempt income. As of December
31, 2007, we did not generate income under the provisions of the Amendment.

Currently,
we have nine Approved Enterprise programs under the alternative route of the Investment
Law. The period of benefits for the first eight programs has expired and we do not expect
substantial benefits from the other program. See ITEM 10: Additional Information
 Israeli Taxation. In addition, the Company chose 2005 as the year of election
for a new Benefited Enterprise under the amendment.

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

We
anticipate that we will not have to pay taxes relating to the 2008 tax year for most of
our major entities due to current or carry forward tax losses. Cash outlays for income
taxes in the future might be different from tax expenses, mainly due to cash tax payments
for previous years that might be triggered by tax audits in the various tax jurisdictions,
deferred tax expenses (income) and payments usually made in arrears for annual taxes in
profitable years.

# Research and Development

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

46

---

---

We
devoted significant research and development resources in 2007, 2006 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 technology or obtain
information that we regard as a trade secret in violation of our legal rights.

# Third-Party Funding

In
accordance with an agreement entered in 2001 with the Chief Scientist we are eligible to
participate in a program under which we are eligible to receive future research and
development grants for generic research and development projects without any royalty
repayment obligations.

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

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

# Trend Information

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

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

47

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# Impact of Recently
Issued Accounting Pronouncements

In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157) which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 applies to other accounting pronouncements that require or permit fair value
measurements and, accordingly, does not require any new fair value measurements. SFAS 157
is effective for fiscal years beginning after November 15, 2007 for financial assets and
liabilities, as well as for any other assets and liabilities that are carried at fair
value on a recurring basis, and should be applied prospectively. The adoption of the
provisions of SFAS 157 related to financial assets and liabilities and other assets and
liabilities that are carried at fair value on a recurring basis is not anticipated to
materially impact the Companys consolidated financial position and results of
operations. Subsequently, the FASB provided for a one-year deferral of the provisions of
SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair
value in the consolidated financial statements on a non-recurring basis. The Company is
currently evaluating the impact of adopting the provisions of SFAS 157 for non-financial
assets and liabilities that are recognized or disclosed on a non-recurring basis.

In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement PlansAn Amendment of FASB No. 87, 88, 106
and 132(R) (SFAS 158). SFAS 158 requires that the funded status of
defined benefit postretirement plans be recognized on the companys balance sheet and
changes in the funded status be reflected in comprehensive income, effective for fiscal
years ending after December 15, 2006. SFAS 158 also requires companies to measure the
funded status of the plan as of the date of their fiscal year end, effective for fiscal
years ending after December 15, 2008. The Company is currently evaluating the impact of
adopting SFAS 158.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
159). Under this Standard, the Company may elect to report financial instruments and
certain other items at fair value on a contract-by-contract basis with changes in value
reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to
mitigate volatility in reported earnings that is caused by measuring hedged assets and
liabilities that were previously required to use a different accounting method than the
related hedging contracts when the complex provisions of SFAS 133 hedge accounting are not
met. SFAS 159 is effective for years beginning after November 15, 2007. The Companys
management has determined that the adoption of SFAS 159 will not have a significant impact
on its consolidated financial statements since it has not elected the fair value option
for any of its existing assets or liabilities as of FAS 159 effective date.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141
(Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting
treatment and disclosure for certain specific items in a business combination. SFAS 141(R)
applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December
15, 2008. As such, the adoption of SFAS 141R is not expected to have any effect on the
Companys consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. This standard is effective for fiscal years
beginning after December 15, 2008 and should be applied prospectively. However, the
presentation and disclosure requirements of the statement shall be applied retrospectively
for all periods presented. The Company is currently evaluating adoption of the provisions
of Statement No. 160.

48

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---

On
December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB 110), which,
effective January 1, 2008, amends and replaces SAB 107, Share-Based Payment. SAB 110
expresses the views of the SEC staff regarding the use of a simplified method
in developing an estimate of expected term of plain vanilla share options in
accordance with FASB Statement No. 123(R), Share-Based Payment. Under the
simplified method, the expected term is calculated as the midpoint between the
vesting date and the end of the contractual term of the option.

The
use of the simplified method, which was first described in Staff Accounting
Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use of
the simplified method for plain vanilla awards in certain
situations. The SEC staff does not expect the simplified method to be used
when sufficient information regarding exercise behavior, such as historical exercise data
or exercise information from external sources, becomes available. The Company is currently
evaluating the impact of SAB 110.

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

# Directors

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

|Name                 | Age |  | Position(s)                                                   
|-------------------- | --- |  | --------------------------------------------------------------
|
|
|
|
|Amiram Levinberg     | 52  |  | Chairman of the Board of Directors and Chief Executive Officer
|Haim Benjamini(1)(2) | 68  |  | External Director                                             
|Jeremy Blank         | 29  |  | Director                                                      
|Ehud Ganani          | 55  |  | Director                                                      
|Leora Meridor(1)(2)  | 60  |  | External Director                                             
|Karen Sarid(1)(2)    | 57  |  | Director                                                      
|Izhak Tamir(1)(2)    | 55  |  | Director                                                      

---

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

(2)
          Member of our Audit Committee.

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

49

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---

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

Jeremy
Blank has served on our board since July 2005. Mr. Blank is a managing
director of York Capital Management. York is a private investment fund based in New York
with approximately $13 billion in assets under management. From 1999 to 2004, Mr. Blank
worked at Morgan Stanley as a vice president within Morgan Stanleys fixed income
department and earlier, in Morgan Stanleys mergers and acquisitions department. Mr.
Blank graduated from Yeshiva University in New York City with a Bachelors degree in
Finance.

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

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

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

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

50

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# Senior Management

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

|Name                | Age |  | Position(s)                                                                                   
|------------------- | --- |  | ----------------------------------------------------------------------------------------------
|
|
|
|
|Amiram Levinberg(1) | 52  |  | Chief Executive Officer and Chairman of the Board of Directors                                
|Erez Antebi         | 48  |  | Chief Executive Officer, Gilat Networks Systems, and, President, Spacenet Rural Communications
|Andreas Georghiou   | 58  |  | Chief Executive Officer, Spacenet Inc.                                                        
|Yoav Leibovitch     | 50  |  | Executive Vice President, Corporate Development                                               
|Joshua Levinberg    | 54  |  | Executive Vice President, Corporate Business Development & Strategy                           
|Tal Payne           | 36  |  | Chief Financial Officer                                                                       

---

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

Erez
Antebi was appointed as Chief Executive Officer of Gilat Networks Systems
on June 1, 2005, and as CEO of Spacenet Rural Communications on February 1, 2008.
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.

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

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

51

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---

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

Tal
Payne was appointed our Chief Financial Officer in May 2005. Before
that, Ms. Payne served as our Vice President of Finance starting January 2004.
Prior to that, Ms. Payne served as our Financial Director since July 1999. Prior
to joining us, Ms. Payne, a CPA, was employed as a Manager for Kesselman &
Kesselman, PriceWaterhouseCoopers Israel office from 1994 to 1999. She holds a B.A.
in Economics and Accounting, as well as an Executive MBA, both from Tel Aviv University.
In March 2008, Ms. Payne announced her resignation which will become effective in
mid-2008.

# 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, 2007:

|                                                   | Salaries, Fees, Directors'
Fees,
Commissions and
Bonuses(1) | Pension, Retirement and
Similar Benefits
|-------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------
|
|
|
|
|All directors and officers as a group (17 persons) |                                                             |                                         

---

|(1) | Also
includes bonuses and stock option compensation accrued in 2007.
|--- | --------------------------------------------------------------------

# Management Agreements

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

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

52

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---

# Board Compensation

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

# Board Composition and
Practices

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

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

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

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.

53

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# Alternate Directors

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

# External Directors

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

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

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

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

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

54

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We
currently have one external director, Dr. Leora Meridor, who was elected at the Special
General Meeting held on August 30, 2005. The initial term of our second external director,
Mr. Haim Benjamini, expired in February 2008, and he is expected to be reelected in a
forthcoming Special General Meeting.

# Audit Committee

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

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

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

# Independent Directors

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

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.

55

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# Employees

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

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

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

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. 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 2007, 2006 and 2005 for all the plans were $ 0.7 million, $ 0.7 million
and $ 0.7 million, respectively. Matching contributions are invested in proportion to each
participants voluntary contributions in the investment options provided under the
plan.

56

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# Share Ownership

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

# Stock Option Plans

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

As
of December 31, 2007, we had granted options to purchase a total of 111,913 ordinary
shares under the 1995 Plans and options to purchase 69,949 ordinary shares remain
outstanding. The exercise prices for such options vary from $7.8 to $2,730 and all such
options expire at various times from January 2008 to February 2013. As of December 31,
2007, 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, 2007, options to purchase a
total of 3,977,081 ordinary shares under the 2003 Plans were outstanding, and options to
purchase 1,515,512 ordinary shares have been exercised.

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

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

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

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.

57

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

As
of March 1, 2008, the 13 directors and executive officers listed above, as a group,
held options to purchase 3,004,650 of our ordinary shares at a weighted average exercise
price of $5.93 per share. Out of such options, 1,100 options expirein 2011, 850
expire in 2012, 154,200 options expire in 2013, 3,000 options expire in 2014 and 2,845,500
options expire in 2015.

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

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

The
following table sets forth certain information with respect to the beneficial ownership of
our ordinary shares as of March 15, 2008 (including options exercisable within 60 days of
March 15, 2008) with respect to: (i) each person who is believed by us to be the
beneficial owner of more than 5% of the ordinary shares; (ii) each director or officer who
holds more than 1% of the ordinary shares, and (iii) all directors and officers as a
group. Except where otherwise indicated, we believe, based on information furnished by the
owners, that the beneficial owners of the ordinary shares listed below have sole
investment and voting power with respect to such shares, subject to any applicable
community property laws. The shareholders listed below do not have any different voting
rights from any other shareholders of our company, except to the extent that they hold
more than 7% and as such, they will have a right to appoint a director, subject to certain
conditions in our Articles of Association. None of the directors, officers or key
executives listed in the Directors and Senior Management table appearing in Item 6 above,
owns 1% or more of our outstanding share capital.

The
information in this table is based on 39,747,279 ordinary shares outstanding as of March
15, 2008. 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 ofOrdinarySharesBeneficiallyOwned | Percent ofOrdinarySharesOutstanding
| | ----------------------------------------------------- | ---------------------------------------- | -----------------------------------
|
|
|
|
| | York Capital Management(1)                            |                                          |                                    
| | Mivtach Shamir Finance Ltd. (2)                       |                                          |                                    
| | All officers and directors as a group (13 persons)(3) |                                          |                                    

---

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

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

| | (3) | Includes
options that are currently exercisable or are exercisable within 60 days that are held by
                  our  directors and executive officers.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Significant Changes in the Ownership of Major Shareholders

As
of January 1, 2005, our major shareholders were Bank Hapoalim, holding 3,302,428 shares
(approximately 15% ownership) and Eliezer Fishman, holding 2,996,259 shares
(approximately 10% ownership. As of December 31, 2005, our major shareholders were Bank
Hapoalim, holding 2,052,428 shares (approximately 9% ownership), Eliezer Fishman, holding
2,112,523 shares (approximately 9% ownership), Mivtach Shamir Finance Ltd., holding
2,216,945 shares (approximately 10% ownership), Joseph Harrosh, holding 1,146,274 shares
(approximately 9% ownership) and York, holding 3,302,428 shares (approximately 15%
ownership). As of December 31, 2006, our major shareholders were York, holding 8,070,563
shares (approximately 20% ownership), Bank Hapoalim, holding 2,052,428 shares
(approximately 5% ownership) and Mivtach Shamir Finance Ltd., holding 2,216,945 shares
(approximately 6 % ownership). As of December 31, 2007, our major shareholders were York,
holding 8,070,563 shares (approximately 20% ownership), Citadel Investment Group, L.L.C.,
holding 2,140,424 shares approximately 5 % ownership) and Mivtach Shamir Finance Ltd.,
holding 2,216,945 shares (approximately 5 % ownership).

Major Shareholders Voting Rights

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

Record Holders

Based
on a review of the information provided to us by our transfer agent, as of March 26,
2008, there were 88 holders of record of our ordinary shares, of which 68 record holders
holding approximately 95.4% of our ordinary shares had registered addresses in the United
States and 12 record holders holding approximately 4.52% of our ordinary shares had
registered addresses in Israel.  These numbers are not representative of the number of
beneficial holders of our shares nor is it representative of where such beneficial
holders reside since many of these ordinary shares were held of record by brokers or
other nominees, including CEDE & Co., the nominee for the Depositary Company (the central
depositary for the U.S. brokerage community), which held approximately 75.6% of our
outstanding ordinary shares as of said date.

59

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

York
Capital Management

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

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

Not
applicable.

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

Consolidated
Statements

See
"Item 18: Financial Statements."

Export Sales

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

Legal Proceedings

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

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 were consolidated into a single
action in the United States District Court for the Eastern District of New York.  The
class action was settled and approved by the United States District Court for the Eastern
District of Virginia in September 2007. The Israeli class action was dismissed by the
court in October 2007.

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

The
Brazilian tax authority has filed a claim against a subsidiary of Spacenet Inc. in
Brazil, for alleged taxes due of approximately $4 million. In January 2004, the
subsidiary received notice of an administrative ruling reducing the amount of the claim,
and the subsidiary filed an appeal of such ruling. In December 2005, this appeal was
denied and at present, the subsidiary faces a tax liability of approximately $8.2 million
(the amount has increased due to interest and exchange rate differences). The subsidiary
denies such claims and has filed a petition known as a  "Acao Anulatoria" in the State
Courts of the State of Sao Paulo, Brazil.

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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 9 and 12 of the notes to consolidated financial
statements included in this annual report on Form 20-F. We may only pay cash dividends in
any fiscal year out of "profits," as determined under Israeli law. In addition, the terms
of some of our financing arrangements restrict us from paying dividends to our
shareholders.

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

Significant Changes

In
March 2008 we announced the resignation of our Chief Financial Officer, Ms. Tal Payne who
will be leaving our company in mid-2008.

On
March 31, 2008 we announced the signing of an Agreement and Plan of Merger  to be
acquired for an aggregate value of $475 Million in an all cash transaction by a
consortium of private equity investors that includes The Gores Group LLC, Mivtach Shamir
Holdings Ltd., companies affiliated with Roy Ben-Yami, Ami Lustig and Eytan Stibbe and
DGB Investments, Inc. Under the terms of the agreement, our shareholders will receive
$11.40 per share in cash at closing, representing a premium of approximately 38% over our
average closing share price during the 30 trading days ended April 25, 2007, the day in
which Mivtach Shamir Holdings Ltd. issued a formal offer to the board of directors of
Gilat to purchase 100% of the Company's shares.  There is no financing condition to the
obligations of the buyers to consummate the transaction. Our Board of Directors approved
the agreement and recommended that our shareholders vote in favor of the transaction.
 The closing of the transaction is subject to shareholder approval, certain regulatory
approvals and other customary closing conditions.  It is currently anticipated that the
transaction will be consummated by September 2008.  Upon the closing of the transaction,
our ordinary shares would no longer be traded on NASDAQ or the Tel Aviv Stock Exchange.
This agreement is attached hereto as Exhibit 4.1.

61

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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 Trading Volume
|----------------------------- | ----- | ----------------------------
|
|
|
|
|Year Ended December 31, 2003: |       |                             
|                              |       |                             
|Year Ended December 31, 2004: |       |                             
|                              |       |                             
|Year Ended December 31, 2005: |       |                             
|                              |       |                             
|Year Ended December 31, 2006: |       |                             
|                              |       |                             
|First Quarter                 |       |                             
|Second Quarter                |       |                             
|Third Quarter                 |       |                             
|Fourth Quarter                |       |                             
|                              |       |                             
|Year Ended December 31, 2007: |       |                             
|                              |       |                             
|First Quarter                 |       |                             
|Second Quarter                |       |                             
|Third Quarter                 |       |                             
|Fourth Quarter                |       |                             
|                              |       |                             
|Most Recent Six Months:       |       |                             
|                              |       |                             
|October 2007                  |       |                             
|November 2007                 |       |                             
|December 2007                 |       |                             
|January 2008                  |       |                             
|February 2008                 |       |                             
|March 2008                    |       |                             
|                              |       |                             
|April 2008 (through April 6)  |       |                             

62

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

Not
applicable.

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

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

|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.

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

63

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# Amendment of the
Articles of Association

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

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

# Amendment of the
Memorandum

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

# Record Date for Notices
of General Meeting and Other Action

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

# Notice of General
Meetings; Omission to Give Notice

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

# Annual General Meetings
and Special General Meetings

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

64

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# Quorum at General
Meetings

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

# Adoption of Resolutions
at General Meetings

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

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

# Voting Power

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

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

# Election and Removal of
Directors

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

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.

65

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

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

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

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

66

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

# Alternate Directors

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

# External Directors

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

# Qualification of
Directors

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

# Proceedings of the Board
of Directors

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

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

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

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

# Borrowing Powers

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

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# Powers of Chief
Executive Officer

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

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

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

# Transfer of Shares

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

# Acquisition of Shares
over Certain Thresholds

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

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

# Repurchase of Shares

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

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# Foreign Ownership

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

# Mergers

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

# Distribution of
Dividends and Liquidation Rights

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

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

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

# 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:

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

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

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

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

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

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

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

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

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

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

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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:

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

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

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

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

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

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

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

# ISRAELI TAXATION

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

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

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

# Tax Consequences to
Nonresidents of Israel

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

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Capital
Gains

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

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

Dividends

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

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

Interest

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

# Filing of Tax Returns in
Israel

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

# Tax Consequences to
Residents of Israel

Capital
Gains

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

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Dividends

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

Interest

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

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

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

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

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

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

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

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

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

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

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

Tax
benefits under the 2005 Amendment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# U.S. TAXATION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# Dividends Paid on
Ordinary Shares

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

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

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

# Sale or Disposition of
Ordinary Shares

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

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

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

# Passive Foreign
Investment Company

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

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

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

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

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

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

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

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

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

# 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.

80

---

---

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

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

Not applicable.

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

Not applicable.

|H. | Documents
on Display
|-- | --------------------

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

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

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

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

81

---

---

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

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

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

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

Not
applicable.

# PART II

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

None

82

---

---

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

Not
applicable.

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

# Disclosure Controls and
Procedures

Our
principal executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended) as of December 31, 2007, have
concluded that, as of such date, our disclosure controls and procedures were effective and
ensured that information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act is accumulated and communicated to our management,
including our principal executive officer and chief financial officer, to allow timely
decisions regarding required disclosure and is recorded, processed, summarized and
reported within the time periods specified by the rules of the Securities and Exchange
Commission.

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

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

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

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

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

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

Our
management assessed the effectiveness of our internal control over financial reporting, as
of December 31, 2007. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.

Based
on that assessment, our management concluded that as of December 31, 2007,  our
internal control over financial reporting is effective.

83

---

---

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

# Changes in Internal
Control over Financial Reporting

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

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

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

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

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

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

|ITEM 16C: | PRINCIPAL 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

84

---

---

|(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.

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

Not
applicable.

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

# Issuer Purchase of
Equity Securities

In
the year ended December 31, 2007, we did not engage in the purchase of any of our own
shares.

# PART III

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

Not
applicable.

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

The Consolidated Financial Statements
and related notes required by this item are contained on pages F-1 through F-54 hereof.

|
|
|
|
|
|
|
|
|
|
|
|

85

---

---

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

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

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

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

|4.1 | Agreement
and Plan of Merger dated March 31, 2008 by and among Galactic Holdings Ltd., Galactic
Acquisition          Company Ltd. and Gilat Satellite Networks Ltd.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

86

---

---

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

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

Date:
   April 9, 2008

87

---

---

# GILAT SATELLITE
NETWORKS LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2007

# IN U.S. DOLLARS

# INDEX

|                                                                 | Page      
|---------------------------------------------------------------- | ----------
|
|
|
|
|Management's Report on Internal Control Over Financial Reporting | F-2       
|                                                                
|Reports of Independent Registered Public Accounting Firm         | F-3 - F-4 
|                                                                
|Consolidated Balance Sheets                                      | F-5- F-6  
|                                                                
|Consolidated Statements of Operations                            | F-7       
|                                                                
|Consolidated Statements of Changes in Shareholders' Equity       | F-8       
|                                                                
|Consolidated Statements of Cash Flows                            | F-9 - F-11
|                                                                
|Notes to Consolidated Financial Statements                       | F-12- F-54



---

---

# MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

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

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

Gilats
management assessed the effectiveness of its internal control over financial reporting as
of December 31, 2007. In conducting its assessment of internal control over financial
reporting, management based its evaluation on the framework in Internal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Gilats management has concluded based on its
assessment, that its internal control over financial reporting was effective as of
December 31, 2007 based on these criteria.

The
effectiveness of Gilats internal control over financial reporting as of December 31,
2007, has been audited by Kost, Forer, Gabbay & Kasierer (A Member of Ernst &
Young Global), an independent registered public accounting firm.

F - 2

---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# GILAT SATELLITE
NETWORKS LTD.

We
have audited Gilat Satellite Networks Ltd.s (Gilat) internal control
over financial reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Gilats management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

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

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

In
our opinion, Gilat maintained in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Gilat and its
subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of
operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2007 and our report dated April 9, 2008
expressed an unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 9, 2008    | A Member of Ernst & Young Global

F - 3

---

---

# 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, 2007 and 2006, and the
related consolidated statements of operations, changes in shareholders equity and
cash flows for each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of StarBand Inc. a wholly owned subsidiary of
the Company, which statements reflect total revenues of approximately 12.5% for the year
ended December 31, 2005, of the related consolidated total. Those statements were audited
by other auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for StarBand Inc., is based solely on the report of the
other auditors.

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

In
our opinion, based on our audits and the report of other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2007 and 2006, and the consolidated results of their operations and cash flows, for each
of the three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.

As
discussed in Note 2t and Note 9b to the consolidation financial statements, in 2006, the
Company adopted Statement of Financial Accounting Standards Board No.123 (revised 2004),
Share-Based Payment. Also, as discussed in Note 2u and Note 12 to the
consolidated financial statements, in 2007, the Company adopted Interpretation No.48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109".

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control
over financial reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued bythe Committee of Sponsoring
Organizations of the Treadway Commission and our report dated April 9, 2008,
expressed an unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 9, 2008    | A Member of Ernst & Young Global

F - 4

---

---

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

|                                                                                | December 31,
|------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                          |             
|                                                                                |             
|CURRENT ASSETS:                                                                 |             
|Cash and cash equivalents                                                       |             
|Short- term bank deposits and held to maturity marketable securities            |             
|Short-term restricted cash                                                      |             
|Restricted cash held by trustees                                                |             
|Trade receivables (net of allowance for doubtful accounts: 2007 - $ 4,528; 2006 |             
|- $ 12,709)                                                                     |             
|Inventories                                                                     |             
|Other current assets                                                            |             
|                                                                                |             
|                                                                                |             
|Total current assets                                                            |             
|                                                                                |             
|                                                                                |             
|LONG-TERM INVESTMENTS AND RECEIVABLES:                                          |             
|Severance pay fund                                                              |             
|Long-term restricted cash                                                       |             
|Long-term restricted cash held by trustees                                      |             
|Long-term trade receivables, receivables in respect of capital leases and other |             
|receivables                                                                     |             
|                                                                                |             
|                                                                                |             
|Total long-term investments and receivables                                     |             
|                                                                                |             
|                                                                                |             
|PROPERTY AND EQUIPMENT, NET                                                     |             
|                                                                                |             
|                                                                                |             
|INTANGIBLE ASSETS AND DEFERRED CHARGES, NET                                     |             
|                                                                                |             
|                                                                                |             
|Total assets                                                                    |             
|                                                                                |             

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

F - 5

---

---

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

|                                                                           | December 31,
|-------------------------------------------------------------------------- | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                       |             
|                                                                           |             
|CURRENT LIABILITIES:                                                       |             
|Short-term bank credit                                                     |             
|Current maturities of long-term loans                                      |             
|Trade payables                                                             |             
|Accrued expenses                                                           |             
|Short-term advances from customer, held by trustees                        |             
|Other current liabilities                                                  |             
|                                                                           |             
|                                                                           |             
|Total current liabilities                                                  |             
|                                                                           |             
|                                                                           |             
|LONG-TERM LIABILITIES:                                                     |             
|Long-term loans, net                                                       |             
|Long-term advances from customer, held by trustees                         |             
|Accrued severance pay                                                      |             
|Accrued interest related to restructured debt                              |             
|Convertible subordinated notes                                             |             
|Other long-term liabilities                                                |             
|                                                                           |             
|                                                                           |             
|Total long-term liabilities                                                |             
|                                                                           |             
|                                                                           |             
|COMMITMENTS AND CONTINGENCIES                                              |             
|                                                                           |             
|SHAREHOLDERS' EQUITY:                                                      |             
|Share capital -                                                            |             
|Ordinary shares of NIS 0.2 par value: Authorized - 60,000,000 shares as of |             
|December 31, 2007 and 2006; Issued and outstanding - 39,611,873 and        |             
|38,820,352 shares as of December 31, 2007 and 2006, respectively           |             
|Additional paid-in capital                                                 |             
|Accumulated other comprehensive income                                     |             
|Accumulated deficit                                                        |             
|                                                                           |             
|                                                                           |             
|Total shareholders' equity                                                 |             
|                                                                           |             
|                                                                           |             
|Total liabilities and shareholders' equity                                 |             
|                                                                           |             

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

F - 6

---

---

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

|                                                                        | Year ended December 31,
|----------------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                                               |                        
|Products *)                                                             |                        
|Services *)                                                             |                        
|                                                                        |                        
|                                                                        |                        
|Total revenues                                                          |                        
|                                                                        |                        
|                                                                        |                        
|Cost of revenues:                                                       |                        
|Products *)                                                             |                        
|Services *)                                                             |                        
|                                                                        |                        
|                                                                        |                        
|Total cost of revenues                                                  |                        
|                                                                        |                        
|                                                                        |                        
|Gross profit                                                            |                        
|Operating expenses:                                                     |                        
|Research and development costs, net *)                                  |                        
|Selling and marketing expenses *)                                       |                        
|General and administrative expenses *)                                  |                        
|Impairment of long-lived and other assets                               |                        
|                                                                        |                        
|                                                                        |                        
|Operating income                                                        |                        
|                                                                        |                        
|Financial income (expenses), net *)                                     |                        
|Other income (expenses)                                                 |                        
|                                                                        |                        
|                                                                        |                        
|Income (loss) before taxes on income                                    |                        
|Taxes on income                                                         |                        
|                                                                        |                        
|                                                                        |                        
|Income (loss) after taxes on income                                     |                        
|Equity in earnings of affiliated companies                              |                        
|                                                                        |                        
|Net income (loss)                                                       |                        
|                                                                        |                        
|                                                                        |                        
|Net earnings (loss) per share:                                          |                        
|Basic                                                                   |                        
|                                                                        |                        
|Diluted                                                                 |                        
|                                                                        |                        
|                                                                        |                        
|Weighted average number of shares used in computing net earnings (loss) |                        
|per share:                                                              |                        
|Basic                                                                   |                        
|                                                                        |                        
|Diluted                                                                 |                        
|                                                                        |                        

|*) | Includes
the following revenues (expenses) resulting from transactions with           related
parties for the years ended December 31, 2007, 2006 and 2005: revenues           from
products  $ 0, $ 0 and $ 1,205, respectively; revenues from           services
 $ 0 , $ 0 and $ 416, respectively; cost of services           $ 0, $ 0
and $ (8,349), respectively; research and development expenses,           net  $
0, $ 0 and $ (1,543) respectively; Selling and marketing           expenses  $
0, $ 0 and $ 468, respectively; General and           administrative expenses  $
0, $ 0 and $ (983), respectively; and           financial expenses  $ 0, $ (3,772)
and $ (3,759), respectively.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 7

---

---

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

|                                                              | Number ofOrdinaryshares(inthousands) | Sharecapital | Additionalpaid-incapital | **)Accumulatedothercomprehensiveloss | Accumulateddeficit | Total
comprehensive
income (loss) | Total
shareholders'
equity
|------------------------------------------------------------- | ------------------------------------ | ------------ | ------------------------ | ------------------------------------ | ------------------ | --------------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2005                                 |                                      |              |                          | 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 |                                      |             
|long-term convertible loan                                    |                                      |              |                          | -                                    |                    |                                   | -                         
|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                       
|                                                              |                                      |             
|Exercise of options, net                                      |                                      |              |                          | 669                                  |                    |                                   | 30                        
|Stock compensation related to employees stock options         |                                      |              |                          | -                                    |                    |                                   | -                         
|Conversion of long-term convertible loan from a related party |                                      |              |                          | 10,578                               |                    |                                   | 492                       
|Issuance of shares in a public offering, net of $ 2,733       |                                      |             
|issuance expenses                                             |                                      |              |                          | 5,017                                |                    |                                   | 240                       
|Comprehensive income - foreign currency translation           |                                      |             
|adjustments                                                   |                                      |              |                          | -                                    |                    |                                   | -                         
|Net income                                                    |                                      |              |                          | -                                    |                    |                                   | -                         
|                                                              |                                      |              |                          |                                      |                    |                                   |                           
|Total comprehensive income                                    |                                      |              |                          |                                      |                    |                                   |                           
|                                                              |                                      |              |                          |                                      |                    |                                   |                           
|Balance as of December 31, 2006                               |                                      |              |                          | 38,820                               |                    |                                   | 1,757                     
|                                                              |                                      |             
|Exercise of options, net                                      |                                      |              |                          | 791                                  |                    |                                   | 39                        
|Stock compensation related to employees stock options         |                                      |              |                          | -                                    |                    |                                   | -                         
|Conversion of convertible subordinated notes                  |                                      |              |                          | 1                                    |                    | *)                                | -                         
|Accumulated affect of adjustment upon adoption of FASB        |                                      |             
|Interpretation No. 48                                         |                                      |              |                          |                                      |                    |                                   | -                         
|Comprehensive income - foreign currency translation           |                                      |             
|adjustments                                                   |                                      |              |                          | -                                    |                    |                                   | -                         
|Net income                                                    |                                      |              |                          | -                                    |                    |                                   | -                         
|                                                              |                                      |              |                          |                                      |                    |                                   |                           
|Total comprehensive income                                    |                                      |              |                          |                                      |                    |                                   |                           
|                                                              |                                      |              |                          |                                      |                    |                                   |                           
|Balance as of December 31, 2007                               |                                      |              |                          | 39,612                               |                    | $                                 | 1,796                     
|                                                              |                                      |              |                          |                                      |                    |                                   |                           

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

*)           represents an amount of less the one thousands dollars**)           represent adjustments in respect of foreign currency translation.

F - 8

---

---

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

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

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

F - 9

---

---

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

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

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

F - 10

---

---

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

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

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

F - 11

---

---

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

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

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

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

| | The
Company currently operates three complementary, vertically integrated business units:
| | -----------------------------------------------------------------------------------------

| |  | Gilat
Network Systems,  ("GNS"), is a provider of VSAT-based networks and associated
 professional services,                             including turnkey and management
services, to telecom operators worldwide.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | In
2007,  the Group  recorded a  provision  for the  impairment  of its long lived  assets
and                      other charges in Colombia in the amount of $ 12,218 see also
note 11.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | York
Capital Management LP ("York"):
| | -- | ------------------------------------

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

F - 12

---

---

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

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

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

| | On
September 27, 2006,  York converted its entire loan and accrued  interest into warrants
and                      immediately  exercised  its option to convert  the  warrants
 into shares at $ 6.75 per share.                      This resulted in the issuance of
 approximately  10,600,000 of the Company's  ordinary  shares                      to
York.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
 on  Interpretation  1 of  Opinion  26  and  EITF  No.  85-17,  "Accrued  Interest  upon
                     Conversion of Convertible  Debt",  the net carrying amount of the
convertible debt and accrued                      interest  unpaid,  including  the
 unamortized  discount,  in the total amount of $ 68,100 was
                     credited to shareholders' equity upon conversion.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Issuance
of ordinary shares
| | -- | ---------------------------

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

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

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

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

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

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

F - 13

---

---

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

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

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with SFAS No. 52, Foreign Currency Translation. All
transaction gains and losses of the remeasurement of monetary balance sheet items are
reflected in the consolidated statements of operations as financial income or expenses,
as appropriate. The financial statements of foreign subsidiaries, whose functional
currency has been determined to be their local currency, have been translated into
dollars. Assets and liabilities have been translated using the exchange rates in effect
at the balance sheet date. Statements of operations amounts have been translated using
average rates, which approximates the prevailing exchange rate for each transaction. The
resulting translation adjustments are reported as a component of shareholders equity
in accumulated other comprehensive income (loss).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries. The accounts for Variable Interest Entities (VIEs), as
prescribed by FASB Interpretation No. 46, Consolidation of Variable Interest
Entities and related interpretations, are included in the consolidated financial
statements. Intercompany balances and transactions, including profits from intercompany
sales not yet realized outside the Group, have been eliminated upon consolidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | As
of December 31, 2007, the Company classifies all of its debt securities as
held-to-maturity. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity and are stated at
amortized cost. The cost of held-to-maturity securities is adjusted for amortization of
accretion of discounts to maturity using the effective interest method. Interest is
included in financial income, net. As of December 31, 2007, no impairment has been
identified
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

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

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

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

| | Short-term
restricted cash is primarily invested in certificates of deposit, which mature within one
year. As of December 31, 2007, the vast majority of this amount is linked to the dollar.
It is used as collateral for the lease of the Groups offices, performance
guarantees to customers and loans and bears weighted average interest of 5.43% and 5.02%
in 2007 and 2006, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Long-term
restricted cash is primarily invested in certificates of deposit, which mature in more
than one year. As of December 31, 2007, the vast majority of the amount is linked to the
dollar. It bears an annual weighted average interest rate of 4.46% and 4.94% as of
December 31, 2007 and 2006, respectively. This long-term restricted cash is used as
collateral for the lease of the Groups offices, a sale and lease back transaction
performance guarantees to customers and loans.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Short-term
and long-term restricted cash held by trustees is primarily invested in certificates of
deposits. As of year end, 92% of the total amount is linked to the dollar and 8% of the
total amount is linked to the Colombian Peso. The amounts held by trustees bear interest
at rates of 4.1% and 7%, respectively, and are released based upon performance milestones
as stipulated in the Groups agreements with the government of Colombia., which are
currently under renegotiation. See also note 11.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

F - 15

---

---

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

|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 statements of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 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 - 5                                        
| | Office furniture and equipment     | 5 - 17                                       
| | Vehicles                           | 5 - 7                                        
| | Leasehold improvements             | Over the term of the lease or the useful life
| |                                    | of the improvements, 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 - 16

---

---

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

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

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

| | Intangible
assets subject to amortization are stated at amortized cost.
| | -----------------------------------------------------------------------

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

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

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

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

| | In
2007, the Group recorded a provision for the impairment of its long lived assets in
Colombia in the amount of $ 10,287. See also Note 11.
| | --------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Revenue
recognition:
| | -- | --------------------

| | The
Group generates revenues mainly from the sale of products and services for
satellite-based communications networks. Sale of products includes mainly the sale of
VSATs and hubs. Service revenues include access to and communication via satellites (space
segment), installation of network equipment, telephone services, internet services,
consulting, on-line network monitoring, network maintenance and repair services. The
Group sells its products primarily through its direct sales force and indirectly through
resellers. Sales consummated by the Groups sales force and sales to resellers are
considered sales to end-users.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 17

---

---

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

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

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

| | Deferred
revenues represent amounts received by the Company when the criteria for revenue
recognition as described above are not met. In general, when deferred revenues are
recognized as revenues, the associated deferred costs are also recognized as cost of
sales.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Shipping
and advertising expenses:
| | -- | ----------------------------------

| | Selling
and marketing expenses include shipping expenses in the amounts of $ 2,400, $ 3,800 and $
1,600 for the years ended December 31, 2007, 2006 and 2005, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advertising
costs are expensed as incurred. Advertising expenses for the years ended December 31,
2007, 2006 and 2005 amounted to $ 800, $ 600 and $ 600, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Warranty
costs:
| | -- | ---------------

| | Generally,
the Company provides product warranties for periods between twelve to eighteen months at
no extra charge. A provision is recorded for estimated warranty costs based on the Companys
experience. Warranty expenses for the years ended December 31, 2007, 2006 and 2005 were
immaterial.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

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

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

| | 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 Advanced Satellite Network Technologies (ASNT), SES
Global S.A Satellite Networks Next Generation Technologies and from other funding
sources, for approved research and development projects. These grants are recognized at
the time the Company is entitled to such grants on the basis of the costs incurred or
milestones achieved as provided by the relevant agreement and included as a deduction
from research and development expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research
and development grants deducted from research and development expenses amounted to $
2,200, $ 2,000 and $ 3,000 in 2007, 2006 and 2005, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)) which requires
the measurement and recognition of compensation expense based on estimated fair values
for all share-based payment awards made to employees and directors. SFAS 123(R)
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25), for periods beginning in fiscal 2006. In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB
107) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in
its adoption of SFAS 123(R).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated income statement. Prior to the
adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 as allowed under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation(SFAS 123). See Note 9 for a further discussion on
stock-based compensation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

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

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

| | 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 a
portion or all of the deferred tax assets will not be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition
(step one) occurs when an enterprise concludes that a tax position, based solely on its
technical merits, is more-likely-than-not to be sustained upon examination. Measurement
(step two) is only addressed if step one has been satisfied (i.e., the position is
more-likely-than-not to be sustained) otherwise a full liability in respect of a tax
position not meeting the more-than-likely-than-not criteria is recognized. Under step
two, the tax benefit is measured as the largest amount of benefit, determined on a
cumulative probability basis, that is more-likely-than-not to be realized upon ultimate
settlement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 applies to all tax positions related to income taxes subject to FAS 109. This includes
tax positions considered to be routine as well as those with a high degree of
uncertainty. FIN 48 has expanded disclosure requirements, which include a tabular roll
forward of the beginning and ending aggregate unrecognized tax benefits as well as
specific detail related to tax uncertainties for which it is reasonably possible the
amount of unrecognized tax benefit will significantly increase or decrease within twelve
months (See also Note 12).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect
of applying FIN 48 is reported as an adjustment to the opening balance of accumulated
deficit. The adoption of FIN 48 resulted in an increase of the tax provision in the
amount of $ 1,309 which was adjusted to the opening balance of the accumulated deficit.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and held to maturity
marketable securities, short-term and long-term restricted cash, short-term and long-term
restricted cash held by trustees, trade receivables, short-term and long-term receivables
relating to capital leases and long-term trade receivables.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

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

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

| | The
majority of the Groups cash and cash equivalents, short-term bank deposits, and
short-term and long-term restricted cash are invested in dollars with major banks in
Israel and in the United States. Such deposits in the United States may be in excess of
insured limits and are not insured in other jurisdictions. Management believes that the
financial institutions that hold the Groups investments are financially sound and,
accordingly, minimal credit risk exists with respect to these investments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investments in U.S. and Israeli government
debentures. Management believes that those governments are financially sound and that the
portfolios are well-diversified, and accordingly, minimal credit risk exists with respect
to these marketable securities. Moreover, the Companys investment policy, limits
the amount the Company may invest in any one type of investment, thereby reducing credit
risk concentration.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2007, restricted cash held by the trustees amounted to approximately
$ 24,000. The Company is entitled to receive the restricted 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. See
also Note 11.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trade
receivables, short-term and long-term receivables relating to capital leases and
long-term trade receivables of the Group are mainly derived from sales to major customers
located in the U.S., Europe, Asia South America (mainly one customer in Peru in the
amount of approximately $9,300, as of December 31, 2007) and Africa. The Group performs
ongoing credit evaluations of its customers and obtains letters of credit and bank
guarantees for certain receivables. An allowance for doubtful accounts is determined with
respect to those amounts that the Group has determined to be doubtful of collection.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
significant portion of the Groups restricted cash held by trustees, trade
receivables and long-term trade receivables is from two countries in Latin America Colombia
and Peru. Any instability in the political or economic situation or otherwise in those
countries, could have a significant adverse impact on the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, the Group has no significant off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other foreign hedging
arrangements. In 2007 the Company entered into a hedging agreement in order to cover the
currency exposure of the New Israeli Shekel on identifiable cash flow items. See also
note 2(z).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

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

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

| | 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 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, 2007, 2006 and 2005, amounted to
approximately $ 2,500, $ 2,400 and $ 2,000, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 401K
profit sharing plans
| | -------------------------

| | The
Company has a number of savings plans in the United States that qualify under Section
401(k) of the Internal Revenue Code. U.S employees may contribute up to 100% of their
pretax salary, but not more than statutory limits. The Company contributes one dollar for
each dollar a participant contributes in this plan, in an amount of up to 3% and in
addition, it contributes fifty cents for each dollar a participant contributes in this
plan, for an additional 3%. Matching contributions in 2007, 2006 and 2005 for all the
plans were approximately $ 700 per year. Matching contributions are invested in
proportion to each participants voluntary contributions in the investment options
provided under the plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 or investing arrangements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

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

| | The
fair value of the convertible subordinated notes, which was determined according to
market value (on the over the counter market) quoted as of the most recent quote
available multiplied by the number of instruments outstanding and the carrying amount of
the Companys convertible subordinated notes was $ 13,200 and $ 16,300 as
of December 31, 2007, respectively and $ 12,100 and $ 16,300 as of December 31,
2006, 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 period. Diluted net earnings (loss) per share are
computed based on the weighted average number of ordinary shares outstanding during each
period, plus dilutive potential ordinary shares considered outstanding during the period,
in accordance with SFAS No. 128, Earnings per Share. The total weighted
average number of shares related to the outstanding options and warrants excluded from
the calculations of diluted net earnings (loss) per share, as they would have been
anti-dilutive, was 272,803, 9,276,286 and 13,390,669 for the years ended December 31,
2007, 2006 and 2005, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1. | Numerator:
| | -- | ----------

| |                                                     | Year ended December 31,
| | --------------------------------------------------- | -----------------------
|
|
|
|
| | Numerator for basic and diluted net earnings (loss) |                        
| | per share -                                         |                        
| | Net income (loss) available to holders of           |                        
| | Ordinary Shares                                     |                        
| |                                                     |                        

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

| |                                                       | Year ended December 31,
| | ----------------------------------------------------- | -----------------------
|
|
|
|
| | Denominator for basic net earnings (loss) per share - |                        
| | Weighted average number of shares                     |                        
| | Add-employee stock options and                        |                        
| | convertible notes                                     |                        
| |                                                       |                        
| | Denominator for diluted net earnings (loss) per       |                        
| | share - adjusted weighted average shares              |                        
| | assuming exercise of options                          |                        
| |                                                       |                        

F - 23

---

---

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

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

| | z. | Derivatives
and hedging activities:
| | -- | -----------------------------------

| | Financial
Accounting Standard Board Statement No. 133 Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133), as amended, requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivatives change in
fair value is immediately recognized in earnings. The Company uses derivatives to hedge
certain cash flow foreign currency exposures in order to further reduce the Companys
exposure to foreign currency risks.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | aa. | Impact
of recently issued accounting pronouncements:
| | --- | ----------------------------------------------------

| | In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157) which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting pronouncements that require or permit
fair value measurements and, accordingly, does not require any new fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007
for financial assets and liabilities, as well as for any other assets and liabilities
that are carried at fair value on a recurring basis, and
should be applied prospectively. The adoption of the provisions of SFAS 157 related to
financial assets and liabilities and other assets and liabilities that are carried at
fair value on a recurring basis is not anticipated to materially impact the Companys
consolidated financial position and results of operations. Subsequently, the FASB
provided for a one-year deferral of the provisions of SFAS 157 for non-financial assets
and liabilities that are recognized or disclosed at fair value in the consolidated
financial statements on a non-recurring basis. The Company is currently evaluating the
impact of adopting the provisions of SFAS 157 for non-financial assets and liabilities
that are recognized or disclosed on a non-recurring basis.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement PlansAn Amendment of FASB No. 87,
88, 106 and 132(R)" (SFAS 158). SFAS 158 requires that the funded status
of defined benefit postretirement plans be recognized on the companys balance sheet
and changes in the funded status be reflected in comprehensive income, effective for
fiscal years ending after December 15, 2006. SFAS 158 also requires companies to measure
the funded status of the plan as of the date of their fiscal year end, effective for
fiscal years ending after December 15, 2008. . The Company is currently evaluating the
impact of adopting SFAS 158.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

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

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

| | In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). Under
this Standard, the Company may elect to report financial instruments and certain other
items at fair value on a contract-by-contract basis with changes in value reported in
earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate
volatility in reported earnings that is caused by measuring hedged assets and liabilities
that were previously required to use a different accounting method than the related
hedging contracts when the complex provisions of SFAS 133 hedge accounting are not met.
SFAS 159 is effective for years beginning after November 15, 2007. The Companys
management has determined that the adoption of SFAS 159 will not have a significant
impact on its consolidated financial statements since it has not elected the fair value
option for any of its existing assets or liabilities as of FAS 159 effective date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141
(Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting
treatment and disclosure for certain specific items in a business combination. SFAS
141(R) applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. As such, the adoption of SFAS 141R is not expected to have any effect
on the Companys consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parents ownership interest
and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. This standard is effective for fiscal years
beginning after December 15, 2008 and should be applied prospectively. However, the
presentation and disclosure requirements of the statement shall be applied
retrospectively for all periods presented. The Company is currently evaluating the impact
of adopting SFAS 160.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB 110),
which, effective January 1, 2008, amends and replaces SAB 107, Share-Based Payment. SAB
110 expresses the views of the SEC staff regarding the use of a simplified method
in developing an estimate of expected term of plain vanilla share options in
accordance with FASB Statement No. 123(R), Share-Based Payment. Under the simplified method,
the expected term is calculated as the midpoint between the vesting date and the end of
the contractual term of the option.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

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

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

| | The
use of the simplified method, which was first described in Staff Accounting
Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use
of the simplified method for plain vanilla awards in certain
situations. The SEC staff does not expect the simplified method to be used
when sufficient information regarding exercise behavior, such as historical exercise data
or exercise information from external sources, becomes available. The Company is
currently evaluating the impact of SAB 110.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ab. | Reclassification:
Certain 2006 and 2005 figures have been reclassified to           conform to the 2007
presentation. The reclassification had no effect on           previously reported net
income, shareholders equity or cash flows.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 3: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| | The
Company invests in marketable debt securities, which are classified as held-to-maturity
investments and included as part of short-term bank deposits and held-to-maturity
marketable securities balance. The following is a summary of marketable debt securities:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                               | December 31,
| | ----------------------------- | ------------
|
|
|
|
| | Held-to-maturity:             |             
| |                               |             
| | Israeli Government debentures |             
| | U.S. Government debentures    |             
| |                               |             
| |                               |             
| |                               |             
| |                               |             

| | *)
            Israeli and U.S Government debentures include accrued interest to be received
          in the amount of approximately $ 64 and $ 1,302 respectively. No unrealized
          losses in respect of these debentures.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 4: |  | INVENTORIES
|------- | - | -----------

| | a. | Inventories
are comprised of the following:
| | -- | -------------------------------------------

| |                                   | December 31,
| | --------------------------------- | ------------
|
|
|
|
| | Raw materials, parts and supplies |             
| | Work in progress                  |             
| | Finished products                 |             
| |                                   |             
| |                                   |             
| |                                   |             
| |                                   |             

| | b. | Inventory
write-offs totaled $ 500, $ 1,200 and $ 600 in 2007, 2006 and 2005,
          respectively.
| | -- | -----------------------------------------------------------------------------------------------------

F - 26

---

---

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

|NOTE 5: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| | a. | Composition
of property and equipment, grouped by major classifications, is as           follows:
| | -- | -------------------------------------------------------------------------------------------------

| |                                                          | December 31,
| | -------------------------------------------------------- | ------------
|
|
|
|
| | Cost:                                                    |             
| | Buildings and land                                       |             
| | Computers and electronic equipment                       |             
| | Equipment leased to others                               |             
| | Office furniture and equipment                           |             
| | Vehicles                                                 |             
| | Leasehold improvements                                   |             
| |                                                          |             
| |                                                          |             
| |                                                          |             
| | Accumulated depreciation and provision for impairment *) |             
| |                                                          |             
| |                                                          |             
| | Depreciated cost                                         |             
| |                                                          |             

| | *) | The
accumulated depreciation of equipment leased to others as of December 31,           2007
and 2006 is $ 85,500 and $ 66,800, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Depreciation
expenses totaled $ 16,850, $ 19,800 and $ 17,700 in 2007,           2006 and
2005,  respectively.
| | -- | --------------------------------------------------------------------------------------------------------------

| | c. | In
2007, the Group recorded a provision for the impairment of its long lived
          assets in Colombia, see also Note 11.
| | -- | ----------------------------------------------------------------------------------------------------------------------------

| | d. | As
for pledges and securities, see also Note 13f.
| | -- | -------------------------------------------------

|NOTE 6: |  | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
|------- | - | -------------------------------------------

| | a. | Composition
of intangible assets and deferred charges, grouped by major           classifications, is
as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------

| |                                               | Weightedaverageamortization | December 31,
| | --------------------------------------------- | --------------------------- | ------------
|
|
|
|
| | Cost:                                         |                             |             
| | Identifiable intangible assets resulting from |                             |             
| | acquisitions of a subsidiary                  |                             |             
| | Customer acquisition costs                    |                             |             
| | Other                                         |                             |             
| |                                               |                             |             
| |                                               |                             |             
| |                                               |                             |             
| | Accumulated amortization and provision for    |                             |             
| | impairment                                    |                             |             
| |                                               |                             |             
| | Amortized cost                                |                             |             
| |                                               |                             |             
| |                                               |                             |             
| | Deferred charges                              |                             |             
| |                                               |                             |             
| |                                               |                             |             
| |                                               |                             |             
| |                                               |                             |             

F - 27

---

---

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

|NOTE 6: |  | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET (Cont.)
|------- | - | ---------------------------------------------------

| | b. | Amortization
expenses amounted to $ 870, $ 960 and $ 1,400 for the years           ended December
31, 2007, 2006 and 2005, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
2007, the Group recorded a provision for the impairment of deferred charges           in
Colombia, see also Note 11.
| | -- | -----------------------------------------------------------------------------------------------------------------------

| | d. | Estimated
amortization expenses for the following years is as follows:
| | -- | ----------------------------------------------------------------------

| | Year ending December 31, | 
| | ------------------------ | 
|
|
|
|
| | 2008                     | 
| | 2009                     | 
| | 2010                     | 
| | 2011                     | 
| | 2012 and thereafter      | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 

|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 $ 31,500 net of certain fees and commissions.
          Concurrently with the sale, Spacenet Inc. entered into an operating leaseback
          contract for a period of fifteen years at an initial annual rent of
          approximately $ 3,500 plus escalation. The capital gain resulting from the
          sale and leaseback amounting to $ 5,600 was deferred and is being
amortized           over the fifteen year term of the lease. In accordance with the lease
terms,           Spacenet Inc. made a security deposit consisting of a $ 5,500 fully
cash           collateralized letter of credit for the benefit of the lessor. The lease
is           accounted for as an operating lease in accordance with Statement of
Financial           Accounting Standards No. 13, Accounting for Leases (SFAS
No.           13).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Lease
commitments:
| | -- | ------------------

| | Minimum
lease commitments of certain subsidiaries under non-cancelable operating lease agreements
with respect to premises occupied by them, at rates in effect subsequent to December 31,
2007, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, | Gross
commitments | Receivables
from subleases | Net
commitments
| | ------------------------ | ----------------- | -------------------------- | ---------------
|
|
|
|
| | 2008                     |                   |                            | $              
| | 2009                     |                   |                            |                
| | 2010                     |                   |                            |                
| | 2011                     |                   |                            |                
| | 2012                     |                   |                            |                
| | 2013 and thereafter      |                   |                            |                
| |                          |                   |                            |                
| |                          |                   |                           
| |                          |                   |                            | $              
| |                          |                   |                            |                

| | Gross
rent expenses and income from subleases were $ 6,493 and $ 1,169, respectively in 2007, $ 6,642
and $ 1,416, respectively in 2006, and $ 6,400 and $ 900, respectively in
2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | Out
of the above commitment, $ 570 is included as restructuring accrual in other
accounts payable and other long-term liabilities as of December 31, 2007. Some of the
Groups lease agreements do not include renewal options.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Commitments
with respect to space segment services:
| | -- | ---------------------------------------------------

| | Future
minimum payments due for space segment services mainly to SES Americom, (a related party
until July 2005), subsequent to December 31, 2007, are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, | 
| | ------------------------ | 
|
|
|
|
| | 2008                     | 
| | 2009                     | 
| | 2010                     | 
| | 2011                     | 
| | 2012                     | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 

| | Space
segment services expenses, mainly to SES Americom, totaled $ 23,970, $ 23,698 and $
24,200 in 2007, 2006 and 2005, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
2007 and 2006, the Companys primary material purchase commitments           derived
from inventorys suppliers. The Companys material inventory           purchase
commitments are based on purchase orders, or on outstanding agreements           with
some of our suppliers of inventory. As of December 31, 2007 and 2006, our           major
outstanding inventory purchase commitments amounted to $ 18.4 million and           $ 9.5
million, respectively, all of which were orders placed or commitments made           in
the ordinary course of our business. As of December 31, 2007 and 2006, $ 13           and
$4.4 million, respectively, of these orders and commitments, were from
          suppliers which can be considered sole or limited in number.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Legal
and tax contingencies :
| | -- | -----------------------------

| | 1. | In
September 2003, Nova Mobilcom S.A. (Mobilcom) filed a lawsuit
          against Gilat do Brasil, a wholly-owned subsidiary of the Company, for specific
          performance of a memorandum of understandings which provided for the sale of
          Gilat do Brazil, and specifically the GESAC project, a government education
          project awarded to Gilat do Brazil, to Mobilcom for an unspecified amount. The
          Company does not believe that this claim has any merit and is vigorously
          defending itself against the claims presented therein.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
2003, the Brazilian Tax Authority filed a claim against a subsidiary of
          Spacenet Inc. in Brazil, for alleged taxes due in the amount of approximately
          $ 4,000. The subsidiary received notice of an administrative ruling
against           it in this regard and has filed a petition challenging this ruling in
the state           courts of the State of Sao Paulo, Brazil. At present, due to interest
rates and           the exchange rate of the Brazilian Reias, the Companys
management believes           that the maximum subsidiarys exposure is the payment
of taxes in an amount           of approximately $ 8,200 The Company intends to contest
the claim vigorously.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | 3. | The
Company has certain tax exposures in some of the jurisdictions in which it
          conducts business. Specifically, in certain jurisdictions in the United States
          and in Latin America the Company is in the midst of different stages of audits
          and has received some tax assessments. The tax authorities in these and in
other           jurisdictions in which the Company operates as well as the Israeli Tax
          Authorities may raise additional claims, which might result in increased
          exposures and ultimately, payment of additional taxes.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
Company has accrued approximately, $ 15,100 and $ 12,000 as of December 31,
          2007 and 2006, respectively, for the expected implications of such legal and
tax           contingencies. These accruals are comprised of approximately $11,700 and
$8,300           of tax related accruals as of December 31 2007 and 2006, respectively,
and           approximately $3,400 and $3,700 of legal and other accruals as of December
31,           2007 and 2006, respectively. The accruals related to tax contingencies have
been           assessed by the Companys management based on the advice of outside
legal           and tax advisers. The total estimated exposure for the aforementioned tax
          related accruals is approximately $14,800 and $14,400 as of December 31, 2007
          and 2006, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
tax accruals include various tax matters such as taxes on income, property taxes, sales
and use tax and value added tax, that are in different stages of audits, for which tax
assessments have been received, or various tax exposures in which the Company has
assessed the exposure and determined that an accrual is necessary. The estimated exposure
for these legal and other related accruals is approximately $11,100 and $12,200 as of
December 31, 2007 and 2006, respectively. The accruals related to legal contingencies
have been assessed by the Companys management based on the advice of outside legal
advisers and are comprised of matters for which legal proceedings have been initiated
against the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
exposures and provisions related to income taxes have been assessed and provided for in
accordance with FIN 48. Liabilities related to legal proceedings, demands and claims and
other taxes are recorded in accordance with SFAS 5, when it is probable that a liability
has been incurred and the associated amount can be reasonably estimated. The Companys
management, based on its legal counsel opinion, believes that it had provided an adequate
accrual to cover the costs to resolve the aforementioned legal proceedings, demands and
claims.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Pledges
and securities  see Note 10a and 13f.
| | -- | ----------------------------------------------

| | g. | Guarantees:
| | -- | -----------

| | The
Group guarantees its performance to certain customers (generally to government entities)
through bank guarantees and corporate guarantees. Guarantees are often required for the
Groups performance during the installation and operational periods of long-term
rural telephony projects such as in Latin America, and for the performance of other
projects (government and corporate) throughout the rest of the world. The guarantees
typically expire when certain operational milestones are met.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

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

|NOTE 7: |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | At
December 31, 2007, the aggregate amount of bank guarantees provided in order to secure
the Groups performance obligations is approximately $ 12,000, comprised mainly of
performance guarantees provided on behalf of the Companys subsidiary in Peru in an
amount of approximately $ 7,700. The Group has restricted cash as collateral for these
guarantees in an amount of approximately $ 1,200.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Group has provided bank guarantees for certain leases throughout the world
for an aggregate amount of approximately $ 5,700. The Group has restricted cash as
collateral for these guarantees in an amount of approximately $ 5,700. The Group also
provided a few other guarantees amounted to approximately $1,200 as of December 31, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with FIN 45, paragraph 4, as the guarantees above are performance guarantees
for the Companys own performance, such guarantees are excluded from the scope of
FIN 45. The Company has not recorded any liability for such amounts, since the Company
expects that its performance will be acceptable. To date, no guarantees have ever been
exercised against the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 8: |  | HEDGING INSTRUMENTS
|------- | - | -------------------

| | To
protect against changes in value of forecasted foreign currency cash flows resulting from
salaries and other payments that are denominated in NIS, the Company has entered into
foreign currency forward contracts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
contracts are designated as cash flows hedges, as defined by SFAS No. 133, as amended,
and are all highly effective as hedges of these expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2007, the Company recognized a net income of $ 791 related to
the effective portion of its hedging instruments. The effective portion of the hedged
instruments has been included as an offset of payroll expenses and other operating
expenses in the statement of operations. The ineffective portion of the hedged instrument
amounted to $ 140 and has been included in financial expenses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, the Company had no outstanding hedging instruments.
| | ----------------------------------------------------------------------------

F - 31

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 9: |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | a. | Share
capital:
| | -- | --------------

| | 1. | Ordinary
shares confer upon their holders voting rights, the right to receive           cash
dividends and the right to share in excess assets upon liquidation of the
          Company.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
September 2006, the Company issued 10,578,474 ordinary shares to York upon
          conversion of its long-term convertible note. See also Note 1c and 10d.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
December, 2006, the Company consummated a public offering of 8,050,000           ordinary
shares at a price of $8.50 per share. Of such shares, 5,016,667           ordinary shares
were sold by the Company and the remaining shares were sold by a           selling
shareholder (York). Through this offering the Company raised a gross           amount of
$ 42,401. Issuance expenses amounted to approximately $ 2,755.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | During
the years ended December 31, 2007, 2006 and 2005 790,563, 668,913 and           243,695
options respectively were exercised into the Companys ordinary           shares and
the same number of the Companys ordinary shares were issued.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Stock
Option Plans:
| | -- | -------------------

| | The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting from January 1, 2006, the
first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in the years ended December 31, 2007 and 2006, includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of Statement 123, and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of Statement 123(R). Results for prior
periods have not been restated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has three stock option plans, the 1995 and the 2003 Stock Option and Incentive
Plans and the 2005 Stock Incentive Plan (the plans). The 1995 Plan was
amended in 1997, 1998 and 1999, and expired although there are still options outstanding
under this plan. Under the 2003 Plan, options may be granted to employees, officers,
directors and consultants of the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, the Companys shareholders approved two increases in the number of options
available for grant of the 2003 Plan for an aggregate of 4,635,000 shares to a total of
6,135,000 shares available for future grants. As of December 31, 2007, an aggregate of
642,407 ordinary shares of the Company are still available for future grants from the
2003 Stock Option Incentive Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
granted under the 1995 and 2003 Plans generally vest quarterly over two to four years.
The options expire seven or ten years from the date of grant. Any options, which are
forfeited or canceled before expiration, become available for future grants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

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

| | The
exercise price per share under the 1995 Plan was not less than the market price of an
ordinary share at the date of grant. The exercise price for the 2003 Plan is the higher
of (i) $ 5.00 per share; and (ii) the market value of the shares as of the date of
the option grant, unless otherwise provided in the stock option agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005, the Companys shareholders approved the adoption of a new plan, the
2005 Stock Incentive Plan with a number of options available for grant of 1,500,000
shares. This Plan is designed to enable the Companys Board of Directors to
determine various forms of incentives for all forms of service providers and, when
necessary, adopt a sub-plan in order to grant specific incentives. Among the incentives
that may be adopted are share options, performance share awards, performance share unit
awards, restricted shares, restricted share unit awards and other share-based awards. As
of December 31, 2007, the Company granted 50,000 performance based options under this
Plan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards, which have graded
vesting, granted prior to January 1, 2006, based on the accelerated attribution method
and for awards granted subsequent to January 1, 2006, based on the straight line method
over the requisite service period of each of the awards, net of estimated forfeitures.
Estimated forfeitures are based on actual historical pre-vesting forfeitures.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates the fair value of stock options granted using the Black-Scholes-Merton
option-pricing model. The option-pricing model requires a number of assumptions, of which
the most significant are expected stock price volatility and the expected option term.
Expected volatility was calculated based upon actual historical stock price movements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
expected option term represents the period that the Companys stock options are
expected to be outstanding and was determined based on the simplified method permitted by
SAB 107 as the average of the vesting period and the contractual term. The risk-free
interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an
equivalent term. The Company has historically not paid dividends and has no foreseeable
plans to pay dividends.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the Companys stock options granted to employees and directors for the
years ended December 31, 2007, 2006 and 2005 was estimated using the following weighted
average assumptions:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | Year ended
December 31,
| | ------------------------ | -----------------------
|
|
|
|
| | Risk free interest       |                        
| | Dividend yields          |                        
| | Volatility               |                        
| | Expected term (in years) |                        

F - 33

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

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

| | A
summary of employee option activity under the Companys Stock Option Plans as of
December 31, 2007 and changes during the year ended December 31, 2007 are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Number of
options | Weighted-average
exercise
price | Weighted-
average
remaining
contractual
term
(in years) | Aggregate
intrinsic
value (in
thousands)
| | -------------------------------- | ----------------- | ------------------------------- | ------------------------------------------------------- | ----------------------------------------
|
|
|
|
| | Outstanding at January 1, 2007   |                   |                                 |                                                         | 4,840,322                               
| | Granted                          |                   |                                 |                                                         | 90,500                                  
| | Exercised                        |                   |                                 |                                                         | (781,075                                
| | Expired                          |                   |                                 |                                                         | (3,373                                  
| | Forfeited                        |                   |                                 |                                                         | (49,344                                 
| |                                  |                   |                                
| | Outstanding at December 31, 2007 |                   |                                 |                                                         | 4,097,030                               
| |                                  |                   |                                
| | Exercisable at December 31, 2007 |                   |                                 |                                                         | 3,346,423                               
| |                                  |                   |                                
| | Vested and expected to vest at   |                   |                                
| | December 31, 2007                |                   |                                 |                                                         | 3,941,878                               

| | A
summary of the  employee  option  activity  under the  Company's  Stock  Option  Plans as
of                      December 31, 2006 and 2005, and changes during the years ended on
those dates, are as follow:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 34

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

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

| | The
weighted-average grant-date fair value of options granted during the years ended December 31,
2007 and 2006 was $ 4.3 and $ 3.55, respectively. The aggregate intrinsic value in the
table above represents the total intrinsic value (the difference between the Companys
closing stock price on the last trading day of the fourth quarter of fiscal 2007 and the
exercise price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on December 31,
2007. This amount changes based on the fair market value of the Companys stock.
Total intrinsic value of options exercised for the year ended December 31, 2007 was
approximately $ 3,200. As of December 31, 2007, there was approximately $ 1,200 of total
unrecognized compensation costs related to non-vested share-based compensation
arrangements granted under the Companys stock option plans.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | That
cost is expected to be recognized over a weighted-average period of 1.2 years. Total
grant-date fair value of vested options as of December 31, 2007 was approximately $
15,600.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding under the Companys Stock Option Plans as of December 31, 2007,
have been separated into ranges of exercise price as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | Ranges of
exercise
price | Options
outstanding
as of
December 31,
2007 | Weighted
average
remaining
contractual
life | Weighted
average
exercise
price | Options
exercisable
as of
December 31,
2007 | Weighted
average
exercise
price of
exercisable
options
| | ------------------------ | ------------------------------------------- | ------------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------------------
|
|
|
|
| | $                        | 5 -7.5                                      |                                             |                                 | 3,742,175                                   |                                                       
| | $                        | 7.7-10.8                                    |                                             |                                 | 285,731                                     |                                                       
| | $                        | 42.4 -79                                    |                                             |                                 | 60,773                                      |                                                       
| | $                        | 240.4 -2,730                                |                                             |                                 | 8,351                                       |                                                       
| |                          |                                             |                                             |                                 |                                             |                                                       
| |                          |                                             |                                            
| |                          |                                             |                                             |                                 | 4,097,030                                   |                                                       
| |                          |                                             |                                             |                                 |                                             |                                                       

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

| |                                                          | Year ended
December 31,
2005
| | -------------------------------------------------------- | ----------------------------
|
|
|
|
| | Net loss as reported                                     |                             
| |                                                          |                             
| | Add: stock-based employee compensation expenses included |                             
| | in reported net loss - intrinsic value                   |                             
| | Deduct: total stock-based employee compensation expense  |                             
| | determined under fair value based method                 |                             
| |                                                          |                             
| |                                                          |                             
| | Pro forma net loss                                       |                             
| |                                                          |                             
| |                                                          |                             
| | Basic net loss per share as reported                     |                             
| |                                                          |                             
| |                                                          |                             
| | Diluted net loss per share as reported                   |                             
| |                                                          |                             
| |                                                          |                             
| | Pro forma basic loss per share                           |                             
| |                                                          |                             
| |                                                          |                             
| | Pro forma diluted loss per share                         |                             
| |                                                          |                             

F - 35

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

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

| | c. | In
2005, the Company recruited new management and as part of their recruitment
          package, an aggregate of 2,445,000 options were granted under the 2003 Stock
          Plan. At the same time, other executives were granted options for an aggregate
          of 490,000 shares under the 2003 Stock Plan.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
August 2005, the Companys shareholders approved the accelerated           vesting
of all of the options granted to non-employee directors in an aggregate           amount
of 90,330 options. The compensation expense in connection with the           accelerated
vesting was approximately $ 26.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In
2003, the Company granted 150,000 stock options to its former Chairman of           the
Board of Directors, who was considered at that time a related party, in
          accordance with the terms of his consultancy agreement. The exercise price is
          $ 5.00 per share. The Company accounted for these options under the fair
          value method of SFAS No. 123 and EITF No. 96-18. The fair value of these
options           was estimated using a Black-Scholes option-pricing valuation model with
the           following weighted-average assumptions for 2005, 2004 and 2003: risk-free
          interest rates of 3%, dividend yields of 0%, volatility factor of the expected
          market price of the Companys ordinary shares of 84%, and a
          weighted-average expected life of the options of three and a half years.
Changes           in the fair value of the options prior to completion of performance are
          reflected as an adjustment to the expense to be included in future periods over
          the vesting period. In 2005, 2004 and 2003, the Company recorded compensation
          expenses of $ 17, $ 207 and $ 233, respectively which are
          included in selling, marketing, general and administrative expenses. All
options           shall expire over a period ending in July 2008.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Dividends:
| | -- | ----------

| | 1. | In
the event that cash dividends are declared by the Company, such dividends           will
be declared and paid in Israeli currency. Under current Israeli           regulations,
any cash dividend in Israeli currency paid in respect of ordinary           shares
purchased by non-residents of Israel with non-Israeli currency, may be           freely
repatriated in such non-Israeli currency, at the exchange rate prevailing           at
the time of repatriation.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Pursuant
to the terms of a credit line from a bank (see also Note 13), the           Company is
restricted from paying cash dividends to its shareholders without           initial
approval from the bank.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 10: |  | RESTRUCTURING OF DEBTS
|-------- | - | ----------------------

| | a. | In
2003, the Company issued the 4.00% Convertible Subordinated Note due to           2012.
The Company pays interest on its 4.00% Convertible Subordinated Note
          semi-annually in arrears on April 1 and October 1 of each year, beginning on
          April 1, 2005. The Company is committed to pay $ 400 of the principal amount of
          the notes on each of April 1 and October 1, in both 2010 and 2011, and the
          remaining principal amount at maturity. The notes are convertible at the option
          of the holder into the Companys Ordinary shares at a conversion price of
$           17.4 per Ordinary share at any time before close of business on October 1,
2012,           unless the notes have been converted pursuant to a mandatory conversion
clause           as defined in the 4.00% Convertible Subordinated Note. Commencing
January 1,           2005, the Company may, at its option, require the conversion right
to be           exercised under certain circumstances set forth in the indenture. The
collateral           for the notes is a second priority security interest consisting of a
floating           charge on all of the Companys assets and a pledge of all on the
shares of           Spacenet Inc., a wholly owned subsidiary of the Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
interest of the holders of the notes in the collateral is subordinated to the security
interest granted for the benefit of lending banks. As of December 31, 2007 and 2006, the
outstanding amount of the notes is $ 16,300 and $ 16,300, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance of the notes results from debt restructurings that occurred in 2003. The debt
restructurings were accounted for as troubled debt restructuring on the basis of
combination of types of restructuring and on the basis of modification of terms pursuant
to Statement of the Financial Accounting Standard No. 15 Accounting by Debtors and
Creditors for Troubled Debt Restructurings (SFAS 15), Emerging Issues
Task Force No. 02-4 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 (EITF 02-4) and SFAS No. 145, Rescission of SFAS No. 4,
44 and 64, Amendment of SFAS No. 13, and Technical Corrections. Accordingly, the
Company recognized a gain in 2003. As part of the accounting for the troubled debt
restructurings, the Company accrued to the balance of the notes the remaining future
interest payable until maturity, presented as a separate line item in the balance sheet.
Therefore, at each reporting date the liabilities include both principal and all future
remaining interest payments. Consequently, though the Company pays periodical interest
payments, the statement of operations does not reflect the costs of such interest
payments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
April 2004, the Company further revised the terms of its loan from Bank
          Hapoalim, to which it owed a principal debt amount of $ 71,400. The new
          loan terms reduced the principal installments due on July 1, 2005 and January
1,           2006 from $ 4,463 to $ 1,000 and $ 1,500, respectively, with
the           remainder due for payment in 2012. Other principal payments of $ 4,463
due           semi-annually thereafter remained unchanged and the last installment of
          $ 15,300 is due on July 2, 2012. In addition, the interest rate on the
loan           was also revised.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for the Bank Hapoalim agreement to amend the interest rates, defer
principal payments and modify certain covenants, the bank was entitled to convert the
loan owed by the Company to Bank Hapoalim into Ordinary shares of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 10: |  | RESTRUCTURING OF DEBTS (Cont.)
|-------- | - | ------------------------------

| | The
modification of the loan terms was accounted for as debt extinguishment due to the
addition of a conversion option to the debt instrument which was considered substantial.
The fair value of the amended loan was recorded, and the book value of the old loan was
removed from the Companys financial statements. Since Bank Hapoalim was a related
party, the extinguishment gain of approximately $ 15,500 was recorded as an equity
contribution in the year ended December 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
July 2005, Bank Hapoalim assigned its loan to the Company to York. Following
          the assignment, York is considered a related party. At that time of the
          assignment, certain board members of the Company resigned and were replaced by
          new board members. In addition, the Companys CEO and Chairman of the
Board           of Directors resigned and a co-founder of the Company rejoined the
Company as           President and Chief Executive Officer.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
December 2005, the Company and York further revised the terms of the loan.           The
new loan terms deferred $ 19,350 in principal payments due in           installments
from January 5, 2006 through January 1, 2008. The new payment           schedule provided
that: (i) no principal payments be due in 2006, 2007 or           January 2008 (with
those payments being deferred until July 2012) (ii)           approximately $ 4,500
was to be paid on July 1, 2008; (iii) approximately           $ 9,000 was to be paid
in semi-annual installments on January 1 and July 1           of 2009, 2010 and 2011;
(iv) approximately $ 4,500 was to be paid on           January 1, 2012; and (v)
approximately $ 34,500 was to be paid on July 1,           2012. In addition, the
amendment modified the terms of the conversion option           until September 30, 2006.
The amendment lowered and set the conversion price to           $ 6.75 per share
until September 30, 2006. In addition, during this period,           the Company was
granted the right to require the conversion of the outstanding           loan from York
at the same exercise price in the event that the closing share           price of the
Companys Ordinary shares as published by NASDAQ over twenty           consecutive
trading days will exceed $ 9, provided that the aggregate           trading volume
during this period is a minimum of 1,700,000 Ordinary shares.           Beginning October
1, 2006, the conversion price reverts to the original price.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
modification of the loan was not considered substantial based on the measurement method
prescribed by EITF 96-19, Debtors Accounting for a Modification or Exchange
of Debt Instruments. In accordance with EITF 05-7, Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related Issues which
was early adopted by the Company, the change in the fair value of the conversation option
immediately before and after the modification in the amount of $ 3,800 was recorded
as a discount on the loan and increase to shareholders equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In
September 2006, York converted the loan into the Companys Ordinary
          shares. Based on Interpretation 1 of Opinion 26 and EITF No. 85-17,
          Accrued Interest upon Conversion of Convertible Debt, the net
          carrying amount of the convertible debt and accrued interest unpaid, including
          the unamortized discount, in the total amount of $ 68,100 was credited to
          shareholders equity upon conversion. See also Note 1c.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

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---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 11: |  | IMPAIRMENT OF LONG-LIVED AND OTHER ASSETS
|-------- | - | -----------------------------------------

| | The
Groups long-lived assets are reviewed for impairment in accordance with Statements
of Financial Accounting Standards No. 144, Accounting for the impairment or
disposal of long lived assets (SFAS 144) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Most
of the activity of Spacenet Rural in Colombia consists of operating subsidized projects
for the government (the Compartel Projects). In accordance with these
projects, the Colombian government has transferred approximately $70,000 to trust
accounts. The money is released from the trusts based on a schedule of payments and
meeting certain operational milestones. As of December 31, 2007, approximately $51,000
has been released from the trusts to the Company. As of December 31, 2007, short-term and
long-term restricted cash held by trustees accounts amounted to approximately
$24,000 out of which 15,300 is due and not yet being released from the trusts as certain
operational milestones imposed have not been fully met. The Colombian government and the
Company have agreed to renegotiate certain terms of the contracts, including the
operational milestones going forward, so that they better reflect the current telecom and
business environment in Colombia. In order to guarantee the Companys performance
under the Compartel projects, the Company secured insurance from a local insurance
company in Colombia. The Company has provided the insurance company with various
corporate guarantees up to approximately $50,000 in order to secure the Companys performance.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the guidelines of SFAS 144, Accounting for the impairment or
disposal of long lived assets, in 2007, the Company compared the carrying amount of
its long lived network assets group to the future undiscounted cash flows expected to be
generated by those assets. Since the undiscounted cash flow expected to be generated by
those assets were less than the long lived networks assets group carrying amount, the
Company determined the fair value of its long lived networks assets group and concluded
that the carrying amount of its long lived network assets group in Colombia exceeded
their fair value and recorded an impairment in an amount of $12,218.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company ensured that the accumulated revenues recognized from the Compartel Projects will
not exceed the accumulated amounts already released from the trust.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Assets
impaired during 2007 as of the above analysis consist as follows:
| | ------------------------------------------------------------------------

| |                        | Year ended
December 31,
2007
| | ---------------------- | ----------------------------
|
|
|
|
| | Property and equipment |                             
| | Other assets           |                             
| |                        |                             
| |                        |                             
| |                        |                             
| |                        |                             

F - 39

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---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 12: |  | TAXES ON INCOME
|-------- | - | ---------------

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

| | The
Company adopted the provisions of FIN 48 as of January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized a $ 1,309 increase in liability for
unrecognized tax positions which was accounted with a corresponding increase to the
January 1, 2007 balance of accumulated deficit. As of January 1, 2007, liabilities for
unrecognized tax positions in accordance with FIN 48 amounted to $ 5,435.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
associated with uncertain tax position is classified as financial expenses in the
financial statements and penalties as general and administrative expenses. The Companys
policy for interest and penalties related to income tax exposures was not impacted as a
result of the adoption of the recognition and measurement provisions of FIN 48.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
reconciliation of the beginning and ending amount of unrecognized tax positions is as
follows:
| | ------------------------------------------------------------------------------------------------

| |                                                                                                                | Unrecognized
tax benefits
| | -------------------------------------------------------------------------------------------------------------- | -------------------------
|
|
|
|
| | Balance at January 1, 2007                                                                                     |                          
| | Additions based on tax positions related to the current year                                                   |                          
| | Additions of exchange rate, penalties and interest related to unrecognized tax
liabilities from previous years |                          
| |                                                                                                                |                          
| |                                                                                                                |                          
| | Balance at December 31, 2007                                                                                   |                          
| |                                                                                                                |                          

| | The
Company and its subsidiaries file income tax returns in Israel and in other jurisdictions
of its subsidiaries. As of December 31, 2007, the tax returns of the Company and its main
subsidiaries are open to examination by the Israeli and other tax authorities for the tax
years 2002 through 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

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---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | b. | The
Company:
| | -- | ------------

| | 1. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959:
| | -- | ------------------------------------------------------------------------------

| | The
Company has been granted an Approved Enterprise status, under the Law, for
nine investment programs in the alternative program, by the Israeli Government . In
addition, the Company has elected 2005 as the Year of Election for a new Beneficiary
Enterprise
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the Company is a foreign investors company, as defined by the
above-mentioned law, it is entitled to a ten-year period of benefits, for enterprises
approved after April 1993. The main tax benefits from the said status are a tax exemption
for two to four years and a reduced tax rate (based on the percentage of foreign
shareholding in each tax year) on income from all of its Approved Enterprisesand
Beneficiary Enterprise, for the remainder of the benefit period. These tax
benefits are subject to a limitation of the earlier of 12 years from commencement of
operations, or 14 years from receipt of approval. The period of benefits for the first
eight programs has expired and the management do not expect substantial benefits from the
ninth program, which benefits will expire in 2009.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is entitled to claim accelerated depreciation with respect to equipment used by
Approved Enterprises and Beneficiary Enterprise during the first five tax
years of the operations of these assets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above mentioned benefits are contingent upon the compliance with the
conditions under the Law, regulations published there under and the conditions set out in
certificates of approval (for an Approved Enterprises). Should the Company fail to meet
such requirements, income attributable to its Approved Enterprise programs could be
subject to the statutory Israeli corporate tax rate and the Company could be required to
refund a portion of the tax benefits already received, with respect to such programs, in
whole or in part, with the addition of linkage differences to the Israeli Consumer Price
Index (CPI) and interest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Law came into effect (the Amendment) and
has significantly changed the provisions of the Law. The Amendment limits the scope of
enterprises which may be approved by the Investment Center by setting criteria for the
approval of a facility as an Approved Enterprise, such as provisions
generally requiring that at least 25% of the Approved Enterprise, income will
be derived from export. Additionally, the Amendment enacted major changes in the manner
in which tax benefits are awarded under the Law so that companies no longer require
Investment Center approval in order to qualify for tax benefits Rather, a company may
claim the tax benefits offered by the Investment Law directly in its tax returns,
provided that its facilities meet the criteria for tax benefits set out by the Amendment.
A company is also granted a right to approach the Israeli Tax Authorities for a
pre-ruling regarding their eligibility for benefits under the Amendment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | Tax
benefits are available under the Amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of the Companys
business income from export. In order to receive the tax benefits, the Amendment states
that a company must make an investment in the Beneficiary Enterprise exceeding a minimum
amount specified in the law. Such investment may be made over a period of no more than
three years ending at the end of the year in which the company requested to have the tax
benefits apply to the Beneficiary Enterprise (the Year of Election). Where a
company requests to have the tax benefits apply to an expansion of existing facilities,
then only the expansion will be considered a Beneficiary Enterprise, and the companys
effective tax rate will be the result of a weighted combination of the applicable rates.
In this case, the minimum investment required in order to qualify as a Beneficiary
Enterprise is required to exceed a certain percentage of the companys production
assets before the expansion. The duration of tax benefits is subject to a limitation of
the earlier of 7-10 years from the Commencement Year, or 12 years from the first day of
the Year of Election. The period of benefits of the Beneficiary Enterprise will expire in
2017.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | However,
the Law provides that terms and benefits included in any certificate of approval already
granted will remain subject to the provisions of the Law as they were on the date of such
approval. Therefore, the Companys existing Approved Enterprises programs
will generally not be subject to the provisions of the Amendment. As a result of the
Amendment, tax-exempt income generated under the provisions of the new law, will subject
the Company to taxes upon distribution or liquidation and the Company may be required in
the future to record deferred tax liability with respect to such tax-exempt income. As of
December 31, 2007, the Company did not generate income under the provisions of the new
law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not expect to pay any cash dividend. In the event of distribution of
dividends from the above mentioned tax exempt income, the amount distributed would be
taxed at the corporate tax rate applicable to such profits as if the Company had not
elected the alternative program of benefits (depending on the level of foreign investment
in the Company), currently between 10% to 25% for an Approved Enterprise and
Beneficiary Enterprise.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than an Approved Enterprise during the benefit period is
subject to tax at the regular corporate tax rate. In June 2004 and in July 2005, the
Knesset (Israels parliament) adopted amendments to the Income Tax
Ordinance (No.140 and Temporary Provision), 2004 and (No.147), 2005 respectively, which
determine, among other things, that the corporate tax rate is to be gradually reduced as
follows: 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. Until
December 31, 2003, the corporate tax rate was 36%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
entitlement to the above mentioned benefits is dependent upon the Company fulfilling the
conditions stipulated by the Law, regulations published there under and the certificates
of approval for the specific investments in approved enterprises. In the event of failure
to comply with these conditions, the benefits may be canceled and the Company may be
required to refund the amount of the benefits, in whole or in part, with the addition of
linkage differences to the Israeli Consumer Price Index (CPI) and interest.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Measurement
of 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 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Non-Israeli
subsidiaries:
| | -- | -------------------------

| | Non-Israeli
subsidiaries are taxed according to the tax laws in their respective domiciles of
residence. The Company has not made any provisions relating to undistributed earnings of
the Companys foreign subsidiaries since the Company has no current plans to
distribute such earnings. If earnings are distributed to Israel in the form of dividends
or otherwise, the Company may be subject to additional Israeli income taxes (subject to
an adjustment for foreign tax credits) and foreign withholding taxes. It is not
practicable to determine the amount of the unrecognized deferred tax liability for
temporary differences related to investments in foreign subsidiaries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Carryforward
tax losses and credits:
| | -- | ------------------------------------

| | As
of December 31, 2007, the Company had operating loss carry forwards for Israeli income
tax purposes of approximately $ 45,000, which may be offset indefinitely against future
taxable income indefinitely.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses in the U.S. subsidiaries amount to approximately $231,000. Utilization of U.S.
net operating losses may be subject to substantial annual limitation due to the change
in ownership provisions of Internal Revenue Code of 1986 and similar state
provisions. The annual limitations may result in the expiration of net operating loss
before utilization. In the U.S, carryforward tax losses can be utilized within 20 years.
See also Note 16.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition the Group has carryforward tax losses relating to other subsidiaries of
approximately $10,000.
| | ----------------------------------------------------------------------------------------------------------

F - 43

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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | e. | Deferred
income taxes:
| | -- | ----------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Groups deferred tax
liabilities and assets are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                                                 | December 31,
| | -- | ----------------------------------------------- | ------------
|
|
|
|
| | 1. | Provided in respect of the following:           |             
| |    | Carryforward tax losses                         |             
| |    | Temporary differences relating to property and  |             
| |    | equipment                                       |             
| |    | Other                                           |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Gross deferred tax assets                       |             
| |    | Valuation allowance                             |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Net deferred tax assets                         |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Gross deferred tax liabilities                  |             
| |    | Temporary differences relating to property and  |             
| |    | equipment                                       |             
| |    | Other                                           |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Net deferred tax assets (liabilities)           |             
| |    |                                                 |             
| |    |                                                 |             
| |    | Domestic                                        |             
| |    | Foreign                                         |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| | 2. | Deferred taxes are included in the consolidated |             
| |    | balance sheets, as follows:                     |             
| |    |                                                 |             
| |    | Current assets                                  |             
| |    | Current liabilities                             |             
| |    | Non-current liabilities                         |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             
| |    |                                                 |             

| | 3. | As
of December 31, 2007, the Group decreased the valuation allowance by
          approximately $ 2,731, resulting from changes in other temporary differences
and           in carry forward tax losses. Management currently believes that it is more
          likely than not that the deferred tax regarding the loss carry forwards and
          other temporary differences for which valuation allowance was provided will not
          be realized in the foreseeable future.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

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GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | f. | Reconciling
items between the statutory tax rate of the Company and the           effective tax rate:
| | -- | -----------------------------------------------------------------------------------------------------

| |                                                        | Year ended December 31,
| | ------------------------------------------------------ | -----------------------
|
|
|
|
| | Income (loss) before taxes, as reported in the         |                        
| | consolidated statements of operations                  |                        
| |                                                        |                        
| |                                                        |                        
| | Statutory tax rate                                     |                        
| |                                                        |                        
| |                                                        |                        
| | Theoretical tax expenses (benefit) on the above        |                        
| | amount at the Israeli statutory tax rate               |                        
| | Currency differences                                   |                        
| | Tax adjustment in respect of different tax rates       |                        
| | and "Approved Enterprise" status (1)                   |                        
| | Changes in valuation allowance                         |                        
| | Forfeiture of carry forward tax losses                 |                        
| | Taxes paid in respect of prior years                   |                        
| | Stock compensation relating to options per SFAS 123(R) |                        
| | 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                     |                        
| |                                                        |                        

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

| |                       | Year ended December 31,
| | --------------------- | -----------------------
|
|
|
|
| | Current tax expense   |                        
| |                       |                        
| | Deferred income taxes |                        
| |                       |                        
| |                       |                        
| |                       |                        
| |                       |                        
| |                       |                        
| | Domestic              |                        
| | Foreign               |                        
| |                       |                        
| |                       |                        
| |                       |                        
| |                       |                        

F - 45

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

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

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

|NOTE 13: |  | SUPPLEMENTARY BALANCE SHEET INFORMATION
|-------- | - | ---------------------------------------

| | a. | Other
current assets:
| | -- | ---------------------

| |                                                        | December 31,
| | ------------------------------------------------------ | ------------
|
|
|
|
| | Receivables in respect of capital leases (see c below) |             
| | VAT receivables                                        |             
| | Prepaid expenses                                       |             
| | Deferred charges                                       |             
| | Tax receivables                                        |             
| | Employees                                              |             
| | Income receivable                                      |             
| | Other                                                  |             
| |                                                        |             
| |                                                        |             
| |                                                        |             
| |                                                        |             

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

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Long-term receivables in respect of capital leases |             
| | (see c below)                                      |             
| | Long-term trade receivables *)                     |             
| | Other receivables                                  |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| |                                                    |             

| | *) | Long
term trade receivables are scheduled to be received by 2009.
| | -- | -----------------------------------------------------------------

F - 46

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

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

| | c. | Receivables
in respect of capital and operating leases:
| | -- | -------------------------------------------------------

| | The
Groups contracts with customers contain long-term commitments, for remaining
periods ranging from one to five years, to provide network services, equipment,
installation and maintenance.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aggregate minimum future payments to be received by the Group under these contracts as of
December 31, 2007, are as follows (including unearned interest income in the amount of $ 500):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, | Capital
lease | Operating
lease | Total
| | ------------------------ | ------------- | --------------- | -----
|
|
|
|
| | 2008                     |               |                 | $    
| | 2009                     |               |                 |      
| | 2010                     |               |                 |      
| | 2011                     |               |                 |      
| | 2012                     |               |                 |      
| |                          |               |                 |      
| |                          |               |                 |      
| |                          |               |                 | $    
| |                          |               |                 |      

| | The
net investments in capital lease receivables as of December 31, 2007, are $ 6,360. Total
revenues from capital and operating leases amounted to $ 10,815, $ 7,966 and $ 5,700 in
the years ended December 31, 2007, 2006 and 2005, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |                     | Weighted average
interest rate |  | 
| | ------------------- | ------------------------------ |  | 
|
|
|
|
| | In Dollars          |                                |  | 
| | In other currencies |                                |  | 
| |                     |                                |  | 
| | Total               |                                |  | 
| |                     |                                |  | 

F - 47

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

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

| | e. | Other
current liabilities:
| | -- | --------------------------

| |                                        | December 31,
| | -------------------------------------- | ------------
|
|
|
|
| | Deferred revenue                       |             
| | Payroll and related employees accruals |             
| | Government authorities                 |             
| | Advances from customers                |             
| | Provision for vacation pay             |             
| | Other                                  |             
| |                                        |             
| |                                        |             
| |                                        |             
| |                                        |             

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

| |                           |  | Interest rate for |  | December 31, |  | 
| | ------------------------- |  | ----------------- |  | ------------ |  | 
|
|
|
|
| | Restructured loans (a.i): |  |                   |  |              |  | 
| | Loan from Bank Leumi      |  |                   |  |              |  | 
| | (a.ii)(a.iii)             |  |                   |  | U.S.dollar   |  | 
| | Other long-term loans (b) |  |                   |  | U.S.dollar   |  | 
| |                           |  |                   |  |              |  | 
| |                           |  |                  
| |                           |  |                   |  |              |  | 
| |                           |  |                   |  |              |  | 
| | Other loans:              |  |                  
| | Loans from a bank (c)     |  |                   |  | Euro         |  | 
| | Other long-term loans     |  |                   |  | U.S.dollar   |  | 
| |                           |  |                   |  | U.S.dollar   |  | 
| |                           |  |                   |  | U.S.dollar   |  | 
| |                           |  |                   |  |              |  | 
| |                           |  |                  
| |                           |  |                   |  |              |  | 
| |                           |  |                   |  |              |  | 
| |                           |  |                  
| |                           |  |                   |  |              |  | 
| | Less - current maturities |  |                   |  |              |  | 
| |                           |  |                   |  |              |  | 
| |                           |  |                  
| |                           |  |                   |  |              |  | 
| |                           |  |                   |  |              |  | 

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

| | ii. | In
addition to existing security interests in their favor, the Company granted           the
banks, a first priority security interest consisting of a floating charge on
          all of the Companys assets and a pledge on Spacenet 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.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | iii. | The
Company granted the lender a first priority security interest of           approximately $ 16,000
in its facilities in Israel.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

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

| | (b) | A
Dutch subsidiary of the Company entered into a mortgage and loan agreement           with
a German bank. The amount of the mortgage as of December 31, 2007, is
          collateralized by the subsidiarys facilities in Germany.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | In
order to secure credit lines provided by the Banks, the Company granted the
          Banks a floating charge on its facilities. As of December 31, 2007, the Company
          used approximately $ 11,400 of those credit lines.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Long-term
debt maturities for loans after December 31, 2007, are as follows:
| | -- | ----------------------------------------------------------------------------

| | Year ending December 31, | 
| | ------------------------ | 
|
|
|
|
| | 2008                     | 
| | 2009                     | 
| | 2010                     | 
| | 2011                     | 
| | 2012 and thereafter      | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 

| | Interest
expenses on the long-term loans amounted to $ 1,700, $ 5,400 and $ 6,600 for the years
ended December 31, 2007, 2006 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | As
for the convertible subordinated notes, see note 10.
| | -- | -------------------------------------------------------

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

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Deferred revenue                                   |             
| | Space segment                                      |             
| | Restructuring charges (mainly termination of lease |             
| | commitments)                                       |             
| | Other                                              |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| |                                                    |             

F - 49

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 14: |  | 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 |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        

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

| |                              |  | Year ended December 31,
| | ---------------------------- |  | -----------------------
|
|
|
|
| | Balance at beginning of year |  |                        
| | Increase during the year     |  |                        
| | Write-off of bad debts       |  |                        
| |                              |  |                        
| |                              |  |                        
| | Balance at the end of year   |  |                        
| |                              |  |                        

| | c. | Financial
expenses, net:
| | -- | ------------------------

| |                                              | Year ended December 31,
| | -------------------------------------------- | -----------------------
|
|
|
|
| | Income:                                      |                        
| | Interest on cash equivalents, bank deposits, |                        
| | restricted cash and accretion on discounts   |                        
| | of held to maturity marketable securities    |                        
| | Interest with respect to capital lease       |                        
| | Other (mainly foreign exchange gains)        |                        
| |                                              |                        
| |                                              |                        
| |                                              |                        
| |                                              |                        
| | Expenses:                                    |                        
| | 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       |                        
| | Accretion of discount related to the York    |                        
| | loan                                         |                        
| | Other                                        |                        
| |                                              |                        
| |                                              |                        
| |                                              |                        
| |                                              |                        
| |                                              |                        
| |                                              |                        
| |                                              |                        

F - 50

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

|NOTE 15: |  | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION
|-------- | - | ----------------------------------------------

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

| | a. | Revenues
by geographic areas:
| | -- | -----------------------------

| | Following
is a summary of revenues by geographic areas. Revenues are attributed to geographic
areas, based on the location of the end customers, and in accordance with FAS 131:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | United States                                   |                        
| | South America and Central America               |                        
| | Asia                                            |                        
| | Europe *)                                       |                        
| | Africa                                          |                        
| |                                                 |                        
| |                                                 |                        
| |                                                 |                        
| |                                                 |                        
| | *)   Including revenues from related parties as |                        
| | follows:                                        |                        
| | Satlynx                                         |                        
| |                                                 |                        

| | b. | During
2007, 2006 and 2005, the Company did not have any single customer or           country
generating revenues exceeding 10% of the Companys total revenues.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |               | December 31,
| | ------------- | ------------
|
|
|
|
| | Israel        |             
| | Latin America |             
| | United States |             
| | Europe        |             
| | Other         |             
| |               |             
| |               |             
| |               |             
| |               |             

F - 51

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

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

| | d. | Information
on operating segments:
| | -- | ----------------------------------

| | Operating
Segments:
| | -------------------

| | 1) | General:
| | -- | --------

| | In
December 2004, the Companys Board of Directors approved a re-organization of its
business under two separate reportable business segments effective January 1, 2005.
During the year ended December 31, 2004, the Company operated under a single reportable
business segment. During the third quarter of 2005, the Company further refined its segment
reporting by dividing the Spacenet segment into two segments, and the Companys 2005
financial statements reflect operation under three business units: (i) Gilat Network
Systems, a provider of VSAT-based networks and associated professional services,
including turnkey and management services, to telecom operators worldwide.; (ii) Spacenet
Inc., which provides satellite network services to enterprises, small office/home office,
or SOHOs, and residential customers in the United States; and (iii) Spacenet Rural
Communications, which provides telephony, Internet and data services primarily for rural
communities in emerging markets in Latin America under projects that are subsidized by
government entities. The following provides proforma information about the Companys
business during 2005, as if its business had operated under the new business segments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys reportable segments are differentiated by whether the nature of the
transaction is dominated by an equipment sale (a Gilat Network Systems transaction) or by
the operation of an enterprise or consumer network (a Spacenet Inc. transaction) or by
the operation of a rural network in Latin America (a Spacenet Rural Communications
transaction). Segments are managed separately and can be described as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gilat
Network Systems (GNS): GNS focuses on sales of solutions to operators by
provision of its proprietary standard VSAT technology and hybrid solutions. The business
of GNS reflects the generation of revenue from sales of the Companys
satellite-based networking equipment, professional services and applications. The charges
to customers for satellite networking products, applications or professional services
vary with the number of sites, the location of sites, installation services required and
the types of technologies and protocols employed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Spacenet
Inc.: Spacenet Inc.s business consists of business activity as an operator of
communications networks for the provision of telephony, data and Internet services to its
customers, primarily in the Americas. The charges to customers for networking services
vary with the type of operations provided, the length of the contract, the amount of
satellite capacity and the types of technologies and protocols employed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 52

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

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

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

| | Spacenet
Rural Communications: The business of Spacenet Rural Communications is comprised of
several government-sponsored rural projects for telephony and/or internet and data
connectivity. To date, this business segment has satellite-based rural telephony and
internet access solutions in remote areas in Latin America.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Information
on the reportable segments:
| | -- | ---------------------------------------

| | a) | The
measurement of the reportable operating segments is based on the same
          accounting principles applied in these financial statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------

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

| | c) | Financial
data relating to reportable operating segments:
| | -- | ---------------------------------------------------------

| |                      | Year ended December 31, 2007
| | -------------------- | ----------------------------
|
|
|
|
| | Revenues:            |                             
| | External revenues    |                             
| | Internal revenues    |                             
| |                      |                             
| |                      |                             
| |                      |                             
| |                      |                             
| |                      |                             
| | Financial income     |                             
| | (expenses), net      |                             
| |                      |                             
| |                      |                             
| | Income (loss) before |                             
| | taxes on income      |                             
| |                      |                             
| |                      |                             
| | Taxes on income      |                             
| |                      |                             

| |                       | Year ended December 31, 2006
| | --------------------- | ----------------------------
|
|
|
|
| | Revenues:             |                             
| | External revenues     |                             
| | Internal revenues     |                             
| |                       |                             
| |                       |                             
| |                       |                             
| |                       |                             
| |                       |                             
| | Financial income      |                             
| | (expenses), net       |                             
| |                       |                             
| |                       |                             
| | Income (loss)  before |                             
| | taxes on income       |                             
| |                       |                             
| |                       |                             
| | Taxes on income       |                             
| |                       |                             

F - 53

---

---

GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

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

| |                      | Year ended December 31, 2005
| | -------------------- | ----------------------------
|
|
|
|
| | Revenues:            |                             
| | External revenues    |                             
| | Internal revenues    |                             
| |                      |                             
| |                      |                             
| |                      |                             
| |                      |                             
| |                      |                             
| | Financial income     |                             
| | (expenses), net      |                             
| |                      |                             
| |                      |                             
| | Income (loss) before |                             
| | taxes on income      |                             
| |                      |                             
| |                      |                             
| | Taxes on income      |                             
| |                      |                             

|NOTE 16: |  | SUBSEQUENT EVENTS  UNAUDITED
|-------- | - | -----------------------------

| | On
March 31, 2008 the Company announced the signing of an Agreement and Plan of Merger to be
acquired for an aggregate value of $475,000 in an all cash transaction by a consortium of
private equity. Under the terms of the agreement, the Companys shareholders will
receive $11.40 per share in cash at closing. There is no financing condition to the
obligations of the buyers to consummate the transaction. The Companys Board of
Directors approved the agreement and recommended that its shareholders vote in favor of
the transaction. The closing of the transaction is subject to shareholder approval,
certain regulatory approvals and other customary closing conditions. It is currently
anticipated that the transaction will be consummated by September 2008. Upon the closing
of the transaction, the Companys Ordinary shares would no longer be traded on
NASDAQ or the Tel Aviv Stock Exchange. Carryforward tax losses in the U.S. subsidiaries
may be subject to substantial limitations, see Note 12d.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 54

---

---

# 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

88

---

---