---

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# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 20-F

# (Mark One)

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

# OR

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

| | For
the fiscal year ended December 31, 2008
| | -------------------------------------------

# OR

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

| | For
the transition period from __________ to __________
| | -------------------------------------------------------

# OR

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

| | Date
of event requiring this shell company report _____________
| | ---------------------------------------------------------------

# Commission file number
000-30628

Alvarion Ltd. (Exact
name of Registrant as specified in its charter)

Israel(Jurisdiction of incorporation or organization)
21A HaBarzel Street, Tel Aviv 69710, Israel(Address of principal executive offices)

|Tzvika Friedman
Chief Executive Officer and President
Alvarion Ltd.
21A HaBarzel Street, Tel Aviv 69710, Israel
Tel: +972-3-645-6262
Fax: +972-3-645-6222
|---------------------------------------------------------------------------------------------------------------------------------------------------------

---

|(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
|---------------------------------------------------------------------------------------

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

|                                              |                                          
|--------------------------------------------- | -----------------------------------------
|
|
|
|
|Title of each class                           | Name of each exchange on which registered
|Ordinary Shares, NIS 0.01 par value per share | NASDAQ Global Market                     
|                                              |                                          



---

---

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

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

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

# As of December 31, 2008,
there were 61,929,895 Ordinary Shares, NIS 0.01 par value per share, outstanding.

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

o Yes     x No

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.

o Yes     x No

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.

x Yes     o No

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).

o Yes     x No

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
in the Exchange Act. (Check one).

|                          |                     |                        
|------------------------- | ------------------- | -----------------------
|
|
|
|
|Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o

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

| | U.S. GAAP x
    International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other o
| | -------------------------------------------------------------------------------------------------------------------------------

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

o Item 17      o Item 18

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).

o Yes     x No

ii

---

---

# INTRODUCTION

Alvarion
Ltd. (the Company, we, our or us)
concentrates resources on a single line of business  wireless broadband. We supply
top-tier carriers, Internet Service Providers (ISPs) and private network
operators with solutions based on the Worldwide Interoperability for Microwave Access
(WiMAX) standard as well as other wireless broadband solutions. We are a
leading provider of WiMAX and non-WiMAX wireless broadband systems, having launched 250
commercial WiMAX deployments worldwide. Our solutions are designed to cover the full range
of frequency bands with fixed, portable and mobile applications, to enable the delivery of
personal broadband services, business and residential broadband access, corporate virtual
private network (VPN), toll quality telephony, mobile base station feeding,
hotspot coverage extension, and services for various vertical markets such as
municipalities, public safety, mining, oil and gas, utilities, video surveillance and
border control. Currently, our business is mainly focused on solutions, based on the WiMAX
standard, that are used for primary wireless broadband access. In addition, we continue to
sell our non-WiMAX products. Most of our solutions provide high-speed wireless last
mile connection to the Internet for homes and businesses in both developed and
emerging markets. When we refer in this annual report to emerging markets, we
mean markets in newly industrialized countries whose economies have not yet reached first
world status but have, in a macroeconomic sense, outpaced their developing counterparts.

Our
strategy is to maintain our leadership in both non-standard broadband wireless access
(BWA) and current WiMAX markets, and leverage our accumulated technology,
together with our brand strength, broad customer base and innovative technology, in order
to be a leader in the WiMAX-based personal broadband market and further expand into
vertical markets.

We
were incorporated in September 1992 under the laws of the State of Israel. Since our
inception, we have devoted substantially all of our resources to the design, development,
manufacturing and marketing of wireless products. On August 1, 2001, Floware Wireless
Systems Ltd., a company incorporated under the laws of the State of Israel
(Floware), merged with and into us. As a result of the merger, we continued as
the surviving company, and Flowares separate existence ceased. Upon the closing of
the merger, we changed our name from BreezeCOM Ltd. to Alvarion Ltd. On April 1, 2003, we
acquired most of the assets and assumed the related liabilities of InnoWave Wireless
Systems Ltd. (InnoWave). In December 2004, we completed the amalgamation of
interWAVE Communications International Ltd. (interWAVE), and most of the
interWAVE operations became our Cellular Mobile business unit (CMU). In
November 2006, we sold our CMU to LGC Wireless, Inc. (LGC), a privately-held
supplier of wireless networking solutions in exchange for promissory notes and convertible
notes of LGC. In September 2007, LGC converted our convertible notes into LGC shares and
consequently we became a shareholder of LGC. In November 2007, ADC Telecommunication Inc.
(ADC) acquired all of LGC shares in a cash transaction. For more information,
see Item 5Operating and Financial Review and ProspectsOperating
Results.

This
annual report contains 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 or any
of the risks discussed in Item 3Key InformationRisk Factors and
elsewhere in this annual report.

In
some cases, you can identify forward-looking statements by terms such as may,
might, will, should, could,
would, expect, believe, intend,
plan, anticipate, project, estimate,
predict, potential or the negative of these terms, and similar
expressions intended to identify forward-looking statements.

These
statements reflect our current views with respect to future events and are based on
current assumptions, expectations, estimates and projections and are subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Except as required by applicable law, including the securities
laws of the United States, we do not undertake any obligation nor intend to update or
revise any forward-looking statements, whether as a result of new information, future
events or otherwise.

As
used in this annual report, the terms we, us, our,
our Company, and Alvarion mean Alvarion Ltd. and its subsidiaries,
unless otherwise indicated. ALVARION, ALVARION & Design, BreezeCOM, BreezeMAX,
BreezeACCESS, BreezeNET, BreezeLITE, WALKair, WALKnet, 4Motion, INTERWAVE, and INTERWAVE
& Design, are trademarks or registered trademarks of Alvarion in some
jurisdictions.  All other trademarks and trade names appearing in this annual report
are owned by their respective holders.

iii

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# TABLE OF CONTENTS

|         |                                                       | Page
|-------- | ----------------------------------------------------- | ----
|
|
|
|
|PART I   |                                                       | 1   
|        
|ITEM 1.  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 1   
|        
|ITEM 2.  | OFFER STATISTICS AND EXPECTED TIMETABLE               | 1   
|        
|ITEM 3.  | KEY INFORMATION                                       | 1   
|        
|A.       | SELECTED FINANCIAL DATA                               | 1   
|        
|B.       | CAPITALIZATION AND INDEBTEDNESS                       | 2   
|        
|C.       | REASONS FOR THE OFFER AND USE OF PROCEEDS             | 2   
|        
|D.       | RISK FACTORS                                          | 3   
|        
|ITEM 4.  | INFORMATION ON THE COMPANY                            | 22  
|        
|A.       | HISTORY AND DEVELOPMENT OF THE COMPANY                | 22  
|        
|B.       | BUSINESS OVERVIEW                                     | 22  
|        
|C.       | ORGANIZATIONAL STRUCTURE                              | 46  
|        
|D.       | PROPERTY, PLANTS AND EQUIPMENT                        | 47  
|        
|ITEM 4A. | UNRESOLVED STAFF COMMENTS                             | 47  
|        
|ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 47  
|        
|A.       | OPERATING RESULTS                                     | 47  
|        
|B.       | LIQUIDITY AND CAPITAL RESOURCES                       | 60  
|        
|C.       | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES        | 67  
|        
|D.       | TREND INFORMATION                                     | 67  
|        
|E.       | OFF-BALANCE SHEET ARRANGEMENTS                        | 67  
|        
|F.       | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS         | 67  
|        
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 68  
|        
|A.       | DIRECTORS AND SENIOR MANAGEMENT                       | 68  

iv

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|         |                                                         |    
|-------- | ------------------------------------------------------- | ---
|
|
|
|
|B.       | COMPENSATION                                            | 72 
|        
|C.       | BOARD PRACTICES                                         | 73 
|        
|D.       | EMPLOYEES                                               | 80 
|        
|E.       | SHARE OWNERSHIP                                         | 81 
|        
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 85 
|        
|A.       | MAJOR SHAREHOLDERS                                      | 85 
|        
|B.       | RELATED PARTY TRANSACTIONS                              | 85 
|        
|C.       | INTERESTS OF EXPERTS AND COUNSEL                        | 85 
|        
|ITEM 8.  | FINANCIAL INFORMATION                                   | 86 
|        
|A.       | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 86 
|        
|B.       | SIGNIFICANT CHANGES                                     | 87 
|        
|ITEM 9.  | THE OFFER AND LISTING                                   | 88 
|        
|A.       | OFFER AND LISTING DETAILS                               | 88 
|        
|B.       | PLAN OF DISTRIBUTION                                    | 89 
|        
|C.       | MARKETS                                                 | 89 
|        
|D.       | SELLING SHAREHOLDERS                                    | 89 
|        
|E.       | DILUTION                                                | 89 
|        
|F.       | EXPENSES OF THE ISSUE                                   | 89 
|        
|ITEM 10. | ADDITIONAL INFORMATION                                  | 90 
|        
|A.       | SHARE CAPITAL                                           | 90 
|        
|B.       | MEMORANDUM AND ARTICLES OF ASSOCIATION                  | 90 
|        
|C.       | MATERIAL CONTRACTS                                      | 92 
|        
|D.       | EXCHANGE CONTROLS                                       | 92 
|        
|E.       | TAXATION                                                | 93 
|        
|F.       | DIVIDENDS AND PAYING AGENTS                             | 103
|        
|G.       | STATEMENT BY EXPERTS                                    | 103

v

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|          |                                                                              |    
|--------- | ---------------------------------------------------------------------------- | ---
|
|
|
|
|H.        | DOCUMENTS ON DISPLAY                                                         | 103
|         
|I.        | SUBSIDIARY INFORMATION                                                       | 104
|         
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 104
|         
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 105
|          |                                                                              |    
|PART II   |                                                                              | 106
|         
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 106
|         
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 106
|         
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 106
|         
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 107
|         
|ITEM 16B. | CODE OF ETHICS                                                               | 107
|         
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 108
|         
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 108
|         
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 109
|         
|ITEM 16F. | RESERVED                                                                     | 109
|         
|ITEM 16G. | CORPORATE GOVERNANCE                                                         | 109
|         
|PART III  |                                                                              | 110
|         
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 110
|         
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 110
|         
|ITEM 19.  | EXHIBITS                                                                     | 111
|          |                                                                              |    

vi

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PART I

|ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- |  | -----------------------------------------------------

Not
applicable.

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

Not
applicable.

|ITEM 3. |  | KEY INFORMATION
|------- |  | ---------------

|A. | SELECTED
FINANCIAL DATA
|-- | -----------------------

The
selected financial data, set forth in the table below, have been derived from our audited
historical financial statements for each of the years from 2004 to 2008. The selected
consolidated statement of operations data for the years 2006, 2007, and 2008, and the
selected consolidated balance sheet data at December 31, 2007 and 2008, have been derived
from our audited consolidated financial statements set forth elsewhere in this annual
report. The selected consolidated statement of income data for the years 2004 and 2005,
and the selected consolidated balance sheet data at December 31, 2004, 2005 and 2006, has
been derived from our previously published audited consolidated financial statements,
which are not included in this Annual Report on Form 20-F. This selected financial data
should be read in conjunction with our consolidated financial statements, and are
qualified entirely by reference to such consolidated financial statements. The
consolidated financial data for the year ended December 31, 2004 include the results of
operations of the former interWAVE Communications International business, referred to as
the Cellular Mobile Unit (or CMU), from December 9, 2004. Following the sale of the net
assets of the CMU on November 21, 2006, the results of the CMU activities for the years
ended December 31, 2004, 2005, 2006 and 2007 were reclassified to one line item in
the statement of operations as Income (loss) from discontinued operations
below the results from continuing operations. We prepare our consolidated financial
statements in accordance with accounting principles generally accepted in the United
States (U.S. GAAP). You should read the selected consolidated financial data
together with the section of this annual report entitled, Item 5Operating and
Financial Review and Prospects and our consolidated financial statements and related
notes included elsewhere in this annual report.

1

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|                                            | Year Ended December 31,
|------------------------------------------- | -----------------------
|
|
|
|
|Statement of Operations Data:               |                        
|Sales                                       |                        
|Cost of sales                               |                        
|Write-off of excess inventory and provision |                        
|for inventory purchase commitments          |                        
|                                            |                        
|Gross profit                                |                        
|                                            |                        
|Operating costs and expenses:               |                        
|Research and development, gross             |                        
|Less grants and participations              |                        
|                                            |                        
|Research and development, net               |                        
|Selling and marketing                       |                        
|General and administrative                  |                        
|                                            |                        
|Amortization of intangible assets           |                        
|Restructuring and other related expenses    |                        
|                                            |                        
|Total operating costs and expenses          |                        
|                                            |                        
|Operating profit (loss)                     |                        
|Other income                                |                        
|Financial income, net                       |                        
|                                            |                        
|Income (loss) from continuing operations    |                        
|Income (loss) from discontinued operations, |                        
|net                                         |                        
|                                            |                        
|                                            |                        
|Net income (loss)                           |                        
|                                            |                        
|                                            |                        
|Net earnings (loss) per share:              |                        
|Basic:                                      |                        
|Continuing operations                       |                        
|Discontinued operations                     |                        
|                                            |                        
|Total                                       |                        
|                                            |                        
|Weighted average number of shares used in   |                        
|computing basic net earnings (loss) per     |                        
|share                                       |                        
|                                            |                        
|Diluted:                                    |                        
|Continuing operations                       |                        
|Discontinued operations                     |                        
|                                            |                        
|Total                                       |                        
|                                            |                        
|Weighted average number of shares used in   |                        
|computing diluted net earnings (loss) per   |                        
|share                                       |                        
|                                            |                        
|                                            |                        

(*)
          Includes charges for stock-based compensation of approximately $6.9 million,
          $7.4 million and $7.6 million as a result of the adoption of Statement of
          Financial Accounting Standards (SFAS) 123(R), Share-Based
          Payment (SFAS 123(R)) for the years ended December 31, 2006,
          2007 and 2008, respectively.

| |                      | As of December 31,
| | -------------------- | ------------------
|
|
|
|
| | Working capital      |                   
| | Total assets         |                   
| | Shareholders' equity |                   
| | Capital Stock        |                   
| |                      |                   

|B. | CAPITALIZATION
AND INDEBTEDNESS
|-- | -------------------------------

Not
applicable.

2

---

---

|C. | REASONS
FOR THE OFFER AND USE OF PROCEEDS
|-- | -----------------------------------------

Not
applicable.

|D. | RISK
FACTORS
|-- | ------------

Our
business, financial condition and results of operations could be seriously harmed due to
any of the following risks, among others. If we do not successfully address the risks to
which we are subject, we could experience a material adverse effect on our business,
results of operations and financial condition, and our share price may decline. We cannot
assure you that we will successfully address any of these risks.

# Risks Related to Our
Business and Our Industry

We have incurred losses in the
past and we may continue to incur losses in the future.

In
2008, our operating loss and net loss was approximately $(9.8) million and $(5.5) million,
respectively. In 2007, our operating loss from continuing operations and net income was
approximately $(7.6) million and $12.5 million, respectively, mainly due to the global
slowdown and the credit crunch in the global capital markets as well as a decrease in our
gross margin as competition increased. In 2006, our operating loss from continuing
operations and net loss was approximately $(8.4) million and $(40.8) million,
respectively. We may continue to incur operating losses and net losses in the future.
Continuing losses could have a material adverse effect on our business, financial
condition and results of operations, and on the value and market price of our ordinary
shares.

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

The
recent crisis in the financial and credit markets in the United States, Europe and Asia
has led to a global economic slowdown, with the economies of the United States and Europe
showing significant signs of weakness. If these economies weaken further, our customers
may reduce or postpone their technology spending significantly. This could result in
reductions in sales, longer sales cycles, slower market acceptance of our products and
increased price competition. Furthermore, periods of economic slowdown or recession
adversely affect the financial health of our subcontractors, partners (for example Nortel
Networks), distributors and resellers. Any of these events would likely harm our business,
operating results and financial condition. If global economic and market conditions, or
economic conditions in the United States, Europe or Asia or other key markets fail to
improve or continue to deteriorate, our business, operating results and financial
condition and the values and liquidity of our investments may be materially adversely
affected.

Adverse conditions in the
telecommunications industry and in the telecommunications equipment market may decrease
demand for our products and may harm our business, financial condition and results of
operations.

Our
systems are used by telecom carriers and service providers. Some carriers and service
providers using wireless broadband are emerging companies with unproven business models.
Adverse market conditions in the last couple of years have caused our customers and
potential customers to be conservative in their spending, and this is likely to continue
in the future. In addition, some of these emerging companies may cease operations due to
the global economic slowdown. Consequently, the markets in which we operate may not grow
as we expect, or at all and our overall expansion plan may be affected. While our goal is
to increase our sales by expanding the number of carrier customers that we address, there
can be no assurance that we will be successful. The number of carriers and service
providers who are our potential customers is relatively small and may not grow because of
the limited number of licenses granted in each country, and the substantial comparative
capital requirements involved in establishing networks. As a result, our revenues may
decline and our losses may increase.

3

---

---

Our
systems are also used in vertical market applications (such as surveillance, monitoring
and connectivity) by private network operators such as government, municipalities and
large enterprises. Vertical markets require new additional sales and marketing channels we
may not be able to acquire. Our products are integrated in a complete solution, which
provides an answer to specific application requirements. The demand for our systems in
such vertical market applications could be less than expected and the alternative
technologies may strongly compete against us. As a result, our revenues may decline and
our losses may increase.

New markets we attempt to
penetrate may not become substantial commercial markets. In addition, if we do not
maintain or increase the market share we expect of the wireless broadband equipment
market, our business will suffer.

The
personal broadband market and other new markets we attempt to penetrate may not become
substantial commercial markets or may not evolve in a manner that will enable our products
to achieve market acceptance. Mobile WiMAX technology targets fourth generation
(4G) services and therefore directly competes with other technologies such as
Long Term Evolution (LTE) which is currently the major technology competitor
of WiMAX for the personal broadband market. WiMAX market acceptance may be hampered by
competing technologies or intellectual property rights disputes. In addition, in order to
maintain or increase the market share that we expectin the markets in which we
operate, we must:

| |  | continue
to innovate and differentiate our technology position in designing, developing and
             manufacturing broadband wireless access products;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | develop
and cultivate additional sales channels in addition to our direct sales from which we
generate our main revenues today, including original equipment manufacturer (OEM)
agreements, regional local partners or other strategic arrangements with leading
manufacturers of access equipment to market our wireless broadband products to
prospective customers, such as local exchange carriers, cellular operators, Internet and
application service providers, municipalities and local telephone companies;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | effectively
establish and support relationships with customers, including local exchange carriers,
Internet and application service providers, public fixed or mobile telephone service
providers and private network operators;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | effectively
develop and market our OPEN WiMAX strategy in our broadband mobile solution, together
with our current and potential partners;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | continue
to enhance our infrastructure project management and overall turnkey capabilities;
| | - | -------------------------------------------------------------------------------------------

| |  | continue
to enhance our financing and credit capabilities towards our customers; and
| | - | ------------------------------------------------------------------------------------

| |  | continue
to enhance our maintenance and support services.
| | - | ---------------------------------------------------------

Our
efforts in these markets may not succeed.

Intense competition in the markets
for our products may have an adverse effect on our sales and profitability.

Many
companies compete with us in the wireless broadband equipment market in which we sell our
products. We expect that competition from large vendors, as well as new market vendors,
will increase in the future, including with respect to products that we currently offer
and products that we intend to introduce in the future. As the market transitions toward
standardization, competition becomes increasingly more challenging for us. In addition,
some or all of the systems integrators and other strategic partners to which we sell our
wireless broadband products could develop the capability to manufacture systems similar to
our wireless broadband products. We expect our competitors to continue to improve the
performance of their current products and to introduce new products or new technologies
that may supplant or provide lower cost alternatives to our products or products with
better performance.

4

---

---

We
are also facing additional and new competition from large telecommunications equipment
vendors, such as Alcatel-Lucent, Cisco Systems (specifically after acquiring Navini
Networks), Huawei Technologies, Motorola, NEC Corporation, Nokia Siemens Networks, Samsung
and ZTE Corporation and we expect this competition to grow, especially with respect to the
mobile WiMAX-based products. Tier One operators may prefer to purchase products from these
large vendors. During recent years, there is a trend of consolidation in the
telecommunications equipment market. This trend may continue in the future, particularly
in light of the global economic slowdown, and result in larger competitors with enhanced
resources, financial and otherwise. This may further intensify the competitive nature of
the markets in which we operate. Furthermore, this consolidation trend, as demonstrated in
the merger of Alcatel and Lucent, Ciscos acquisition of Navini and the merger of
Nokia and Siemens operations, limits and may further reduce the potential variety of our
customers and partners.

In
addition, as the market grows, we may face competition from aggressive start-ups in
different markets. We also expect to face competition from alternative wireline and
wireless technologies including copper wires, fiber-optic cable, digital subscriber lines
(DSL), cable modems, satellite, Wi-Fi and other broadband access technologies,
such as long-term evolution (LTE) and high-speed packet access
(HSPA).

We
expect these competitors to continue to improve their technologies and products, which may
cause us to lose some of our customers or prevent us from penetrating into new markets.
Some of our existing and potential competitors, including large competitors arising from
the continued consolidation in the telecommunications equipment market, have substantially
greater resources, including financial, technological, manufacturing and marketing, and
distribution capabilities, and enjoy greater market recognition than we do. Increased
competition, direct and indirect, has resulted in, and is likely to continue to result in,
reductions of average selling prices, shorter product life cycles due to our
competitors launching innovative products in the market more frequently, reduced
gross margins, longer sales cycles and potential loss of market share and, consequently,
could adversely affect our sales and profitability.

We
may not be able to differentiate our products from those of our competitors, successfully
develop or introduce new products that are less costly, offer better performance than
those of our competitors, or offer our customers payment or other commercial terms as
favorable as those offered by our competitors. In addition, we may not be able to offer
our products as part of integrated systems or solutions or provide extensive services to
the same extent as our competitors. A failure to accomplish one or more of these
objectives could materially adversely affect our sales and profitability, harming our
financial condition and results of operations.

Existing and potential industry
standards may have an adverse affect on our competitiveness and market position, on our
relations with our customers and on our revenues and results of operations.

We
have developed and continue to develop our products with an intention to comply with
existing standards and anticipated future standards. We expended, and intend to continue
to expend, substantial resources in developing products and product features that are
designed to conform to such standards. In addition, although we developed our products
with an intention to comply with existing standards and anticipated future standards, we
may not be able to introduce on a timely basis products that comply with industry
standards. Since the WiMAX industry is currently in its early stages, we have received
requests to invest significant resources in interoperability testing (IOT)
with other significant WiMAX manufacturers. The broad demand of manufacturers and
operators for IOT, as well as the length of the IOT process and its success may have a
significant impact on our relationships with our customers and on our revenues and
expenses.

5

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---

Certain
standards on which we base our products and technology  such as Institute of
Electrical and Electronic Engineers (IEEE) 802.16d-2004 and IEEE 802.16e-2005
 may not continue to be, or will not be, broadly adopted which could significantly
limit our market opportunity and harm our business. In general, IEEE has expressed
interest in collaborating with an international consortium to develop open access
publishing mode. In addition, our focus on anticipated future standards, may lead to
delays in introducing products designed for current standards and may have an adverse
affect on our competitiveness, market position, relations with our customers and revenues.

Our
strategy of seeking to anticipate and comply with industry standards is subject to the
following additional risks, among others:

| |  | the
standards ultimately adopted by the industry may vary from those anticipated by us,
causing our products (which were designed to meet anticipated standards) to fail to
comply with established standards;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | even
if our products do comply with established standards, these standards are not mandatory
and consumers may prefer to purchase products that do not comply with them or that comply
with new or competing standards;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | product
standardization may have the effect of lowering barriers to entry in the markets in which
we seek to sell our products, by diminishing product differentiation and causing
competition to be based upon criteria such as the relative size and marketing skills of
competitors in which we believe we have less of a competitive advantage, rather than on
the basis of product differentiation;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | standardization
of product features may increase the number of competitive product offerings;
| | - | ---------------------------------------------------------------------------------------------

| |  | our
competitors may attempt to influence the adoption of standards that are not compatible
with              our products; and
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | standardization
may also result in lower average selling prices.
| | - | ----------------------------------------------------------------

These
risks, among others, may harm our revenues and, consequently, our results of operations.

Customers may refrain from buying
our current products in order to wait for products under development, and our business may
suffer if these new products, including our IEEE 802.16e-2005 standards- compliant
WiMAX-certified products, are not available on our planned timetable.

In
the past, we experienced delays in orders for, and decreasing revenues from, both
non-WiMAX products and products based on IEEE 802.16d standards. These delays were
primarily due to the market transition to WiMAX certified products based on 802.16e Time
Division Duplex (TDD) systems. We may continue to suffer from the market
transition to IEEE 802.16e-2005 WiMAX certified products or to any other new WiMAX
standards as customers continue to slow or cease their purchases of our commercially
available products in order to wait for such products. In addition, we may also be subject
to delays in development due to third party vendors, such as chip- vendors. If such
products are not available on our planned timetable, and if our planned timetable lags
behind our competitors, our customers may seek other providers to fulfill their wireless
needs and our revenues could decrease.

6

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Some of our standards-compliant
WiMAX products may not receive the certification that we expect, which may affect our
future business.

We
rely on WiMAX technology. Products based on this technology may not receive certification
in the time frame we expect, or at all, and may therefore not achieve the wide acceptance
that we are seeking. Market changes could render this technology obsolete or subject to
intense competition by alternative technologies. This may harm the sales of our standards
compliant products, and consequently, our results of operations.

Rapid technological change may have
an adverse effect on the market acceptance for our products and may adversely affect our
results of operations.

The
markets for our products and the technologies utilized in the industry in which we operate
evolve rapidly. We rely on key technologies, including wireless local area network
(LAN), wireless packet data, orthogonal frequency division multiplexing
(OFDM), orthogonal frequency division multiple access (OFDMA),
time division multiplexing, modem and radio technologies and other technologies, which we
have been selling for several years, as well as WiMAX, multiple-input multiple-output
communications (MIMO), Sub Channelization, beam forming, high power base
station and other technologies. These technologies may be replaced with alternative
technologies or may otherwise not achieve the wide acceptance that we are seeking,
particularly in light of the current global economic slowdown. In particular, there is a
substantial risk that the wireless broadband technologies underlying our products may not
achieve market acceptance for use in access applications. As a result, our results of
operations may be adversely affected.

In
addition, market changes could render our products and technologies obsolete or subject
them to intense competition by alternative products or technologies or by improvements in
existing products or technologies. For example, the wireless broadband equipment market
may stop growing as a result of the deployment of alternative technologies that are
constantly improving, such as DSL, cable modem, fiber optic, coaxial cable, satellite
systems, Wi-Fi technology, third or fourth generation cellular systems, or otherwise HSPA
and LTE technologies. New or enhanced products developed by our competitors may be
technologically superior to our products, may limit our target markets or may render our
products obsolete, and consequently adversely affecting our results of operations.

The
success of our technology depends on the following factors, among others:

| |  | acceptance
of new and innovative technologies;
| | - | ----------------------------------------------

| |  | acceptance
of standards for wireless broadband products;
| | - | --------------------------------------------------------

| |  | timely
availability and maturity of technology from technology suppliers and chip-vendors, such
             as Intel, Sequans and Beceem;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | capacity
to handle growing demands for faster transmission of increasing amounts of data and
             voice;
| | - | ----------------------------------------------------------------------------------------------------------------

| |  | cost-effectiveness
and performance compared to other broadband wireless technologies;
| | - | -------------------------------------------------------------------------------------

| |  | reliability
and security;
| | - | -------------------------

| |  | acceptance
of new WiMAX ecosystem;
| | - | ----------------------------------

| |  | suitability
for a sufficient number of geographic regions;
| | - | ----------------------------------------------------------

| |  | the
availability of sufficient frequencies and site locations for carriers to deploy and
             install products at commercially reasonable rates; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | safety
and environmental concerns regarding wireless broadband transmissions.
| | - | -----------------------------------------------------------------------------

We may experience difficulties or
delays in the introduction of new or enhanced products, which could result in reduced
sales or unexpected expenses.

The
development of new or enhanced products is a complex and uncertain process. We are engaged
in the development of very advanced technologies. We have and may continue to experience
design, manufacturing, marketing and other difficulties due to delays in our development
or delays by third party vendors and these delays could continue to cause difficulties or
prevent our development, introduction or marketing of new products or product enhancements
and intensified competition. The difficulties could result in reduced sales, unexpected
expenses or delays in the launch of new or enhanced products or inability to timely
introduce to the market the appropriate products, all of which may adversely affect our
results of operations.

7

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We engaged and may continue to
engage in mergers and acquisitions which could harm our business, results of operations
and financial condition, and dilute our shareholders equity.

We
have pursued, and subject to market conditions may continue to pursue, growth
opportunities through internal development and 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.
Past and future acquisitions may require substantial capital resources, which may require
us to seek additional debt or equity financing. Past and future acquisitions by us could
result, without limitation, in the following, any of which could seriously harm our
results of operations or the price of our ordinary shares:

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

| |  | large
write-offs;
| | - | -----------------

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

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

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

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

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

| |  | potential
loss of key employees of acquired organizations; and
| | - | --------------------------------------------------------------

| |  | potential
impact on our cash reserve.
| | - | -------------------------------------

We have experienced in the past,
and may experience in the future, quarterly and annual fluctuations in our results of
operations which may cause volatility in the market price of our ordinary shares.

We
have experienced, and may continue to experience, significant fluctuations in our
quarterly and annual results of operations, in particular, in light of the current crisis
in the financial sector and the unfavorable global economic conditions. Any fluctuations
may cause our results of operations to decrease below the expectations of securities
analysts and investors. This would likely affect the market price of our ordinary shares.

Our
quarterly and annual results of operations may vary significantly in the future for a
variety of reasons, many of which are outside of our control, including the following:

| |  | the
uneven pace of spectrum licensing to carriers and service providers;
| | - | ------------------------------------------------------------------------

8

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| |  | purchasing
 patterns of our customers, the size and timing of orders and the timing of large
             scale deployments;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | the
fulfillment of all revenue recognition criteria;
| | - | ----------------------------------------------------

| |  | customer
deferral of orders in anticipation of new products, product features or price
             reductions;
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | the
timing of our product introductions or enhancements or those of our competitors or of
             providers of complementary products;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | seasonality,
including the relatively low level of general business activity in the first and
             third quarters of each year;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | disruption
or changes in the quality of our sources of supply;
| | - | --------------------------------------------------------------

| |  | changes
in the mix of products sold by us;
| | - | ------------------------------------------

| |  | mergers
or acquisitions, by us, our competitors and exiting and potential customers, if any;
| | - | --------------------------------------------------------------------------------------------

| |  | one-time
charges such as asset impairment and restructuring;
| | - | ------------------------------------------------------------

| |  | fluctuations
in the exchange rate of the New Israeli Shekel (the "NIS") against the United
             States dollar;
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | general
economic conditions, including the unfavorable global economic conditions; and
| | - | --------------------------------------------------------------------------------------

| |  | network
approval process dependencies.
| | - | --------------------------------------

Our
customers ordinarily require the delivery of products promptly after their orders are
accepted. Historically, our business does not have a significant backlog of accepted
orders. Consequently, revenues in any quarter depend primarily on orders received and
accepted in that quarter. The deferral of the placing and acceptance of any large order
from one quarter to another could materially and adversely affect our results of
operations for the former quarter. If revenues from our business in any quarter remain in
the same level or decline in comparison to any previous quarter, our results of operations
could be harmed.

In
addition, our operating expenses may increase significantly. If revenues in any quarter do
not increase correspondingly or at a higher rate, or if we do not reduce our expenses in a
timely manner in response to lower level or declining revenues, our results of operations
for that quarter would be materially adversely affected. Because of the variations that we
have experienced in our quarterly results of operations, we do not believe
quarter-to-quarter comparisons of our results of operations are necessarily meaningful and
you should not rely on results of operations in any particular quarter as an indication of
future performance.

Our products have long and
unpredictable sales cycles which could adversely impact our revenues and results of
operations.

The
sales cycle for most of our products encompasses significant technical evaluation and
testing by each potential purchaser and a commitment of significant cash and other
resources. The sales cycle can extend for more than one year from initial contact with a
carrier to receipt of a purchase order. This time frame may be extended due to, among
other reasons, a carriers desire to ensure that the systems work for a long period
with increased number of subscribers coverage and capacity, a carriers need to
obtain financing to purchase systems incorporating our products, the regulatory
authorization of competition in local services, delays in the licensing of spectrum for
these services and other regulatory hurdles.

As
a result of the length of this sales cycle, revenues from our products may fluctuate from
quarter to quarter and fail to correspond with associated expenses, which are largely
based on anticipated revenues. In addition, the delays inherent in the sales cycle of our
products raise additional risks of customers canceling or changing their product plans.
Our revenues will be adversely affected if a significant customer, or significant
potential customer, reduces delays or cancels orders during the sales cycle of the
products or chooses not to deploy networks incorporating our products. Any such
fluctuation in revenue or cancellation of orders may have an adverse effect on our
business and may affect the market price of our ordinary shares. In addition, the global
economic financial recession may have an adverse effect on the length of our sales cycle.

9

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We may fail to deliver
turn-key solutions to our customers.

We
are experiencing an increasing demand from existing and potential customers to provide a
complete operational or turn key solution for their deployment needs where we
are responsible for overall project management including third-party deliverables. In
addition, our OPEN WiMAX strategy is designed to enable multiple telecom vendors to build
a best-of-breed telecom access network in an open standard architecture. This strategy
enables communication service providers to choose the combination of vendors and partners
that best fits their specific requirements in large telecom projects. These solutions
require us to integrate subcontractors technologies, equipment and services. Relying
on these third parties increases our responsibilities towards these customers. If we or
any of our subcontractors fail to fully comply with the customers requirements, it
may adversely affect our results of operations.

Our business is dependent upon the
success of distributors who are under no obligation to purchase our products.

A
significant portion of our revenues is derived from sales to independent distributors.
These distributors then resell the products to others, who further resell those products
to end users. Changes in the distribution and sales channels of our products, a loss of a
major distributor or their loss of a major end-user, or our inability to establish
effective distribution and sales channels for new products may impact our ability to sell
our products and result in a loss of revenues. We are dependent upon the acceptance of our
products by the market through our distributors efforts in marketing and sales. In
some cases, arrangements with our distributors do not prevent them from selling
competitive products and some of those arrangements do not contain minimum sales or
marketing performance requirements. These distributors may not give a high priority to
marketing and supporting our products. Changes in the financial condition, business or
marketing strategies of these distributors could have a material adverse effect on our
results of operations. Any of these changes could occur suddenly and rapidly.

Our business depends in part on
Original Equipment Manufacturers (OEM) and systems integrators.

The
success of the sales of our wireless broadband products currently depends in part on
relationships with OEMs or other system integrators. A portion of our systems is sold to
and through telecommunications systems integrators for integration into their systems,
rather than directly to carriers. The sale of our wireless broadband products depends in
part on the OEMs and systems integrators active marketing and sales efforts as
well as the quality of their integration efforts and post-sales support. Sales through the
OEM and system integrator channels exposes this business to a number of risks, each of
which could result in a reduction in the sales of our products.

Some
of these OEMs and system integrators may terminate their relationships with us, be
consolidated or face financial problems, as well as promote competing products or
emphasize alternative technologies, which may turn them into our competitors rather than
our partners, all of which may result in a decline in the purchase of our products. In
addition, our efforts to increase sales may suffer from the lack of brand visibility
resulting from OEMs and systems integrators integration of these products into
more comprehensive systems. We experience and may continue to experience the
materialization of the above risks and the need to develop alternative methods of
marketing these products.

10

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If our revenues decrease and our
days- sales-outstanding (DSO) increase, we may suffer from a cash shortfall.

We
expect that over time our DSOs may increase and will range between 80 to 90 days during
2009, mainly due to our customers requesting better payment terms from us, as well
as the global credit crunch in the capital markets. We may experience an additional
increase in DSOs due to a decline in revenues in the future, resulting in a cash
shortfall. The main reasons for the DSO increase mentioned above are: (i) the change of
our customers profile (mainly larger entities which demand longer and better payment
terms), and (ii) a market trend resulting from intense competition.

We may experience a continuing
decrease in our gross margin levels in the future, which may adversely affect our
financial results.

We
believe that several market developments have caused, and may continue to cause, a decline
in our gross margin. Such developments include the following: (i) increased competition in
the regions in which we currently operate; (ii) the mix of our products, such as an
increase in the volume of sale of lower-margin Customer Premise Equipment
(CPEs); (iii) the entry of new, large operators into our markets; (iv) changes
in the market demand of some of our existing and potential products; and (v) an increase
in the proportion of sales through OEM. We expect this decline in gross margin to continue
over time. If our revenues do not increase and our operating expenses remain the same or
increase, the decline in gross margin will have a negative impact on our results of
operations.

Our products are complex and may
have errors or defects that are detected only after deployment in complex networks.

Some
of our products are highly complex and are designed to be deployed in complex networks.
Although our products are tested during manufacturing and prior to deployment, our
customers may discover errors after the products have been fully deployed. If we are
unable to fix errors or other problems that may be identified in full deployment,
including problems related to the site survey, radio planning and other problems that are
not necessarily related to product functionality but to the associated services, we could
experience:

| |  | costs
associated with the remediation of any problems;
| | - | ------------------------------------------------------

| |  | loss
of or delay in revenues;
| | - | -----------------------------

| |  | loss
of customers;
| | - | ------------------

| |  | failure
to achieve market acceptance and loss of market share;
| | - | --------------------------------------------------------------

| |  | diversion
of deployment resources;
| | - | ----------------------------------

| |  | diversion
of research and development resources to fix errors in the field;
| | - | ---------------------------------------------------------------------------

| |  | increased
service and warranty costs;
| | - | -------------------------------------

| |  | legal
actions or demands for compensation by our customers; and
| | - | ---------------------------------------------------------------

| |  | increased
insurance costs.
| | - | --------------------------

In
addition, our products are often integrated with other network components. There may be
incompatibilities between these components and our products that could significantly harm
service providers or their subscribers. Product problems in the field could require us to
incur costs or divert resources to remedy the problems and subject us to liability for
damages caused by the problems or delay in research and development projects because of
the diversion of resources. These problems could also harm our reputation and competitive
position in the industry.

11

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We could be subject to warranty
claims and product recalls, which could be very expensive and harm our financial
condition.

Products
like ours sometimes contain undetected errors. These errors can cause delays in product
introductions or require design modifications. In addition, we are dependent on
unaffiliated suppliers for key components incorporated into our products. Defects in
systems in which our products are deployed, whether resulting from faults in our products
or products supplied by others, from faulty installation or from any other cause, may
result in customer dissatisfaction. We are continually marketing several new products. The
risk of errors in these new products, as in any new product, may be greater than the risk
of errors in established products. The warranties for our products permit customers to
return for repair or replacement, within a period ranging from 12 to 21 months of
purchase, any defective products. Any failure of a system in which our products are
deployed (whether or not these products are the cause), any product recall and any
associated negative publicity could result in the loss of, or delay in, market acceptance
of our products and harm our business, financial condition and results of operations.
Although we attempt to limit our liability for product defects to product replacements, we
may not be successful, and customers may sue us or claim liability for the defective
products and for related claims arising therefrom. A successful product liability claim
could result in substantial cost and divert managements attention and resources,
which would have a negative impact on our financial condition and results of operations.

Our dependence on limited sources
for key components of our products may lead to disruptions in the delivery and increased
cost of our products, harming our business and results of operations.

We
currently obtain key components for our products from a limited number of suppliers, and
in some instances from a single supplier. In addition, some of the components that we
purchase from single suppliers are custom-made. We cannot assure that we will not
experience disruptions in the delivery and increased cost of our products. We do not have
long-term supply contracts with most of these suppliers. In addition, there is a global
demand for some electrical components that are used in our systems and that are supplied
by relatively few suppliers. Our dependence on these limited sources for key components
for our products presents the following potential risks:

| |  | delays
in delivery or shortages of components, especially for custom-made components or
components with long delivery lead times, could interrupt and delay manufacturing and
result in cancellations of orders for our products;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | suppliers
could increase component prices significantly and with immediate effect on the
manufacturing costs for our products;
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | due
to the global financial recession, some of our suppliers may cease to exist or face
             financial difficulties which could affect the supply chain;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we
may not be able to develop alternative sources for product components;
| | - | -------------------------------------------------------------------------

| |  | suppliers
could discontinue the manufacture or supply of components used in our products which may
require us to modify our products and which may cause delays in product shipments,
increased manufacturing costs and increased product prices;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we
may be required to hold more inventory for longer periods of time than we otherwise might
in order to avoid problems from shortages or discontinuance; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | due
to the political situation in the Middle East, we may not be able to import necessary
             components.
| | - | ------------------------------------------------------------------------------------------------------------------

In
the past, we experienced delays and shortages in the supply of components on more than
one occasion. We may experience such delays in the future, harming our business and
results of operations.

12

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We must be able to manage expenses
and inventory risks associated with meeting the demand of our customers.

To
ensure that we are able to meet customer demand for our products, we place orders with our
subcontractors and suppliers based on our estimates of future sales. If actual sales
differ materially from these estimates, our inventory levels may be too high, and
inventory may become obsolete and/or over-stated on our balance sheet. This result would
require us to write off inventory, which could adversely affect our results of operations.
In 2006, 2007 and 2008, we wrote off inventory in the amounts of $9.5 million, $4.8
million and $3.5 million, respectively.

In
addition, we are required to place manufacturing orders well in advance of the time we
expect to sell products, and this may result in us ordering a larger or smaller number of
these products than required. In the event that we order the manufacture of a greater or
lesser amount of these products, then we may be required to purchase the surplus products
or to forego or delay the sale or delivery of the products that we did not order in
advance. In either case, our business and results of operations may be adversely affected.

The limited manufacturing capacity
of a number of subcontractors we depend on, may prevent us from filling orders in the
timeframe and with the quality specifications our customers demand, which may harm our
business and results of operations.

We
currently depend on a number of contract manufacturers with limited manufacturing capacity
to manufacture our products. The assembly of certain of our finished products, the
manufacture of custom printed circuit boards utilized in electronic subassemblies and
related services are also performed by these independent subcontractors. In addition, we
rely on third-party turn-key manufacturers to manufacture certain sub-systems
for our products. Reliance on third-party manufacturers exposes us to significant risks,
including risks resulting from:

| |  | potential
lack of manufacturing capacity;
| | - | -----------------------------------------

| |  | limited
control over delivery schedules;
| | - | ----------------------------------------

| |  | quality
assurance and control;
| | - | ------------------------------

| |  | manufacturing
yields and production costs;
| | - | ------------------------------------------

| |  | voluntary
or involuntary termination of their relationship with us;
| | - | -------------------------------------------------------------------

| |  | difficulty
in, and timeliness of, substituting any of our contract manufacturers, which could
             take as long as six months or more;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
economic and political conditions in their environment; and
| | - | ---------------------------------------------------------------

| |  | their
financial strength.
| | - | -------------------------

If
the operations of our contract manufacturers are halted, even temporarily, or if they are
unable to operate at full capacity for an extended period of time, we may experience
business interruption, increased costs, loss of goodwill and loss of customers.

Any
of these risks could result in manufacturing delays or increases in manufacturing costs
and expenses. If we experience manufacturing delays, we could lose orders for our products
and, as a result, lose customers. There may be an adverse effect on our profitability and
consequently, on our results of operations, if we incur increased costs.

13

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Regulation by governments or other
public authorities may increase our costs of doing business, limit our potential markets
or require changes to our products that may be difficult and costly.

Our
business is premised on the availability of certain radio frequencies for two-way
broadband communications. Radio frequencies are subject to extensive regulation under
international treaties and local laws , which are different in most countries. Some of our
products operate in license-free bands in the radio spectrum, while others operate in
licensed bands. The regulatory environment in which we operate is subject to significant
change, the results and timing of which are uncertain.

In
some cases, the continued validity of these licenses may be conditional on the licensee
complying with various conditions. Since WiMAX technologies evolve and enable new
applications, such as mobile services, in some countries the regulator may not permit the
operators to use the spectrum previously allocated according to their full technology
potential and its latest technological evolution. The regulator in some countries may
avoid granting WiMAX spectrum to protect owners of other spectrum previously allocated. In
addition to regulation of available frequencies, our products must conform to a variety of
national and international regulations that require compliance with administrative and
technical requirements as a condition to the operation or marketing of devices that emit
radio frequency energy.

The
regulatory environment in which we sell our products subjects us to several risks,
including the following:

| |  | Our
customers may not be able to obtain sufficient frequencies for their planned uses of our
wireless broadband products.
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | Failure
by the regulatory authorities to allocate suitable and sufficient radio frequencies in a
timely manner could deter potential customers from ordering our wireless broadband
products. Also, frequency licenses and other regulations may include terms that affect
the desirability of using our products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
process of establishing new regulations for wireless broadband frequencies and allocating
these frequencies to operators is complex and lengthy, and delays in this process may
postpone the commercial deployment of our products.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If
our products operate in the license-free bands, Federal Communications Commission (FCC)
rules and similar rules in other countries require operators of radio frequency devices,
such as our products, to cease operation of a device if its operation causes interference
with authorized users of the spectrum and to accept interference caused by other users.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If
the use of our products interferes with authorized users, or if users of our products
experience interference from other users, market acceptance of our products could be
adversely affected.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Regulatory
changes, including changes in the allocation of frequency spectrum, may significantly
impact our operations by rendering our current products obsolete or non-compliant,
restricting the applications and markets served by our products, or requiring us to
modify our products.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Regulatory
changes and restrictions imposed due to environmental concerns, such as restrictions
imposed on the location of outdoor antennas.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | Spectrum
technology neutrality or specific technology allocation can be changed by regulatory
authorities towards other competing technologies or to fit specific competitive
solutions. Spectrum allocation may specify a particular technology, such as 3G, LTE or
WiMAX rather than enabling the spectrum owner to determine the technology.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Export
control laws and regulations which are applicable to all of our products and technology
may become more stringent in the future.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

14

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We
may also be subject to certain European directives like the Waste Electrical and
Electronic Equipment and the Restriction of Hazardous Substances in Electrical and
Electronic Equipment.

Our proprietary technology is
difficult to protect and its unauthorized use by third parties may impair our ability to
compete effectively.

Our
success and ability to compete depends and will continue to depend, to a large extent, on
maintaining our proprietary rights and the rights that we currently license or will
license in the future from third parties. We rely primarily on a combination of patents,
trademarks, trade secrets and copyright law and on confidentiality, non-disclosure and
assignment-of-inventions agreements to protect our proprietary technology. We have
obtained several patents and have several patent applications pending that are associated
with our products. We also have several trademark registrations associated with our name
and some of our products.

These
measures may not be sufficiently adequate to protect our technology from third-party
infringement. Our competitors may independently develop technologies that are
substantially equivalent or superior to our technology. Third-party patent applications
filed earlier may block our patent applications or receive broader claim coverage. In
addition, any patents issued to us, if issued at all, may not provide us with significant
commercial protection. Third parties may also invalidate, circumvent, challenge or design
around our patents or trade secrets, and our proprietary technology may otherwise become
known or similar technology may be independently developed by competitors. Additionally,
our products may be sold in foreign countries that provide less protection to intellectual
property than that provided under U.S. or Israeli laws. Failure to successfully protect
our intellectual property from infringement may damage our ability to compete effectively
and harm our results of operations.

We could become subject to
litigation regarding intellectual property rights, which could seriously harm our
business.

From
time to time, we receive letters alleging we have infringed upon a patent, trademark or
other proprietary right. As the Broadband Wireless Access market transitions toward
standardization, we are more exposed to intellectual property litigation by third parties
who claim to hold intellectual property rights related to such standards. In addition,
based on the size and sophistication of our competitors and the history of rapid
technological change in our industry, it is possible that several competitors may have
intellectual property rights that could relate to our products. Therefore, we may need to
litigate to defend against claims of infringement or to determine the validity or scope of
the proprietary rights of others. Similarly, we may need to litigate to enforce or uphold
the validity of our patent, trademarks and other intellectual property rights. Other
actions may involve ownership disputes over our intellectual property or the
misappropriation of our trade secrets or proprietary technology. As a result of these
actions, we may have to seek licenses to third-parties intellectual property rights,
which may not be able to be successfully integrated into our products. These licenses may
not be available to us on reasonable terms or at all. In addition, if we decide to
litigate these claims, the litigation could be expensive and time consuming and could
result in court orders preventing us from selling our then-current products or from
operating our business. Any infringement claim, even if not meritorious, could result in
the expenditure of significant financial and managerial resources and harm our business,
financial condition and results of operations. We have no assurance that any such
allegation will not have a material adverse effect on our business, financial condition or
results of operations.

15

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If we are unable to maintain
licenses to use certain technologies, we may not be able to develop and sell our products.

We
license certain technologies from others for use in connection with some of our
technologies. The loss of these licenses could impair our ability to develop and market
our products. If we are unable to obtain or maintain the licenses that we need, we may be
unable to develop and market our products or processes, or we may need to obtain
substitute technologies of lower quality or performance characteristics or at greater
cost. We cannot assure you that we can maintain these licenses or obtain additional
licenses, if we need them in the future, on commercially reasonable terms or at all. Also,
some of our products utilize open source technologies.  These technologies are
licensed to us on varying license structures.  This license and others like it pose a
potential risk to products should they be inappropriately used.

# We depend on key
personnel.

Our
future success depends, in part, on the continued service of key personnel. If one or more
of our key technical, sales or senior management personnel terminates his or her
employment and we are unable to retain a qualified replacement, our business and results
of operations could be harmed.

We may be classified as a passive
foreign investment company.

As
a result of the combination of our substantial holdings of cash, cash equivalents and
securities and the decline in the market price of our ordinary shares from its historical
highs, there is a risk that we could be classified as a passive foreign investment company
(PFIC) for United States federal income tax purposes. Based upon our market
capitalization during the taxable years 2004 through 2007, and 2008, and each taxable year
prior to 2001, we do not believe that we were a PFIC for any such year and, based upon our
valuation of our assets as of the end of each quarter of 2002 and 2003 and an independent
valuation of our assets as of the end of each quarter of 2001, we do not believe that we
were a PFIC for 2001, 2002 or 2003 despite the relatively low market price of our ordinary
shares during some of those years. We cannot assure you, however, that the United States
Internal Revenue Service or the courts would agree with our conclusion if they were to
consider our situation. There is no assurance that we will not become a PFIC in 2009 or in
subsequent taxable years. If we were classified as a PFIC, U.S. taxpayers that own our
ordinary shares would be subject to additional taxes upon certain distributions by us or
upon gains recognized after a sale or disposition of our ordinary shares unless they
appropriately elect to treat us as a qualified electing fund or to make a
mark to market election under the U.S. Internal Revenue Code. Our
classification as a PFIC could also adversely affect the market price of our ordinary
shares. For more information, see TaxationUnited States Federal Income Tax
Considerations with Respect to the Acquisition, Ownership and Disposition of our Ordinary
SharesPassive Foreign Investment Company Status.

The trading price of our ordinary
shares is subject to volatility.

The
trading price of our ordinary shares has experienced significant volatility in the past
and may continue to do so in the future. Since our initial public offering in
March 2000, the sales prices of our ordinary shares on the NASDAQ Global Market have
ranged from a high of $53.12 to a low of $1.55. On December 31, 2008 and June 03, 2009,
the closing sale price of our ordinary shares on the NASDAQ Global Market was $3.63 and
$3.17. We may continue to experience significant volatility in the future, based on the
following factors, among others:

| |  | general
economic conditions;
| | - | ----------------------------

| |  | our
prospects;
| | - | --------------

| |  | actual
or anticipated fluctuations in our sales and results of operations;
| | - | --------------------------------------------------------------------------

16

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| |  | variations
between our actual or anticipated results of operations and the published
             expectations of analysts;
| | - | ---------------------------------------------------------------------------------------------------------------------------

| |  | general
conditions in the wireless broadband products industry and general conditions in the
             telecommunications equipment industry;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | announcements
by us or our competitors of significant technical innovations, acquisitions,
             strategic partnerships, joint ventures and capital commitments;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | introduction
of technologies or product enhancements or new industry substitute standards that
             reduce the need for our products;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
effect of general political conditions on our operations and results; and
| | - | -----------------------------------------------------------------------------

| |  | departures
of key personnel.
| | - | ----------------------------

We may be named defendants in
securities class action lawsuits, or in other time- consuming and expensive litigation,
that requires extensive management attention and resources and can be expensive, lengthy
and disruptive.

We
are currently a defendant in a securities class action litigation and we were a defendant
in another securities class action litigation that was dismissed in 2008, as described in
Item 8Financial InformationLegal Proceedings. We may be named in
the future as a defendant in other securities class action lawsuits or in other time
consuming and expensive litigation. Legal proceedings can be expensive, lengthy and
disruptive to normal business operations, and can require extensive management attention
and resources, regardless of their merit. Moreover, we cannot predict the results of legal
proceedings, and an unfavorable outcome of a lawsuit or proceeding could materially and
adversely affect our business, results of operations and financial condition.

Operating in international markets
exposes us to risks, which could cause our sales to decline, our operations to suffer and
expose us to various legal, business, political and economic risks.

While
we are headquartered in Israel, approximately 99% of our sales in recent years were
generated elsewhere around the world. Our products are marketed internationally and we
are, therefore, subject to certain risks associated with international sales, including,
but not limited to the following:

| |  | trade
restrictions, tariffs, and technology import and export license requirements, which may
restrict our ability to export our products or make them less price-competitive;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | effects
of economic conditions and credit availability;
| | - | -------------------------------------------------------

| |  | adverse
tax consequences;
| | - | -------------------------

| |  | greater
difficulty in safeguarding intellectual property;
| | - | ---------------------------------------------------------

| |  | difficulties
in managing our overseas subsidiaries and staffing multiple offices and multiple research
and development centers, and the increased travel, infrastructure and legal compliance
costs associated with multiple international locations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | difficulties
in enforcing contracts and implementing our accounts receivable function, which
introduces revenue recognition, translation, proximity and cultural challenges;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | political
and economic instability, particularly in emerging markets;
| | - | ---------------------------------------------------------------------

| |  | reduced
protection for intellectual property rights in some countries where we may seek to
             expand our sales in the future;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | laws
and business practices favoring local companies;
| | - | -----------------------------------------------------

| |  | differing
labor standards;
| | - | --------------------------

17

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| |  | costs
of localizing our products for foreign countries and the lack of acceptance of localized
             products in foreign countries; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | fluctuations
in currency exchange rates and the implications on our financial statements.
| | - | -----------------------------------------------------------------------------------------

We
may encounter significant difficulties with the sale of our products in international
markets as a result of one or more of these factors. As we expand our business globally,
our success will depend, in large part, on our ability to anticipate and effectively
manage these risks. Our failure to manage any of these risks successfully could harm our
international operations and reduce our international sales, adversely affecting our
business, operating results and financial condition.

There may be health and safety
risks relating to wireless products.

In
recent years, there has been publicity regarding the potentially negative direct and
indirect health and safety effects of electromagnetic emissions from cellular telephones
and other wireless equipment sources, including allegations that these emissions may cause
cancer. Our wireless communications products emit electromagnetic radiation. Health and
safety issues related to our products may arise that could lead to litigation or other
actions against us or to additional regulation of our products. We may be required to
modify our technology and may not be able to do so. We may also be required to pay damages
that may reduce our profitability and adversely affect our financial condition. Even if
these concerns prove to be baseless, the resulting negative publicity could affect our
ability to market these products and, in turn, could harm our business and results of
operations.

If our stock price declines
sufficiently, we may need to write down our goodwill, which may have a material adverse
affect on our operating results.

We
account for goodwill and other intangible assets under SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS 142). Under this standard, goodwill is
tested for impairment annually or more frequently if certain events or changes in
circumstances indicate that the carrying amount of goodwill exceeds its implied fair
value. We operate our business in a single reporting unit under SFAS 142, so we use an
enterprise approach to determine our total fair value. In the current capital markets
downturn, our stock price, and consequently our market capitalization, have declined, and
may decline further in the future. If the value of our market capitalization falls below
the value of our stockholders equity, it might indicate that a write-down of our
goodwill is required. Our ability to reconcile the gap between our market capitalization
and our enterprise value depends on various factors, such as an estimated control premium
that an investor would be willing to pay for a controlling interest in us. If our market
capitalization stays below the value of our stockholders equity, we may be required
to record impairment charges for our goodwill.

18

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# Risks Relating to Our
Location in Israel

# Conducting business in
Israel entails special risks.

We
are incorporated under Israeli law and our principal offices and the majority of our
manufacturing and research and development facilities are located in the State of Israel.
Political, economic and military conditions in Israel directly affect our operations. We
could be harmed by any major hostilities involving Israel, the interruption or curtailment
of trade between Israel and its trading partners or a significant downturn in the economic
or financial condition of Israel. In the event of war, we and our Israeli subcontractors
and suppliers may cease operations which may cause delays in the development,
manufacturing or shipment of our products. Additionally, several countries still restrict
business with Israel and with Israeli companies. Since October 2000, terrorist
violence in Israel has increased significantly. Recently, there has been an escalation in
violence among Israel, Hamas, the Palestinian Authority and other groups, as well as
extensive hostilities in December 2008 and January 2009 along Israels border with
the Gaza Strip, which resulted in missiles being fired from the Gaza Strip into southern
Israel. There were also extensive hostilities along Israels northern border with
Lebanon in the summer of 2006. Ongoing and revived hostilities or other Israeli political
or economic factors could harm our operations and cause our revenues to decrease.

Furthermore,
several countries, principally those in the Middle East, still restrict business with
Israel and Israeli companies. These restrictive laws and policies may seriously limit our
ability to offer our services to customers in these countries.

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

Many
of our officers and employees in Israel are obligated to perform annual military reserve
duty until they reach age 45 and, in the event of a military conflict, such as the recent
hostilities along Israels border with the Gaza Strip, could be called to active
duty. Our operations could be disrupted by the absence of a significant number of our
employees related to military service or the absence for extended periods of military
service of one or more of our key employees. A disruption could materially and adversely
affect our business, operating results and financial condition.

We currently benefit from
government programs and tax benefits that may be discontinued or reduced.

We
have received grants from the Government of Israel through the Office of the Chief
Scientist of the Ministry of Industry, Trade and Labor (OCS) for the financing
of a portion of our research and development expenditures in Israel, pursuant to the
provisions of The Encouragement of Industrial Research and Development Law, 1984, referred
to as the Research and Development Law. Pursuant to our current arrangement
with the OCS, the OCS will finance up to 20% of our research and development expenses by
reimbursing us for up to 50% of the approved expenses related to our generic research and
development projects. In addition, we obtain other grants from the OCS to partially fund
certain other research and development projects. These programs currently restrict our
ability to manufacture particular products or transfer particular technology outside of
Israel. The Research and Development Law and related regulations permit the OCS to approve
the transfer of manufacturing rights outside Israel subject to an approval of the research
committee and in exchange for payment of higher royalties, for royalty-bearing programs.
Under these programs we need to comply with certain conditions. If we fail to comply with
these conditions, the benefits received could be canceled and we could be required to
refund any payments previously received under these programs or pay additional amounts
with respect to the grants received under these programs. In recent years, the Government
of Israel has reduced the benefits available under these programs, and these programs may
be discontinued or curtailed in the future. If the Government of Israel discontinues or
modifies these programs and potential tax benefits, our business, financial condition and
results of operations could be materially and adversely affected.

19

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In
addition, we have been granted Approved Enterprise status under the Law for
the Encouragement of Capital Investments, 1959 (the Investment Law) for our
production facilities in Israel. Such status enables us to obtain certain tax relief for a
definitive period upon compliance with the Investment Law regulations. On April 1, 2005,
an amendment to the Investment Law came into effect which significantly changed the
provisions of the Investment Law. The amendment revised the criteria for investments
qualified to receive tax benefits. An eligible investment program under the amendment will
qualify for benefits as a Privileged Enterprise (rather than the previous
terminology of Approved Enterprise). Among other things, the amendment provides tax
benefits to both local and foreign investors and simplifies the approval process. However,
the amendment provides that terms and benefits included in any certificate of approval
granted prior to December 31, 2004 will remain subject to the provisions of the law as
they were on the date of such approval. We believe that we are currently in compliance
with these requirements. However, if we fail to comply with these conditions in the
future, the tax benefits received could be canceled and we could be required to pay
increased taxes in the future.

We
currently contemplate that a larger portion of our products will be manufactured outside
of Israel. This could materially reduce the tax benefits to which we would otherwise be
entitled. We cannot assure you that the Israeli tax authorities will not adversely modify
the tax benefits that we could have enjoyed prior to these events.

We are adversely affected by the
devaluation of the U.S. dollar against the New Israeli Shekel and could be adversely
affected by the rate of inflation in Israel.

Substantially
all of our revenues are generated in U.S. dollars. A significant portion of our expenses,
primarily salaries, building leases and related personnel expenses is incurred in NIS. We
anticipate that a significant portion of our expenses will continue to be denominated in
NIS.

As
a result, inflation in Israel and/or the devaluation of the U.S. dollar in relation to the
NIS has and may continue to have the effect of increasing the cost in U.S. dollars of
these expenses; hence, our dollar-measured results of operations are and may continue to
be adversely affected. In order to manage the risks imposed by foreign currency exchange
rate fluctuations, from time to time, we enter into currency forward contracts and put and
call options to hedge some of our foreign currency exposure. We can provide no assurance
that our hedging arrangements will be effective. In addition, if we wish to maintain the
dollar-denominated value of our products in non-U.S. markets, devaluation in the local
currencies of our customers relative to the U.S. dollar may cause our customers to cancel
or decrease orders or default on payment.

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

Our
Articles of Association contain certain provisions that may delay or prevent a change of
control, including a classified board of directors. In addition, the Israeli Companies Law
regulates acquisitions of shares through tender offers and mergers, requires special
approvals for transactions involving directors, officers or 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, and 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 acquisition transactions unappealing to us or to some of
our shareholders. For example, Israeli tax law may subject a shareholder who exchanges his
or her ordinary shares for shares in a foreign corporation to taxation before disposition
of the investment in the foreign corporation.

20

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It may be difficult to effect service
of process and enforce U.S. judgments against our directors and officers in Israel or
assert U.S. securities laws claims in Israel.

We
are incorporated in Israel. Our executive officers and some of the directors are not
residents of the United States, and a substantial portion of our assets and the assets of
these persons are located outside the United States. Therefore, it may be difficult to
obtain a judgment in the United Stated or collect or get an Israeli court to enforce a
judgment obtained in the United States against us or any of those persons. Furthermore, it
may be difficult to assert U.S. securities law claims in original actions instituted in
Israel.

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

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.

We
do not comply with the NASDAQ requirement that we obtain shareholder approval for certain
dilutive events, such as for the establishment or amendment of certain equity based
compensation plans. Instead, we follow Israeli law and practice in accordance with which
the establishment or amendment of certain equity based compensation plans is approved by
our board of directors.

As
a foreign private issuer listed on the NASDAQ Global Market, we may also follow home
country practice with regard to, among other things, executive officer compensation,
director nomination, composition of the board of directors and quorum at
shareholders meetings. In addition, we may follow our home country law, instead of
the NASDAQ Marketplace Rules, which require that we obtain shareholder approval for an
issuance that will result in a change of control of the company, certain transactions
other than a public offering involving issuances of a 20% or more interest in the company
and certain acquisitions of the stock or assets of another company.

A
foreign private issuer that elects to follow a home country practice instead of NASDAQ
requirements, must submit to NASDAQ in advance a written statement from an independent
counsel in such issuers home country certifying that the issuers practices are
not prohibited by the home countrys laws. In addition, a foreign private issuer must
disclose in its annual reports filed with the Securities and Exchange Commission or on its
website each such requirement that it does not follow and describe the home country
practice followed by the issuer instead of any such requirement. Accordingly, our
shareholders may not be afforded the same protection as provided under NASDAQs
corporate governance rules.

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

|A. | HISTORY
AND DEVELOPMENT OF THE COMPANY
|-- | --------------------------------------

We
were incorporated in September 1992 under the laws of the State of Israel. Since our
inception, we have devoted substantially all of our resources to the design, development,
manufacturing and marketing of wireless products.

On
August 1, 2001, Floware merged with and into us. As a result of the merger, we
emerged as the surviving company and Flowares separate existence ceased. Upon the
closing of the merger, we changed our name from BreezeCOM Ltd. to Alvarion Ltd. On April
1, 2003, we completed an acquisition of most of the assets and the assumption of related
liabilities of InnoWave Wireless Systems Ltd. In December 2004, we completed the
amalgamation of interWAVE Communications International Ltd., and the interWAVE operations
became our Cellular Mobile business unit (CMU). In November 2006, we completed
the sale of our CMU to LGC Wireless, Inc. (LGC), a privately-held supplier of
wireless networking solutions in exchange for promissory and convertible notes of LGC. In
September 2007, LGC converted our convertible notes into LGC shares and thus we became a
shareholder of LGC. In November 2007, ADC Telecommunication Inc. (ADC)
acquired LGC and we sold our LGC shares to ADC for approximately $7.3 million. See
Item 5Operating and Financial Review and ProspectsOperating
Results.

Our
principal executive offices are located at 21A HaBarzel Street, Tel Aviv 69710, Israel,
and our telephone number is 972-3-645-6262. In 1995, we established a wholly-owned
subsidiary in the United States, Alvarion, Inc., a Delaware corporation. Alvarion, Inc. is
located at 2495 Leghorn Street, Mountain View, CA, 94043, and its telephone number is
650-314-2500. Alvarion, Inc. serves as our agent for service of process.

We
also have several wholly owned subsidiaries worldwide that handle local support,
promotion, sales and developing activities. For a discussion of our capital expenditures
and divestitures, see Item 5Operating and Financial Review and
ProspectsLiquidity and Capital Resources.

|B. | BUSINESS
OVERVIEW
|-- | -----------------

General

We
concentrate our resources on a single line of business  wireless broadband. As a
wireless broadband pioneer, we have been driving and delivering innovations for more than
10 years, from developing core technology to creating and promoting industry standards.
Leveraging our key roles in the IEEE and HiperMAN standards committees and having
experience in extensive development and deployment of OFDM technology -based systems, we
have been in the forefront of the WiMAX Forum in its focus on increasing the
widespread adoption of standards-based products in the wireless broadband market and
leading the entire industry to mobile WiMAX solutions. The WiMAX standard is the outcome
of the standardization work done by the WiMAX Forum, widely based on the IEEE 802.16
standard working group.

Our
primary business is to provide solutions based on the 802.16e-2005 WiMAX standard and
other broadband wireless technologies for three main categories of applications:

| |  | Primary
Broadband: Primary broadband services provide subscribers with home and business
service connectivity to high-speed broadband networks for accessing Internet, Intranet,
virtual private network (VPN) and Voice over Internet Protocol (VoIP)
services. Solutions for primary broadband services provide high-speed wireless last
mile connectivity to the Internet for homes and businesses in both developed and
emerging markets. In the primary broadband market we currently continue to sell our
pre-WiMAX products in addition to our WiMAX standard products, which are growing in
sales.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Personal
Broadband: Personal broadband services are always-on, high-speed and all-IP-based
services that enable subscribers to take their broadband connection with them anywhere
and extend their mobile services to broadband speeds above 1 megabit per second (Mbps).
We believe that personal broadband services based on WiMAX technology will be gradually
introduced to the market by operators using WiMAX infrastructure during the second half
of 2009. Our solutions for personal broadband services are based on the WiMAX standard
and enable communication operators to offer anytime, anywhere (where the WiMAX network is
deployed) broadband services access to individuals on personalized devices, such as
notebook personal computers, personal digital assistants (PDAs) and smart
handsets (which are hand-held devices providing multiple services such as telephony, data
and digital services based on information technology). The personal broadband market
realizes the broad vision of mobile broadband service consumption that changes consumers lifestyle
and increases productivity and entertainment. Personal broadband networks are converging
several distinct services, such as mobile telephony, multi-media services and broadband
data access that are provided with different access infrastructure into a single, all-IP
network in a unified user device and in special purpose devices (such as consumer
electronic devices).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Broadband
wireless applications for vertical and defense markets: Broadband wireless
applications for vertical markets provide owners and operators of public networks,
private networks, utility companies, municipalities and government institutions with
broadband connectivity and applications that fulfill each organizations own
communication needs, rather than offering to subscribers communication services like the
two services above (primary and personal broadband). Examples of such applications
include government and municipal offices connectivity, security and surveillance
services, campus-to-campus broadband connectivity, oil & gas and mining company
applications, and many other machine-to-machine automated applications that require
high-speed wireless access. In this market, we sell both WiMAX and non-WiMAX solutions,
primarily in the license-exempt frequency bands.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

With
250 commercial WiMAX deployments worldwide, we believe that we are the worldwide leader in
providing WiMAX and wireless broadband access solutions. We supply top-tier carriers,
ISPs, new communications service providers known as Innovative Challengers,
and private network operators with solutions based on the WiMAX standard, as well as other
wireless broadband solutions.

Our
strategy is to leverage our business leadership, experience, market presence, leading
brand in our industry, technology leadership, innovative technologies and broad customer
base in WiMAX technologies, as well as in other broadband wireless technologies to enable
growth in our business for all types of applications for WiMAX technology.

# INDUSTRY DYNAMICS

# Our Existing Market:
WiMAX and Wireless Broadband for Primary Broadband Access Services

The Early Demand for
Wireless Broadband

In
the late 1990s, both consumers and businesses began to demand broadband  also known
as high-speed Internet data services  thus accelerating the establishment of DSL and
cable-based broadband networks (wired broadband infrastructure). These DSL and cable-based
broadband networks involved high investment costs, so the access network infrastructure
was not established everywhere the demand for broadband existed. Wireless broadband
networks stepped in to meet this unserved need for broadband services. The market for
wireless broadband networks exists primarily in the rural and suburban areas in developed
countries and in more developed areas in developing countries and emerging markets. By
bridging the digital divide or providing both broadband and basic telephony
services in areas where telecommunications infrastructure is poor or does not exist,
wireless broadband has grown to comprise more than 5% of the worlds broadband
networks.

23

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The Evolution of Wireless
Broadband

The
wireless broadband market has grown over the last decade due to the acceptance of wireless
equipment as a high performance, cost-efficient alternative to wireline infrastructure for
broadband connectivity.

In
developed countries, government financial support encourages operators to complete
broadband coverage in rural and suburban areas with low-density populations, where the
business model for wired infrastructure is less cost-effective. In developing countries,
government financial support is provided to encourage operators to offer basic telephony
services and Internet access based on wireless broadband infrastructure in order to meet
the demand, mainly in urban and suburban areas.

The
worldwide success of broadband connectivity and services creates demand for additional
broadband networks mainly in regions where broadband was not widely available. The
accelerated proliferation of broadband services and networks around the world as well as
commoditization of broadband devices and services has generated more demand for broadband
in developing regions, often referred to as the worlds emerging markets. In these
regions, wireline infrastructure is generally very poor and often non-existent, resulting
in an accelerated widespread adoption of WiMAX and non-WiMAX wireless broadband networks.

Government Deregulation
Creates Demand

Global
telecom deregulation is opening up the telecommunications and Internet access industries
to competition by new players. Unlike the built-in delivery systems of wireline
infrastructure, wireless technology requires the use of frequencies contained within a
given spectrum to transfer voice, multimedia and other data services. Usually, governments
allocate a specific range of that spectrum, either licensed or license-exempt
(unlicensed) bands, to incumbent Innovative Challengers and alternative
carriers, as well as cellular operators, ISPs and other service providers, enabling such
carriers and operators to launch a variety of broadband initiatives based exclusively on
wireless networking solutions. During 2008, additional licensed and unlicensed spectrums
were allocated in many regions around the world and we expect this trend to continue in
the future. Increased availability of licensed and unlicensed spectrums enables operators
to address increasing demand for wireless broadband.

Additional Factors in the
Widespread Adoption of Wireless Broadband

Over
the last few years, wireless broadband networks have increasingly grown in popularity, due
in part to the inability of wired infrastructure to meet demand, but also because of
the following factors:

| |  | competition
among various types of telecommunications players to offer multiple services using
             a single network;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | growing
trend of public access providers to build infrastructures owned by municipalities;
| | - | ------------------------------------------------------------------------------------------

| |  | rapid
progression of standardization by international authorities, such as the WiMAX Forum,
combined with the wide adoption of these standards by equipment vendors and carriers;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | attractiveness
of the business model offered to operators that use high performance
             standardized and interoperable products;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | convergence
of fixed and mobile services; and
| | - | ---------------------------------------------

| |  | increasing
availability of WiMAX ecosystem products, leading to reduction in the capital
expenditures (CAPEX) and operating expenses (OPEX) of network deployment and the
promotion of WiMAX operators competitiveness with traditional wireline broadband
service providers, such as DSL and cable.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Impact on Industry
Dynamics in Light of Global Economic Crisis

| |  | In
the emerging markets, we expect innovative operators in the traditional broadband segment
to face difficulties raising funds to create Greenfield networks. In addition, the OPEX
investment of incumbent broadband operators and incumbent cellular operators may
decrease, while targeting broadband connectivity.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
the developed markets, we expect to see lower budgets and lower investments by
telecommunication operators, in regions such as rural areas or wide zones, where our
technology is used to bridge the digital device.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | As
a result of the economic crisis, we may see an increase in projects capitalized by
governmental funds, as is the case in the United States, targeted to new broadband
infrastructure in rural areas and underserved regions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Personal
broadband innovation may be delayed, due to the overall credit crunch and the
unwillingness of operators to take any risk with new infrastructure for innovative
services.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

WiMAX Technology,
Applications and Industry Advantages

Mobile
WiMAX is a technology based on the IEEE 802.16e air interface standard and the ETSI
HiperMAN wireless metropolitan area network (MAN) standard. WiMAX is the
worldwide standard for wireless broadband access and personal mobile broadband
applications. Solutions based on WiMAX technology enable fixed-line, cable, and mobile
operators and new challengers to compete with each other in the anticipated market for
higher Average Revenue Per User (ARPU) services. WiMAX technology has the
capacity to deliver sufficient bandwidth to enable value-added applications,
including live video broadcasting, high-speed data, toll-quality voice and multimedia
content. Most importantly, the WiMAX (IEEE 802.16) standards were developed based on the
concept of an all-IP Network. A complete set of IP-based functions and
interfaces allow for high quality service delivery, while keeping end-to-end Quality of
Service (QoS) and minimizes investment and operating costs for operators with
its distributed architecture and efficient, packet-based air interface.

WiMAX
offers two technological advantages to the operators relative to the existing commercial
technologies: (i) a superior radio technology; and (ii) an open IP-based access network
infrastructure.

| |  | Superior
radio access technology: WiMAX benefits from advanced Non-Line-of-Sight (NLOS)
radio and antenna technologies, such as MIMO, Beam Forming, and Spatial Division Multiple
Access (SDMA). These new technologies can be used in fixed, portable and
mobile WiMAX networks and facilitate high spectral efficiency and obstacle penetration
(e.g., walls) resulting in best network coverage, capacity, low latency and improved user
experience. As a result, WiMAX offers lower infrastructure costs and reduced cost per
subscriber for the operator, compared with any other wireless technology.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Utilizing
its built-in strong QoS mechanisms, WiMAX technology has the capacity to deliver maximal
service quality under the subscribers Service Level Agreement (SLA) to
enable rich value-added applications, including high-speed data and Internet, live video
multicasting, toll-quality voice and multimedia content in both download and streaming
formats. These capabilities enable toll-quality delivery of differentiating services,
coupled with enhanced subscriber Quality of Experience (QoE).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

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| |  | Open
IP-based access network infrastructure: The WiMAX (IEEE 802.16) standard was
developed based on the concept of an open all-IP Network, which allows WiMAX
to leverage the vast IP-based telecom and enterprise industries. WiMAX, as an IP-based
connectivity standard, is able to easily and smoothly interface with any IP-based
equipment, device or network. This approach, following the success of the World-Wide-Web
Internet adoption, (a) minimizes investment in introducing new applications, thereby
creating new interfaces and interoperability connections, (b) enjoys the low prices and
abundance of information and know-how of the IP-based equipment world and (c) may
significantly reduce the operators capital and operational expenditures when
deploying such service networks. Therefore, the advantage of WiMAX over other mobile
networks is in offering a complete OPEN IP architecture. The formation of an industry
based on OPEN IP architecture can leverage on best-of-breed IP network equipment and
IP-based consumer electronics devices, thus creating an open Internet model of wireline
data over the new wireless WiMAX network.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
WiMAX standards are defined by the WiMAX Forum. The WiMAX Forum is a
non-profit organization focused on increasing the widespread adoption of standards-based
products in the wireless broadband market and leading the industry to mobile WiMAX
solutions. The WiMAX Forum members work to promote the interoperability of multiple
vendors products in the wireless broadband market. Since its establishment, the
WiMAX Forum members, working together with the IEEE, have established the first of
the standards on which fixed wireless broadband systems operate, namely the IEEE
802.16d-2004 standard and IEEE 802.16e-2005. These standards fully support fixed and
nomadic broadband wireless applications.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
WiMAX Forum defines the following types of access to a wireless network:

| |  | fixed
access, at a single stationary location for the duration of the network subscription;
| | - | -------------------------------------------------------------------------------------------

| |  | nomadic
access, at multiple stationary locations, allowing the user to change locations between
             sessions;
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | portability,
at multiple locations at walking speed, within a limited network coverage area,
             with hard handoffs between cells;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | simple
mobility, at multiple locations at low vehicular speed, within a network coverage area,
with hard handoffs between cells, enabling non-real time applications; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | mobility,
at multiple locations at high vehicular speed, within network coverage area, with
guaranteed handoffs between cells, enabling service continuity for all applications.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Our Next Developing
Market: Mobile WiMAX and Mobile Broadband for Personal Broadband Access Service

We
promote a new generation of personal broadband networks and services that enable
subscribers to take their broadband connection with them anywhere and add mobility to
their broadband service at throughput above 1Mbps. Personal broadband unites the fixed,
mobile and multimedia broadband worlds, offering subscribers a combination of high-speed
broadband and mobile services that are available anywhere. Personal broadband offers
always-on, high-speed and all- IP-based connectivity, providing direct access to the
mobile Internet and creating a dynamic market for various services and applications.

Personal
broadband capabilities are anticipated to be embedded in a wide range of computing,
telephony and consumer electronics devices to optimize personal lifestyle and professional
productivity. Following the adoption of the personal broadband service offering by
telecommunications operators, business applications once reserved for the office
environment and media content previously available only through a residential broadband
connection, are predicted to be available anywhere. These new personal broadband
capabilities would enhance traditional service provider business models and create
opportunities for new entrants to penetrate the market with alternative business
strategies.

26

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However,
for this next service level of personal broadband services to be adopted by consumers and
businesses, the technology must offer tight security, reliability, high quality of service
and broadband data speeds; in addition, vendors must offer diverse and innovative
applications with the right devices to utilize the applications.

To
differentiate themselves and target subscribers with higher ARPU, operators are interested
in providing what may be characterized as mobile DSL connectivity with the
primary application of mobilizing the Internet, namely broadband Internet
connectivity while on the go. So far, we believe that no technology has been able to
technically or economically support this type of service, which would be targeted
initially to highly developed, metropolitan areas.

We
believe that WiMAX is currently the technology that is the most advanced and best suited
to cost-effectively meet the requirements of personal broadband. WiMAX solutions, in
addition to being standards-based, benefit from the open architecture of an all-IP
network. Legacy wireline and wireless technologies are indeed standard but not entirely
IP-based with an open architecture, such as WiMAX. The WiMAX industry, in contrast to
other telecom standards and technologies, leverages the consumer electronics market
capabilities, such as IP innovation, creativity, low cost and advanced services. We are
aiming to be at the center of these dynamics through our position as a member of the WiMAX
Forum and through our go-to-market strategy and business relationships with various
partners. An example of our continuing strength in this area is that we received WiMAX
certification for our 2.5 GhZ product in 2008 and our 3.5 GhZ product in 2009.

# COMPANY STRENGTHS

For
more than 15 years, our primary business activity has been focused on fulfilling the
growing demand for IP wireless broadband in the telecom industry by providing solutions
and services to build wireless broadband networks. In addition, we have deployed through
our customers fixed wireless broadband solutions for applications, such as toll quality
telephony service, mobile base station feeding, hotspot coverage extension, municipal and
community interconnection, utility company metering and monitoring applications, as well
as public safety communications. The Companys key strengths include:

| | Market
Leadership and Brand Recognition: We believe that we are the worldwide leading WiMAX
vendor with a single business focus in broadband wireless access equipment and we enjoy a
strong brand identity.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Customer
Base: We have a broad customer base, with 250 WiMAX commercial deployments. We
believe that our product offerings are the most extensive in the market.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Technology:
We have over 15 years of experience in end to end broadband wireless IP and we believe we
have been the leader in the broadband wireless access market for more than a decade. In
addition, we have continued our leadership in the relevant standardization organizations
(IEEE 802.16, WiMAX Forum).
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Execution
Capabilities:
|- | -----------------------

| |  | We
have the ability to deliver and deploy a complete end to end solution in terms of
product, technology, and full end-to-end network deployments and to build long-term
customer satisfaction.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
believe that we have the ability to compete with any other player in this industry, while
keeping our flexibility and technology differentiators according to customer demands and
needs.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Strategic
Relationships: We are actively partnering with industry and market leaders to create
go-to-market strategic relationships and best-of-breed end-to-end wireless broadband
network solutions.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Our Wireless Broadband
Experience Enables Us to Leverage the Potential of WiMAX

Our
wireless broadband experience enabled us to identify the potential of WiMAX in early 2002,
ahead of most equipment vendors. As a result of this experience and early strategic
decisions, by 2007, we led the market in the number of deployed WiMAXbased networks.
We have been at the forefront of developments with WiMAX technology since its inception,
at a Company and industry level. Examples of our active involvement include major roles in
the standardization process through our work in the WiMAX Forum as a charter board
member and by chairing key working groups. In addition, our employees are active in other
related technology organizations, such as Wireless Communications Association, IEEE
802.16, ETSI BRAN-HiperMAN and ITU standards.

Single Evolving WiMAX
Platform

We
believe that we hold a distinct advantage in the nascent market for personal broadband
services, since our WiMAX platform was designed from the ground up according to the IEEE
802.16 standard and WiMAX Forum specifications to provide operators with primary broadband
solutions, personal broadband solutions and a path of service growth required to extend
the service offering from Primary to personal broadband services. With our single and
evolving WiMAX platform, we strive to enable our customers to compliment their business
models with innovative service offerings.

# STRATEGY FOR GROWTH

Our
strategy for future growth is focused on providing complete end-to-end broadband wireless
solutions, maintaining our current leadership position in existing primary broadband
markets and growing along with the market demand for fixed and nomadic applications, while
leveraging our strengths to become a significant participant in the personal broadband
market. We have accomplished significant milestones in terms of product development,
agreements with third parties to integrate their products into our complete solution,
enhancement of know-how and execution of turn-key projects in order to offer a complete
end-to-end broadband wireless solution to telecommunication operators.

Opportunities for
Providing Personal Broadband Solutions Based on OPEN Architecture

The
developing demand for personal broadband services has caused us to expand our focus to
include a new set of users, both in terms of socioeconomic groups and geographic markets.
The developing demand has also led us to target a different type of telecom operators.
With our experience and knowledge of wireless technologies, we believe that WiMAX
technology will be one of the best to satisfy personal broadband needs. In addition to its
high technical capacities, the interoperability and standardization of WiMAX-based
products and networks are expected to offer lower-cost, volume-produced standard chips and
systems. We believe that in turn, these low costs will be passed on to users, thus
encouraging service adoption for personal broadband services.

Our
goal is to become a major global WiMAX vendor of primary broadband and personal broadband
solutions by being at the forefront of exploring and maximizing the benefits of open
architecture characteristics of WiMAX to create a new operator-centric model based on
best-of-breed solutions from a variety of OPEN WiMAX ecosystem partners.

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# The WiMAX Transformation
to OPEN Architecture

The
dynamics of WiMAX creates an all-IP open architecture, removing barriers to entry and
facilitatingrapid innovation. Designed from the start as an open
standardized interoperable technology, OPEN WiMAX is a network strategy that enables a
complete ecosystem, including radio access network equipment, core network equipment,
consumer electronics, service offerings and applications. This new strategy enables
communication service providers to choose the combination of vendors and partners that
best fit their specific requirements.

OPEN
WiMAX is designed to enable multiple telecom vendors to build a best-of-breed telecom
access network in an open standard architecture. It creates a telecom operator-centric
offering, concept or culture as opposed to a vendor-centric approach, historically used in
large telecom projects.

OPEN
WiMAX is open to innovation and is intended to enable an offering of mass-market consumer
electronics combined with low cost and economies-of-scale. OPEN WiMAX is highly scalable
and suitable for large, medium or small deployments that assist operators to optimize
WiMAX network deployment costs and fit the expenditures to the desired services-centric
network  both in terms of capital expenditures and operating expenses during the
operation of the network. This mix and match multi-vendor approach may promote
competition, which drives prices down and enhances the product offering. Innovative
products and services for WiMAX, such as mobile TV and mobile gaming for personal use and
Virtual Private Network and File Transfer for business use, enable vendors to distinguish
themselves from the competition.

Open
networks in general, and OPEN WiMAX in particular, promote the long-term success of
service providers in the highly competitive markets of broadband services, by offering the
following:

| |  | superior
performance combination (i.e., "best-of-breed") of network equipment to meet service
                  providers' requirements;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | wide
variety of subscriber service and openness to enable future services and applications;
| | - | -------------------------------------------------------------------------------------------

| |  | increased
purchasing power to promote service providers business model; and
| | - | ---------------------------------------------------------------------------

| |  | improved
risk management, including sustainability against possible changes in vendors strategy,
products and services, as the service provider is not limited to a single or only a few
vendors.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
believe that, in the near future, operators will build open IP networks. WiMAX is based on
open IP networks; therefore, the OPEN WiMAX strategy is a direct implementation of one of
the strong WiMAX innovation fundamentals. We believe that pure players (meaning companies
focused on a single field of activities that are not diversified), each an expert in its
own field, will team to create best-of-breed offering. We believe that adopting our OPEN
WiMAX strategy, differentiates us from our competitors and provides us with a competitive
advantage over large telecom vendors, as we offer a best-of-breed one stop-shop, rather
than a single offering from a single vendor.

An
example of our expanding OPEN WiMAX ecosystem is our cooperation with Accton Technology
Corporation of Taiwan with whom we formed Accton Wireless Broadband in January 2007, to
develop mass market cost-effective WiMAX consumer electronic devices. These devices are
intended to complement our WiMAX offerings while facilitating the availability of WiMAX-
based personal broadband services. This cooperation is planned to augment our
4Motion, our OPEN WiMAX solution, by including a variety of industry-standard,
WiMAX-enabled devices and customer-premise equipment, while enhancing the number and types
of self-installable and outdoor WiMAX subscriber units. See
Products4Motion Solutions.

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PRODUCTS

BreezeMAX
Platforms - our WiMAX Solutions for fixed, nomadic and mobile applications

Our
WiMAX-based BreezeMAX Frequency Division Duplex (FDD) and Time Division Duplex
(TDD) (BreezeMAX) platforms are designed from the ground-up
according to the IEEE 802.16 standard. BreezeMAX platforms feature advanced OFDM and
OFDMA  technologies to support NLOS operation, adaptive modulation up to QAM64 and
the highest spectral efficiency available. Currently commercially available and operating
in the 2.3, 2.3WCS, 2.5, 3.3, 3.5, 3.6 and 5.2 GHz licensed frequency bands, BreezeMAX
meets the immediate customer demand for cost-effective, next generation broadband wireless
systems with a platform designed around the implementation of the IEEE 802.16 and HiperMAN
standards by the WiMAX Forum. The BreezeMAX carrier-class design supports broadband
speeds and QoS to enable carriers to offer quadruple play (meaning broadband data, voice,
mobility and multi-media) services to thousands of subscribers in a single-base station.

BreezeMAX
has quickly become a popular solution for operators offering fixed high-bandwidth, VoIP
and data services to evolve their networks to industry-standard solutions with improved
outdoor and indoor CPE economics. This platform includes an enhanced offering of primary
voice services and allows an operator to leverage legacy voice infrastructure. This
systems features and cost-effective, versatile subscriber units make BreezeMAX a
preferred broadband wireless solution for service providers that are interested in
improving their business model.

From
the last quarter of 2006, we have introduced commercially outdoor and indoor Si CPEs based
on Intel last generation WiMAX chipset, Intel Connection 2250 (also called Rosedale 2).
The advantage of these CPE is in supporting both standards of IEEE 802.16-2004 and
802.16-2005 as well as both duplex of FDD and TDD modes of operations in a single
hardware. During last year, the BreezeMAX indoor Si CPE opened the door for personal
broadband and primary broadband WiMAX standard-based solutions and enabled nomadic
services via quick deployments based on a plug-and-play installation. In addition, the
BreezeMAX indoor Si CPE enabled centrally provisioned, portable connectivity for
subscribers to use the CPE in various points within the network coverage and reconnect to
the service after moving from one location to another.

The
BreezeMAXs FDD platform was designed according to the IEEE 802.16-2004 standard, and
was partially certified by the WiMAX Forum during 2006 for fixed and nomadic
networks, for both Base Stations and CPEs. In early 2007, we introduced our TDD
pre-certified IEEE 802.16-2005 platform that was designed for fixed and nomadic networks.
Our new BreezeMAX platform, which is part of our 4Motion solution, provides support for
fixed, nomadic and mobile WiMAX, and is being designed according to the IEEE 802.16e-2005
standard for portable and mobile networks.

IEEE
802.16e-2005 compliant technology enables portable and mobile networks to be IP-based,
with a focus on open standards, end users and consumer devices. Portable access is defined
according to the WiMAX Forum to apply to handsets, PDA, laptop Personal Computer
Memory Card International Association (PCMCIA) or mini cards at multiple
locations, at least at walking speed, and enables a hard handoff of devices, in which the
subscriber terminal is disconnected from one base station before connecting to the next
base station. Mobile access ranges in scope from low to high vehicular speeds but adds
PDAs and smart-phone devices, multiple locations and enables a soft handoff, in which the
subscriber maintains a simultaneous connection with two or more base stations for a
seamless handoff to the base station with the highest quality connection. Both consumer
and business users have driven the demand for this technology that has resulted from the
convergence of fixed broadband networks and mobile voice networks towards mobile broadband
communications.

30

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4Motion Solution

Our
mobile WiMAX solution, called 4Motion, was introduced to the market during the second half
of 2006 and was commercially deployed in the market in mid 2008. 4Motion is an
end-to-end mobile WiMAX solution designed to comply with the IEEE 802.16e-2005 standard.
The solution portfolio was developed in conjunction with leading providers of core network
and IP technology, devices and integration services and its evolution is under continuous
development. 4Motion offers an open, end-to-end, carrier-class, scalable and
cost-effective mobile broadband data solution that delivers personal broadband services of
several Mbps per subscriber or more. Offering the benefits of the OPEN WiMAX approach to
network strategy, our 4Motion solution provides operators with the flexibility to
choose best-of-breed multi-vendor partners to add third-party IP services, while
controlling costs.

The
4Motion solution includes Radio Access Network (RAN), which is based on
our BreezeMAX WiMAX base-station platform and includes third parties core network,
radio and IP networking elements, end-user devices and subscriber applications.

4Motion
enables a wide range of deployment scenarios, such as (i) personal mobile and fixed
broadband, (ii) wireless DSL, (iii) residential and business quadruple-play and (iv)
municipal, public safety and video surveillance.

We
also expect 4Motion to support broadband connectivity for both business and personal
services, such as mobile TV, online gaming, instant messaging (IM), VoIP, video
conferencing, Internet browsing, mobile applications, location-based services
(LBS), VPN and file transfers (FTP).

Our Wireless Broadband
Access Solutions (Non-WiMAX)

Although
our primary focus is to provide solutions based on the WiMAX standard, we also continue to
sell our non-WiMAX products in the short and mid-term. We provide a broad range of
integrated fixed wireless broadband solutions, addressing different markets and frequency
bands, designed for the various business models of carriers, service providers and private
network operators. Our products are usually used in a point-to-multipoint architecture and
address a wide scope of end-user profiles, including residential, small office/home office
(SOHO), small/medium enterprises (SME),
multi-tenant/multi-dwelling units (MTU/MDU) and large enterprises (corporate). Our
products operate in licensed and license-free bands, ranging from 900 MHz to 28 GHz and
comply with various industry standards. Our core technologies include spread spectrum
radio, linear radio, digital signal processing, modems, MAC (media access control),
IP-based mobile switches, networking protocols and very large systems integration
(VLSI).

Our
fixed wireless broadband solutions are based on OFDM technology with NLOS capabilities,
creating more possibilities to cover a wireless access network.

We
offer applications in which access to the end user is provided by wireless broadband
systems. These access applications can be utilized by telecom operators, service providers
and regional carriers based on the needs of their regions of operation. Fixed wireless
broadband solutions are implemented in a modular infrastructure, enabling swift,
cost-effective roll-out as needed. Sectorized base stations are deployed to provide radio
coverage to the targeted area, and frequency channels are reused in non-adjacent base
station sectors, making the most efficient use of the available spectrum. Base stations
are connected to the operators central office, or point-of-presence, using wired or
wireless point-to-point solutions. End users are provided with customer premises
equipment, or CPE, typically consisting of an outdoor unit with a radio and an antenna
connected to an indoor unit or indoor self-installed unit, which present voice and data
interfaces to the customer network. The entire wireless broadband network is connected to
the carrier backbone.

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BreezeACCESS Products
(BreezeACCESS II, XL, VL, OFDM)

BreezeACCESS
enables fixed high-speed data and voice, point-to-multipoint wireless broadband
applications. BreezeACCESS products operate in several frequency bands to meet the needs
of service providers and telecom operators worldwide. The BreezeACCESS product family
consists of base stations, including access units, controllers and subscriber units. The
latter operates optimally when connected to computers or computer networks utilizing the
Internet Protocol. The subscriber units include subscriber units for data applications and
subscriber units for data and telephony applications. BreezeACCESS is modular in design,
allowing for a low initial investment, and is scalable to enable future growth.

BreezeACCESS
OFDM products support fixed high speed wireless broadband access products currently in the
licensed 3.5 GHz band, and provide gross data rates of up to 12 Mbps.

BreezeACCESS
VL, OFDM-based fixed products operate in the 0.9, 4.9, 5.2, 5.3, 5.4, 5.7 GHz bands, which
are mostly unlicensed, and provide gross data rates of up to 54 Mbps. BreezeACCESS
Wi(2)combines the advantages of Wi-Fi access with the capabilities of
BreezeACCESS VL systems to provide cost-effective solutions for personal broadband
services today. With its design, BreezeACCESS Wi(2)gateway solutions can be
deployed almost anywhere to provide personal broadband to standard IEEE 802.11 b/g end
user devices such as laptops, PDAs, smart-phones and portable gaming devices. BreezeACCESS
Wi(2)solutions are ideal for operators, municipalities and communities looking
to build metropolitan broadband networks or to integrate Wi-Fi hot zone capabilities into
their existing broadband wireless access networks. This solution provides personal
broadband services ranging from public Internet access to public safety and Intranet
applications.

OFDM
technology, on which BreezeACCESS OFDM and BreezeACCESS VL are based, enables higher data
rates of up to 12 Mbps and up to 54 Mbps, respectively , by utilizing the available radio
spectrum in an efficient manner. In addition, OFDM technology enables NLOS operation with
robust resistance to interference. OFDM-based products enable carriers to use the
technology in applications where a high data rate is required, including serving medium to
large enterprises and high-speed backbone applications. The BreezeACCESS VL OFDM-based
system, which utilizes our proprietary air protocol and broad set of features along with a
high power radio, uses our open platform architecture and may be used with
other BreezeACCESS band versions (BreezeACCESS II, XL, V or OFDM), giving operators the
flexibility to use one band for service provisioning to residential, SOHO and SME
customers, while reserving high bandwidth for large enterprises and MTUs.

BreezeACCESS
wireless DSL products include BreezeACCESS II, BreezeACCESS XL, BreezeACCESS VL and
BreezeACCESS OFDM.

BreezeACCESS
II products operate in the unlicensed 2.4 GHz ISM band and provide gross data rates of up
to 3 Mbps.

BreezeNET B Product

Our
BreezeNET B products are designed to provide highly reliable, building-to-building
bridging solutions, support mobile connectivity and provide individuals or small groups of
users with wireless access to a LAN.

BreezeNET
B products function as a wireless bridge system that provides high-capacity and high-speed
point-to-point connectivity. The BreezeNET B system operates in the unlicensed 5GHz band
and enables operation in near and NLOS environments, such as buildings, foliage or
ridgelines. The system also features adaptive modulation for automatic selection of
modulation schemes to maximize data rate and improve spectral efficiency. BreezeNET B
supports security sensitive applications through optional use of authentication and data
encryption. The system supports Virtual Local Networks (VLANs), which enable
secure operation, and VPN services, which allow workers in remote locations or remote
offices to conveniently access their enterprise network.

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eMGW Products

The
enhanced MultiGain (eMGW) solutions are cost-effective, rapidly deployable,
point-to-multipoint fixed wireless access systems that provide data and voice services for
both residential and small business users, mainly in suburban and rural environments.
Utilizing radio links instead of copper lines to bridge the last mile, the eMGW products
enable rapid deployment of quality services to residential or SOHO customers. The products
ensure the optimal utilization of the available spectrum and minimum interference,
regardless of topography.

eMGW
provides fast Internet access, corporate access and carrier-class telephony in a single
system. It also enables LAN-to-LAN connectivity over IP-VPN tunnels for businesses, fax
(G3) and dial-up modem (v.92/56Kbps) services for residential subscribers and leased line
services. eMGW operates in a broad range of licensed and unlicensed (ISM) bands, from 1.5
to 5.7 GHz. eMGW provides coverage of up to 25 kilometers in very challenging environments
and operates in NLOS installation scenarios. The eMGW is the optimal price / performance
fixed wireless access system for operators who need to provide coverage to subscribers in
green fields, to upgrade existing networks with advanced data services and to provide
wireless DSL services in low and medium subscriber density areas.

eMGW,
which has a scalable and modular architecture, is comprised of an indoor base station
controller, an outdoor base station radio, an indoor subscriber interface and an outdoor
subscriber terminal. It also includes a network planning tool and a network management
system featuring fault, configuration, performance and security management.

eMGW
is based on our frequency hopping Code Division Multiple Access (CDMA)
technology and utilizes our innovative hybrid switching transmission
technology, combining circuit switching for toll quality voice and packet switching for
fast data services, optimizing the utilization of spectrum resources. This hybrid
switching concept provides a solution for the economic and technological challenges
facing network operators today.

WALKair Products

The
WALKair system is a wireless broadband system that enables carriers to provide
high-speed Internet access, other data services and voice services primarily to
SMEs.  WALKairs high spectral efficiency, dynamic bandwidth allocation,
effective frequency reuse plan and high coverage capacity enable carriers to connect
last-mile business subscribers to their network in an efficient and cost-effective manner.

Our
WALKairproducts consist of WALKair1000 that operates in the 3.5, 10.5 and
26 GHz licensed bands, and WALKair3000 that operates in the 3.5, 10.5, 26 and 28
GHz bands.

WALKairproducts are based on time division multiplexing technology.  WALKairsystems support a complement of value-added classes of services including VPN, VLAN
and QoS, based on per-user allocation of committed data rate and maximum data rate.

WALKair
3000 accommodates carriers requirements for broader bandwidth, primarily driven by
the growing use of data-intensive Internet applications.  It also enables carriers to
efficiently connect multiple subscribers in multi-tenant buildings by a single terminal
station.  WALKair 3000 supports significantly broader bandwidth for each
customer and increased capacity for each cell, increasing the peak speed of transmission
of each terminal station to up to 36 Mbps.  WALKair3000 integrates smoothly
with WALKair 1000, which enables carriers to deploy both systems on the same base
station, serving a variety of subscribers with different needs for communication services,
within the same cell.

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Network Management
Solutions for Both WiMAX and Non-WiMAX Wireless Broadband

We
provide advanced management applications for our wireless solutions. Our network
management applications are equipped with graphics-based user interfaces and provide a set
of tools for configuring, monitoring and effectively managing our wireless broadband
networks. Our flagship carrier-class Network Management System is the AlvariSTAR that
fully compliant with Telecommunications Management Network (TMN) standards and simplifies
network deployment and maintenance for networks of every scale. AlvariSTAR can be used to
manage multiple Alvarion solutions, including BreezeMAX, 4MotionTM, BreezeACCESS VL and
BreezeNET B.

Our
full portfolio of network management products include:

| |  | AlvariSTAR,
which configures, monitors and manages our BreezeMAX, 4Motion and BreezeACCESS
products;
| | - | ----------------------------------------------------------------------------------------------------

| |  | WALKnet,
which configures, monitors and manages our WALKair products; and
| | - | -------------------------------------------------------------------------

| |  | IMS,
which configures, monitors and manages our eMGW product.
| | - | -------------------------------------------------------------

AlvariSTAR,
WALKnet and IMS are multi-platform simple network management protocol (SNMP)
applications. Using standard and private SNMP agents incorporated in the products, these
applications, operating under the HP Open View network management platform, enable
configuring, managing faults and monitoring performance of all system components from a
central management station.

Accessories Offered by
Alvarion

In
order to support our products and provide comprehensive solutions to our customers, we
provide a family of accessories designed to extend the range of our BreezeMAX, 4Motion,
BreezeACCESS, WALKair and BreezeNET solutions. These accessories include antennas, cables,
surge arrestors, amplifiers and other components.

Our Geographic Markets

Until
now, our network installations have been typically found in developing regions in
developed countries and in emerging markets.

Within
developed countries (defined as countries with overall high levels of economic
prosperity), there are rural or suburban regions with low-density populations, often
extending over vast distances, that have limited telecommunications infrastructures. WiMAX
and wireless broadband have made inroads in these areas due to the business opportunities,
robust equipment, extensive coverage and non line-of-sight capabilities. In addition,
government assistance in closing the digital divide in these countries has
served as an incentive for alternative operators to consider WiMAX systems for providing
broadband services. Examples of these locations have been identified in the United States,
Western and Eastern Europe, Asia Pacific and South America.

We
believe that wireless broadband service providers in emerging markets have found that
deploying wireless broadband and new WiMAX solutions where there is a lack of
telecommunication coverage due to poor infrastructure is an affordable means to provide
broadband and telephony services. Emerging markets are countries where basic voice
services combined with broadband data remain scarce. Examples of these locations are in
Africa, Commonwealth of Independent States, former USSR (CIS), Eastern Europe,
Latin America, Central America and Asia Pacific.

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In
2008, the industry continued to show additional WiMAX penetration and a growing interest,
primarily in emerging markets and developing regions within developed countries. In
addition, the WiMAX industry began to provide cost-effective infrastructure that can
compete with broadband DSL and cable operators in the developed countries.

We
hope to continue to benefit from the expected evolution of WiMAX, building from nomadic
and portable, to fully mobile services, that enables us to penetrate the high-end,
metropolitan consumer and business user groups.

Geographic Breakdown of
Our Revenue

| |                                | 2006 | 2007 | 2008
| | ------------------------------ | ---- | ---- | ----
|
|
|
|
| | North America                  |      |      | $   
| | Latin America                  |      |      |     
| | Europe, Middle East and Africa |      |      |     
| | Asia Pacific                   |      |      |     
| |                                |      |      | $   

General  Industry
Market Segments and Players

The
operators in the wireless broadband market fall within the following categories, as
determined by the industry:

Communications Service
Providers: Tier One and Tier Two Operators

Tier
One and Tier Two operators  both Fixed Network Operators (FNOs) and
Mobile Network Operators (MNOs)  form the largest and most established
group of telecom operators, with nationwide or global presence, serving tens of million of
users. These operators are a primary focus for our WiMAX equipment since these operators
have a strong, strategic interest in deploying WiMAX in their networks. Tier One and Tier
Two carriers are looking for the technology that will enable them to maintain their
position at the front line of communications business within their home countries, as well
as quickly expand their business by providing telecommunications services in neighboring
countries. Examples of Tier One and Tier Two carriers that have publicly indicated their
strategy include: Telkom South Africa Ltd., Cable & Wireless International, Telenor,
Sviaz Invest, Nippon Telegraph and Telephone West Corporation (NTT West), AT&T, France
Telecom, Eircom, Bharti and Telefonos de Mexico S.A. de C.V. Historically, these operators
have shifted slowly to new technologies, although many of them are involved in trials with
our WiMAX equipment.

In
addition, cellular operators are able to leverage their infrastructure, radio base-station
sites and customer base, together with their marketing, services and billing platforms,
and customer support investments, to offer media centric, personal broadband services and
competitive broadband Internet access services to their existing customers or new
customers. Examples of operators in this group include Orange, Vodacom, Digicel, Megafone,
Meditel, MTN and Entel (Chile).

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Innovative
Challengers

Innovative
Challengers are the broadband service providers that are building their business model
primarily on WiMAX solutions, while providing in many cases improved services compared to
legacy telecommunication operators. Innovative Challengers are expected to constitute a
greater portion of the WiMAX market in the future. Examples of service providers in to
this category include Bolloré Telecom (France), Digital-Bridge Communications
(USA), WiMAX Telekom (Austria), Enforta (Russia), Free (France), Iberbanda in Spain (a
subsidiary of Telefonica de Espana), Irish Broadband and Ertach (Argentina). Innovative
Challengers are also becoming early adopters of WiMAX portable and mobile services.

CLECs
& Regional Carriers

Competitive
Local Exchange Carriers (CLECs) seek to compete effectively with the Incumbent
Local Exchange Carriers (ILECs). Wireless broadband is an attractive and
cost-effective last-mile alternative to wired access solutions. CLECs are deploying our
products to provide voice and broadband services in rural and suburban areas where
wireline infrastructure does not exist or does not support the demand. In addition, in the
areas of landline infrastructure in developed countries, wireless broadband systems offer
carriers the ability to reach otherwise inaccessible customers, while providing increased
bandwidth flexibility and service differentiation, surpassing the inherent limitations in
wireline infrastructure.

CLECs
have constituted an important part of our focus in our fixed wireless access product line
and have increasingly exhibited an interest in WiMAX. The reduced installation costs,
rapid roll-out potential and modular architecture, coupled with high network capacity and
coverage and enhanced service options, present an appealing alternative to service
providers and regional carriers seeking to supply their customers with reliable
comprehensive data and voice solutions. Examples of these operators include Euskaltel
(Spain), Finnet (Finland), TDS (USA), VMAX (Taiwan), Wisper (USA), Elro (Denmark), Linkem
(Italy), Czech on line, Altitude (France), KDN (Kenya), Millicom and Peterstar (Russia).

Government,
Municipalities, Communities and Private Network Operators

Private
and government sectors that operate private networks for business management and
operations are in constant need of deploying technologies to support their operational
requirements. Examples of such requirements are enterprises that require leased line
replacement for cost-effective connectivity to provide VoIP and data services;
metropolitan area networks for broadband connectivity; metering and monitoring
applications used by utility companies to collect information and supervise operations;
and cost-effective access within communities, municipalities and educational institutions.
Another area that has leveraged broadband wireless very effectively has been surveillance,
public safety and municipal applications. Government authorities and private organizations
with government sponsored funds have begun to deploy broadband wireless systems to support
remote video surveillance, traffic flow management, back-up for disaster recovery, leased
line replacement, various forms of backhaul and other public safety uses. Examples may be
found in various U.S. communities such as Lenexa, Kansas and Corpus Christi, Texas, and
many others in the Silicon Valley.

2008 Partial Customer
List for WiMAX and Other Fixed Wireless Broadband Systems

Telecom
carriers and service providers using our products include, among others:

| |  | ACCESS
KENYA
| | - | ------------

| |  | AIRCEL,
INDIA
| | - | -------------

| |  | ALLEGRO
NETWORKS, AUSTRALIA
| | - | ---------------------------

| |  | ALLTEL,
USA
| | - | -----------

| |  | ALTITUDE
TELECOM, FRANCE
| | - | ------------------------

| |  | BALTICUM
TV
| | - | -----------

| |  | BHARTI
TELE-VENTURES LIMITED ( AIRTEL ENTERPRISE SERVICES), INDIA
| | - | -----------------------------------------------------------------

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| |  | CABLE
& WIRELESS, Worldwide
| | - | ---------------------------

| |  | CENTER
TELECOM, RUSSIA
| | - | ----------------------

| |  | CIELUX,
DRC
| | - | -----------

| |  | DIGICEL,
CARIBBEAN
| | - | ------------------

| |  | DIGITAL
BRIDGE COMMUNICATIONS, USA
| | - | ----------------------------------

| |  | ELRO,
DENMARK
| | - | -------------

| |  | EMTEL,
MAURITIUS
| | - | ----------------

| |  | ENFORTA,
RUSSIA
| | - | ---------------

| |  | ENTEL
CHILE SA, CHILE
| | - | ---------------------

| |  | ERTACH
SA (FORMERLY MILLICOM), ARGENTINA
| | - | ----------------------------------------

| |  | FINNET
GROUP, FINLAND
| | - | ---------------------

| |  | GHANA
TELECOM, GHANA
| | - | --------------------

| |  | IBERBANDA,
S.A, SPAIN
| | - | ---------------------

| |  | ICE
COSTA RICA
| | - | --------------

| |  | IRISH
BROADBAND INTERNET, IRELAND
| | - | ---------------------------------

| |  | JSC
COMSTAR - UNITED TELESYSTEMS, RUSSIA
| | - | ----------------------------------------

| |  | KDN,
KENYA
| | - | ----------

| |  | LINKEM
ITALY
| | - | ------------

| |  | MEGAFONE,
RUSSIA
| | - | ----------------

| |  | MONACO
TELECOM, MONACO
| | - | ----------------------

| |  | MONARCH
COMMUNICATIONS, NIGERIA
| | - | -------------------------------

| |  | MTN
UGANDA, UGANDA
| | - | ------------------

| |  | NEOTEL
DOO, - MACEDONIA
| | - | -----------------------

| |  | NETIA
SA, POLAND
| | - | ----------------

| |  | NGI,
ITALY
| | - | ----------

| |  | NTT
WEST, JAPAN
| | - | ---------------

| |  | ORANGE
BOTSWANA
| | - | ---------------

| |  | RACSA,
COSTA RICA
| | - | -----------------

| |  | SOVINTEL,
RUSSIA
| | - | ----------------

| |  | TELECOM
NAMIBIA, NAMIBIA
| | - | ------------------------

| |  | TELEFONICA
CELULAR DEL PARAGUAY
| | - | -------------------------------

| |  | TELEKOM
SERBIA, SERBIA
| | - | ----------------------

| |  | TELKOM
SOUTH AFRICA LTD., SOUTH AFRICA
| | - | --------------------------------------

| |  | TELENOR,
NORWAY
| | - | ---------------

| |  | TPSA
POLAND, POLAND
| | - | -------------------

| |  | TRANS
TELEKOMUNIKACJA POLSKA S.A., BULGARY
| | - | ------------------------------------------

| |  | UKRANIAN
HIGH TECHNOLOGIES, UKRAIN
| | - | ----------------------------------

| |  | VMAX,
TAIWAN
| | - | ------------

| |  | VODAFONE
ROMANIA S.A, ROMANIA
| | - | -----------------------------

# TECHNOLOGIES UNDERLYING
OUR PRODUCTS

We
use internally developed core technologies and continue to invest heavily in augmenting
our expertise in networking, radio, digital signal processing (DSP) modem
technologies, Media Access Control (MAC) technologies and Radio Resource
Management (RRM) technologies. We also participate as active members in
international standards committees.

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Networking Technology

To
support the OPEN WiMAX concept and our 4Motion solution as well as our BreezeMAX and
other products, we have developed or otherwise acquired, and continue to invest in,
networking expertise in the areas of IP Access and Mobile IP that is particularly adapted
for mobile WiMAX networks, Access Service Networks Gate Ways (ASN-GW),
Point-to-Point Protocol Over Ethernet (PPPoE) tunneling, VPN and VoIP, based
on industry standards, such as H.323, SIP and MGCP, and other Internet standards and
protocols. To support the SentieM technologies embedded in our 4Motion
solution as well as our BreezeMAX and other products, we have developed or otherwise
acquired, and continue to invest in, distributed radio architecture and hierarchical
ASN-GW network architecture. We have also developed, and are continuing to develop,
know-how to satisfy market requirements with respect to quality of service, classes of
services, committed information rate, maximum information rate, virtual LAN management and
prioritization. We are developing access technology based on the IEEE 802.16-2004 (16d)
and the IEEE 802.16e-2005 (16e) standards, as well as the WiMAX Forum technical
specifications for both radio access and networking to further support the needs of
customers using WiMAX. We have also developed a network management system that provides
network surveillance, monitoring and configuration capabilities for all our products.

Radio Technology

We
have in-house radio development capabilities to address the diverse frequency bands and
modulation methods of our products. The frequency bands include, among others, 900 MHz,
2.4 GHz, 2.3, 2.5-2.7 GHz, or MMDS, 3.3-3.8 GHz, 4.9-6 GHz, 10.5 GHz and 26 and 28 GHz.
The modulation methods include Frequency Hopping Spread Spectrum (FHSS), Gaussian
Frequency Shift Keying (GFSK), Direct Sequence Spread Spectrum (DSSS), Single Carrier QAM
and OFDM and OFDMA. Our products include both TDD and FDD radios.

Our
radio teams specialize in low cost, mass-production oriented radio design. The system
level capability is software-assisted radio auto-calibration, which allows for reduced
manufacturing costs and compensates for components parameter spread and instability,
temperature-related changes and aging of components.

Our
internal radio expertise enables us to attract customers by addressing promptly new needs,
such as new frequency bands.

We
have developed or otherwise acquired, and continue to invest in, radio technology
expertise, specifically high efficiency, high power radios and new interfaces between the
modem and the remote radio heads.

Digital Signal Processing
(DSP) Modem Technology

We
maintain strong expertise in DSP and in modem design. Our capabilities include a hardware
oriented design, as well as programmable DSP oriented design. Our modem design hinges on
the Software Defined Radio paradigm. The extensive configurability of our base station
modems, through Field Programmable Gate-Array (FPGA) and DSP reprogramming, allows us to
readily introduce advanced features to our products and to follow amendments to emerging
standards, including capability to upgrade deployed networks by downloading only software.
Similarly, our CPE designs allow for upgradeability through over the air software
download, simplifying our customers operations.

We
have developed the BreezeMAX base station platform, which is designed to support the WiMAX
(IEEE 802.16 and HIPERMAN) air interface specification. The platform supports the multiple
antenna elements per sector to exploit the smart-antenna signal processing techniques for
improved coverage and network capacity. The programmable DSP-based architecture of the
BreezeMAX platform enables us to support the IEEE 802.16-2004 standard, as well as the
IEEE 802.16e-2005 standard for broadband mobile, while enjoying the benefits of OFDMA and
smart-antenna processing. The base station architecture and capabilities are closely
aligned and synchronized with the CPE application-specific integrated circuit
(ASIC) and reference design developed by Intel resulting from our
collaboration, which began in 2003, to ensure optimum performance in future WiMAX
deployments. We are working closely with additional Mobile WiMAX user terminal system on a
chip (SoC) silicon providers to ensure proper interoperation of our base station equipment
with their devices.

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To
support the SentieM technologies embedded in our 4MotionTM solution, as
well as our BreezeMAX and other products, we have developed or otherwise acquired, and
continue to invest in MIMO and beam forming and SDMA technologies.

We
have also developed mixed signal ASICs containing DSP cores. Inclusion on-chip of
analog-digital converters is instrumental to both cost reduction and power consumption
reduction. First generation ASIC supports our IEEE 802.11-based FH-GFSK products, with the
above-standard capability of delivering 3 Mbps, with automatic fall back to 2 Mbps and 1
Mbps as necessary. Our second generation ASIC is optimized for OFDM modulation, as used by
the IEEE 802.11a/g standards and the recently approved IEEE 802.16a standard. This ASIC is
based on proprietary programmable very long instruction word DSP architecture.
The programmable architecture allows us to implement numerous beyond-standard
capabilities, such as OFDMA extensions to the baseline OFDM mode. This system-on-a-chip
ASIC has been used as a key component of our BreezeACCESS-OFDM products. An additional
ASIC developed in-house supports our WALKair products, with a full duplex
point-to-multipoint single carrier trellis-coded 64QAM modem. An ASIC was developed for
the eMGW product to reduce the products costs.

We
designed the FWA eMGW system to provide data services to wireless subscribers on top of
voice services. The subscriber unit is based on our ASIC implementing functions of the PHY
and MAC layers of the air interface. The eMGW base station design includes Voice echo
canceling and fax/modem detection algorithm to support high spectrum efficiency while
ensuring toll quality voice.

MAC and RRM Technologies

We
have developed or otherwise acquired, and continue to invest in, MAC and RRM technology
expertise that support channel aware rate adaptation and power control technology (part of
the SentieM suite) technologies as well as advanced packet data scheduling and OFDMA
frame building technologies embedded in our BreezeMAX and 4Motion products. Additional
features developed or otherwise acquired are MAC and RRM support for MIMO transmissions in
the downlink, collaborative MIMO reception in the uplink and beam-forming in the downlink.

Participation in
International Standards Committees

As
part of our strategy to become a technology leader and influence the industry in specific
areas, we have, since our inception, been active members in standardization committees.

We
are a principal founder of the WiMAX Forum, a non-profit organization whose members
work to promote adoption of the IEEE 802.16 OFDM/OFDMA standard and to certify
interoperability of compliant equipment. Our representative on the board of directors of
the WiMAX Forum is Dr. Mohammad Shakouri, Corporate Vice President of Marketing at
Alvarion, who holds the position of Vice Chair of the WiMAX Forum and chairs the
Marketing Working Group. For a more detailed description of the WiMAX Forum, please
see Industry DynamicsOur Existing Market: WiMAX and Wireless Broadband
for primary broadband Access ServicesWiMAX Technology, Applications and Industry
Advantages.

39

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The
scope of the IEEE 802.16-based standard is the Wireless MAN, supporting larger range
fixed/nomadic/mobile broadband access networks with more performance and dedicated
high-end services. Our engineers actively participate in the technical group for defining
inter-operability profiles and tests. Our representative, Dr. Vladimir Yanover, holds the
position of chair of WiMAX Forums Technical Working Group (TWG), which is
responsible for defining the interoperability profiles and the interoperability and
conformance tests for the IEEE802.16e-2005 standard.

We
actively participate in the IEEE 802.16s Broadband Wireless Access work group.
Similarly, we are part of the WiMAX Forums groups that define and improve the
OFDM/OFDMA mode for both fixed and mobile broadband applications and that improve the
ability of the IEEE 802.16 standard to increase its market footprint in license-exempt
applications.

Mariana
Goldhamer, Director for Strategic Technologies at Alvarion, is Chair of IEEE 802.16h,
which targets Improved Coexistence in License-Exempt deployment. She is also ETSI BRAN
(Broadband Radio Access Networks) Vice-Chair and HiperMAN Chair. ETSI HiperMAN has adopted
the IEEE 802.16 OFDM mode and has recently embraced the OFDMA mode. Ms. Goldhamer is
acting to harmonize the IEEE and ETSI standards to create a worldwide broadband standard
for converged Fixed-Mobile applications.

We
have participated in the IEEE 802.11 wireless LAN work group, which is the driving force
behind increasing the data rate of the frequency hopping modem. Naftali Chayat,
Alvarions Chief Scientist, chaired the IEEE 802.11a task group, which is the first
OFDM based high-data rate wireless LAN standard.

We
are also very active in the international regulatory arena, including ITU-R, which aims to
promote WiMAX in the regulatory domain and to secure the spectrum for broadband
fixed/mobile deployment.

40

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# SALES, MARKETING AND
SUPPORT OF OUR PRODUCTS

We
market our products through an extensive network of more than 200 active partners. These
include OEMs, global and local system integration and service fulfillment partners in
various geographic regions, solution partners, national and local distribution partners,
and resellers. Our distribution partners in turn sell to resellers, including value-added
resellers and systems integrators, as well as to end users. We also market our solutions
and products directly to large operators.

We
currently sell and distribute our products in more than 150 countries worldwide. The use
of different types of marketing channels through our partnership network enables us to
market our products to many different markets and to meet the differing needs of our
customers.

Our
products are aimed at the WiMAX, other wireless broadband and wireless broadband combined
with wireless voice markets. We sell in these markets directly through OEM agreements or
other strategic partner arrangements with leading telecommunications suppliers, as well as
indirectly through our distribution channels, which market primarily to smaller ISPs and
operators. Additionally, to achieve broad and rapid market penetration, we cultivate
direct relationships with communication service providers. By doing so, we believe that we
are better able to understand the needs of new operators such as Innovative Challengers,
Tier One and global operators, and are better able to identify and anticipate trends in
the WiMAX and wireless broadband market.

We
have established relationships with major telecommunications equipment manufacturers such
as Hitachi Communications Technologies, Nokia-Siemens Networks, Alcatel- Lucent, Nera
Networks and global system integrators, such as Hewlett-Packard (HP) and IBM. Pursuant to
arrangements entered into with these partners, they are permitted to distribute our
products on either a regional or worldwide basis under private labels. We are seeking
additional strategic relationships with international partners, strong local partners and
other key companies to increase our exposure and establish ourselves as a supplier to
service providers, telecom markets and end-user markets that are not reached by our
present distribution channels.

On
June 11, 2008, we and Nortel Networks Limited (Nortel) entered into a joint
strategic agreement . Our agreement covered the resale by Nortel of our platform of WiMAX
access products in order to form, together with Nortels core network solutions,
backhaul solutions, applications services for WiMAX, an end-to-end solution for customers.
Our agreement also covered Nortels contribution of resources and funding to
accelerate our development of our portfolio of WiMAX base stations. Pursuant to the
provisions of our agreement, during the term, we were to be Nortels exclusive
supplier of WiMAX IEEE 802.16(e) 2X2/2X4 macro base stations and the parties designated
account leads in order to go to market in the most efficient and effective manner.

On
January 14, 2009 Nortel and certain of its subsidiaries and affiliates filed for
protection from creditors in several jurisdictions, including Canada, UK and the US. On
January 29, 2009, we were notified by Nortel of its decision to repudiate our agreement.
See Item 5 A Operating and Financial Review and Prospects2008
Highlights.

We
have strong relationships with leading incumbents and leading telecom operators to whom we
sell our solutions directly. Our relationships are primarily based on the following common
activities: (i) We are building together the industry and leadership position; (ii) We
have a common strategy and participate in world-wide standards authorities and consortia;
(iii) We have a positive commercial relationship and share a common vision and joint
marketing activities.

A
distributor of our products is typically a data communications or a telecommunications
marketing organization, or both, with the capability to add value with training and
first-tier support to resellers and systems integrators.

41

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We
operate in various regions. Our subsidiaries and representative offices, located
throughout North America, South America, Europe, Africa and Asia, support our
international marketing network.

We
derive our revenues from different geographical regions. For a more detailed discussion
regarding the geographic allocation of our revenues based on the location of our
customers, see Item 5AOperating and Financial Review and
ProspectsOperating Results.

We
conduct a wide range of marketing activities aimed at generating name recognition and
awareness of our brands throughout the telecommunications industry, as well as identifying
leads for distributors and other resellers. These activities include public relations,
participation in trade shows and exhibitions, advertising programs, public speaking at
industry forums and maintaining a website.

We
maintain a highly trained global technical support team that participates in providing
customer support to customers who have purchased our products. This includes local support
by distributors and systems integrators personnel trained by our support team,
support through help desks and the provision of detailed technical information on our
website, expert technical support for resolution of more difficult problems, as well as
participation in pre-sales and post-sales activities conducted by our distribution
channels with large customer accounts and key end users.

We
organize technical seminars covering general technologies, as well as specific products
and applications. We also have qualification programs to advance the technical knowledge
of our distributors and their ability to sell and support our products. These seminars are
held in various countries and in different languages as needed.

# MANUFACTURING OPERATIONS
AND SUPPLIERS

We
currently subcontract most of the manufacturing of our products. We have a
pre-qualification process for our contract manufacturers, which includes the examination
of the technological skills, production capacity and quality assurance ability of each
contract manufacturer. Our manufacturing capacity planning is based on rolling forecasts
done on a monthly basis. The forecasts provided to the sub-contractors are based on
internal company forecasts, and are up to six months. We purchase our raw materials from
several suppliers.

Our
products are currently manufactured primarily by several contract manufacturers located in
Israel, the Philippines and Taiwan. Our quality assurance, final assembly and testing
operations of our products are performed at our facilities in Tel Aviv, Omer, and in our
leased premises at some of our subcontractors facilities in Israel as well as at
some of our contract manufacturers. We have processes in place for the ongoing performance
of quality assurance at our own facilities and at our subcontractors facilities.
Equipment owned by us and used for final assembly and testing is located at our facilities
in Tel Aviv, Omer and in our leased premises at the facilities of some of our
subcontractors in Israel as part of our Approved Enterprise programs.

We
monitor quality with respect to each major stage of the production process, including the
selection of components and subassembly suppliers, warehouse procedures, assembly of
goods, final testing and packaging and shipping.

All
our manufacturing locations in Israel and in the Philippines are ISO 9001 certified, which
verifies that our manufacturing processes adhere to established standards. We require from
our Israel-based contract manufacturers to be ISO 9002 certified. Our contract
manufacturers are ISO 9002 certified. Our Tel Aviv and Omer locations are also ISO 14000
and ISO18000 certified.

42

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# PROPRIETARY RIGHTS

In
order to protect our proprietary rights in our products and technologies, we rely
primarily upon a combination of patents, trademarks, trade secrets, and copyrights, as
well as confidentiality, non-disclosure and assignment of inventions agreements. We have
52 patents issued by patent offices in several countries, and 89 pending patent
applications. The proprietary rights described above are material to our business and
profitability. Because our proprietary rights are diversified and independent of each
other, we believe that we are not dependent on any one patent.

We
have trademark registrations in Israel, the United States, the European Union and many
other countries. In addition, we have typically entered into nondisclosure,
confidentiality and assignment of inventions agreements with our employees, consultants
and with some of our suppliers and customers who have access to sensitive information. We
cannot assure you that the steps taken by us to protect our proprietary rights will be
sufficiently adequate to prevent misappropriation of our technology or independent
development or the sale by others of products with features based upon, or otherwise
similar to, those of our products.

Given
the rapid pace of technological development in the communications industry, we also cannot
assure you that our products may not be adjudicated as infringing on existing or future
proprietary rights of others. Although we believe that our technology has been
independently developed and that none of our intellectual properties infringe upon the
rights of others. From time to time, we receive letters alleging that we have infringed
upon a patent, trademark, license or other proprietary right. We have no assurance that
any such allegation will not have a material adverse affect on our business, financial
condition or results of operations.

We
license certain technologies from others for use in connection with some of our
technologies. The loss of these licenses could impair our ability to develop and market
our products. If we are unable to obtain or maintain the licenses that we need, we may be
unable to develop and market our products or processes, or we may need to obtain
substitute technologies of lower quality or performance characteristics or at greater
cost.

As
part of our efforts to support an ecosystem focused on broader choice, competitive
equipment and service costs for WiMAX technology, devices and applications globally, we
have recently joined the Open Patent Alliance (OPA) as a board member. One of
the key objectives is to form a WiMAX patent pool to aggregate patent rights, which are
needed to implement the WiMAX standard. As a result, we expect that patents pertaining to
WiMAX and their associated royalty rates will be more predictable and transparent and have
a lower cost. Furthermore, OPA may act as a one stop shop where companies
building WiMAX solutions can obtain use of the patents more simply and cost effectively
using a more competitive royalty structure that charges only for the features required to
develop WiMAX products.

# THE COMPETITIVE
ENVIRONMENT IN WHICH WE OPERATE

The
markets for our products are very competitive, and we expect that competition will
increase in the future as WiMAX technology is further adopted by major network equipment
providers and when the personal broadband WiMAX market matures, both with respect to
products that we are currently offering and with respect to products that we are
developing. We also expect competition in this market to increase in light of
announcements by large telecom equipment vendors with respect to their intention to serve
this market. We believe that the principal competitive factors in the markets for our
products include:

| |  | price
and price/performance ratio;
| | - | ----------------------------------

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

| |  | superior
technology;
| | - | --------------------

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

| |  | service
and spectrum regulation and product certifications;
| | - | -----------------------------------------------------------

| |  | vendor
financing;
| | - | -----------------

| |  | ability
to support new industry standards;
| | - | ------------------------------------------

| |  | product
time to market;
| | - | -----------------------

| |  | brand
strength, go-to market capabilities and sales channels;
| | - | -------------------------------------------------------------

| |  | systems
integration; and
| | - | ------------------------

| |  | quality
of service.
| | - | -------------------

Companies
that are engaged in the manufacture and sale or the development of products that compete
with our wireless broadband products include Airspan Inc., Alcatel-Lucent, Aperto
Networks, Cisco Systems, Ericsson, Huawei Technologies, Motorola, NokiaSiemens
Networks, Redline Communications, Samsung, SR Telecom and ZTE. Other vendor members of the
WiMAX Forum may become our competitors in the future.

Our
products use wireless media, which also compete with alternative telecommunications
transmission media, including leased lines, copper wire, fiber-optic cable, cable modems,
satellite technologies and television modems. Our products compete with other wireless
media technologies, including (i) 3rd Generation cellular technologies
(3G), HSPDA, HSUPA, EVDO and (ii) 4th generation cellular technologies
(4G), such as UMB and Long Term Evolution (LTE). Although LTE and
Mobile WiMAX are based on the same fundamental technologies, they originate from different
eco-systems. WiMAX technology is considered to have a two or three year time-to-market
advantage over LTE. However, over the last two years, LTEs 4G has been adopted
rapidly by cellular operators and their traditional eco-systems throughout the world, and
we expect increased competition between WiMAX and LTE over the course of the next few
years.

Some
of our existing and potential competitors, including some large companies arising from the
continued consolidation in the telecommunications equipment market, have substantially
greater resources including financial, technological, manufacturing, marketing and
distribution capabilities, and enjoy greater recognition than we do.

Increased
competition in our market results in price reductions, new business alliances, shorter
product life cycles, reduced gross margins, longer sales cycles and loss of market shares,
which could harm the results of our operations. We have designed and engineered our
products to minimize costs, maximize margins and improve competitiveness. However, we
cannot assure you that we will be able to compete successfully against current or future
competitors.

# GOVERNMENT REGULATION

Our
business is premised on the availability of certain radio frequencies for two-way
broadband communications. Radio frequencies are subject to extensive regulation under the
laws of each country and international treaties. Each country has different regulation and
regulatory processes for wireless communications equipment and uses of radio frequencies.
In the United States, our products are subject to FCC rules and regulations. In other
countries, our products are subject to national or regional radio authority rules and
regulations. Current FCC regulations permit license-free operation in FCC-certified bands
in the radio spectrum in the United States. Outside of the United States the use of
spectrum license, if any, and the purposes of such use, vary from country to country. Some
of our products operate in license-exempt bands, while others operate in licensed bands.
The regulatory environment in which we operate is subject to significant change, the
results and timing of which are uncertain.

44

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In
many countries, the unavailability of radio frequencies for two-way broadband
communications has inhibited the growth of these networks. The process of establishing new
regulations for wireless broadband frequencies and allocating these frequencies to
operators is complex and lengthy. The regulation of frequency licensing began during 1999
in many countries in Europe and South America and continues in many countries in these and
other regions. Licensed blocks in 2.3, 2.5, 3.3, 3.5, 3.6 GHz were released in some
countries. However, this frequency licensing regulation process may suffer from delays
that may postpone commercial deployment of products that operate in licensed bands in any
country that experiences this delay. As an example, India is expected to allocate licenses
during 2009, following a lengthy process and several delays. In Europe, the European Civil
Code (the ECC) has recently assigned the spectrum in 3.4-3.8GHz to broadband
applications, in a flexible and technology-neutral mode. However, the implementation of
the ECC decisions in individual countries may suffer delays or may be limited to a
relatively small range of spectrum. In addition to the above, in some countries,
particular frequency bands were allocated for licensing; for example, in 2007, the AWS
band was auctioned by the FCC in the United States. Our current customers that
commercially deploy our licensed band products have already been granted appropriate
frequency licenses for their network operation. In some cases, the continued validity of
these licenses may be conditional on the licensee complying with various conditions. In
October 2007, the Radio-communication Sector of the International Telecommunication Union
(ITU-R) made a decision that effectively includes WiMAX technology in the IMT-2000 set of
standards. This inclusion of WiMAX in IMT-2000 may be viewed as placing WiMAX on equal
footing with the legacy-based technologies ITU-R already endorses. However, establishing
new regulations in individual countries for wireless broadband frequencies and allocating
frequencies to operators is complex and lengthy. The European Commission started a process
to revise the 2.5-2.69GHz regime to provide more flexibility in the spectrum usage and a
more balanced protection of the TDD operation. A change in the European regulation may
imply a need for revised type approval norms; such revisions may involve a lengthy
process.

There
is a trend to release more license-exempt bands. For example, in the United States, FCC
rules were modified to include an additional 255MHz of spectrum, though actual use of this
allocation is not permitted until a technical issue is resolved between the NTIA (which
manages government-used spectrum) and the FCC (which manages commercial and public
spectrum). In Europe, the process is slower. We see potential for new markets in rural
areas and developing countries, created by the availability of licensed-exempt spectrum in
the 5GHz band. The FCC has recently enforced the 3.65-3.7GHz spectrum to be used in a
shared mode; the upper 25MHz require a special coexistence protocol. Such a protocol is
defined for the WiMAX systems in 802.16 and this process might be lengthy.

An
additional trend affecting our business involves allowing TDD operation in frequency bands
allocated in the past for FDD operation. Generally, TDD operation allows for lower cost
equipment and is currently the preferred mode of operations, according to the adopted
WiMAX Forums profiles. However, the operation of TDD networks in proximity to FDD
networks creates a mutual interference hazard that may postpone customer decisions, impede
network deployment or require higher cost solutions to address such issues.

In
addition to regulation of available frequencies, our products must conform to a variety of
national and international regulations that require compliance with administrative and
technical requirements as a condition to marketing devices that emit radio frequency
energy. These requirements were established, among other things, to avoid interference
among users of radio frequencies and to permit the interconnection of equipment.

We
are subject to export control laws and regulations with respect to all of our products and
technology. In addition, Israeli law requires us to obtain a government license to engage
in research and development, and export, of the encryption technology incorporated in some
of our products. We currently have the required licenses to utilize the encryption
technology in our products.

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|C. | ORGANIZATIONAL
STRUCTURE
|-- | ------------------------

The
following is a list of our subsidiaries, each of which is wholly-owned:

| |  | Alvarion,
Inc., incorporated under the laws of Delaware, United States;
| | - | -----------------------------------------------------------------------

| |  | Alvarion
Mobile, Inc., incorporated under the laws of Delaware, United States, is a wholly
             owned subsidiary of Alvarion Inc.;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | Alvarion
UK LTD., incorporated under the laws of England;
| | - | ---------------------------------------------------------

| |  | Alvarion
SARL*, incorporated under the laws of France;
| | - | ------------------------------------------------------

| |  | Alvarion
SRL, incorporated under the laws of Romania;
| | - | -----------------------------------------------------

| |  | Alvarion
Asia Pacific Ltd., incorporated under the laws of Hong Kong;
| | - | ---------------------------------------------------------------------

| |  | Alvarion
do Brasil LTDA, incorporated under the laws of Brazil;
| | - | ---------------------------------------------------------------

| |  | Alvarion
Uruguay SA, incorporated under the laws of Uruguay;
| | - | ------------------------------------------------------------

| |  | Alvarion
Japan KK, incorporated under the laws of Japan;
| | - | --------------------------------------------------------

| |  | Alvarion
Israel (2003) Ltd., incorporated under the laws the State of Israel;
| | - | -----------------------------------------------------------------------------

| |  | Alvarion
Spain, S.L, incorporated under the laws of Spain;
| | - | ----------------------------------------------------------

| |  | Tadipol-ECI
Sp.z o.o.,** incorporated under the laws of Poland;
| | - | ---------------------------------------------------------------

| |  | Alvarion
Telsiz Sistemleri Ticaret A.S.**, incorporated under the laws of Turkey;
| | - | ---------------------------------------------------------------------------------

| |  | Alvarion
de Mexico S.A de C.V, incorporated under the laws of Mexico;
| | - | ---------------------------------------------------------------------

| |  | interWAVE
Communications International SA, incorporated under the laws of  France;
| | - | ----------------------------------------------------------------------------------

| |  | Alvarion
Philippines incorporated under the laws of Philippines;
| | - | ----------------------------------------------------------------

| |  | Kermadec
Telecom B.V. incorporated under the laws of Holland;
| | - | -------------------------------------------------------------

| |  | Alvarion
South Africa (Pty) Ltd., incorporated under the laws of South Africa;
| | - | ------------------------------------------------------------------------------

| |  | Alvarion
Italy SRL incorporated under the laws of Italy;
| | - | --------------------------------------------------------

| |  | Alvarion
GmbH incorporated under the laws of Germany;
| | - | -----------------------------------------------------

| |  | Alvarion
Singapore PTE LTD., incorporated under the laws of Singapore.
| | - | ----------------------------------------------------------------------

| |  | Alvarion
BWA Wireless Solutions India Private Limited, incorporated under the laws of India;
| | - | --------------------------------------------------------------------------------------------

| |  | Alvarion
del Ecuador S.A, incorporated under the laws of Ecuador;
| | - | -----------------------------------------------------------------

| |  | Alvarion
Chile LIMITADA, incorporated under the laws of Chile;
| | - | --------------------------------------------------------------

| |  | Alvarion
S.A., incorporated under the laws of Argentina; and
| | - | ------------------------------------------------------------

| |  | Alvarion
Costa Rica S.A, incorporated under the laws of Costa Rica.
| | - | -------------------------------------------------------------------

*Alvarion SARL is a wholly-owned
subsidiary of Alvarion UK LTD.

** Alvarion Telsiz Sistemleri Ticaret
A. S. and Alvarion  Tadipol  ECI Sp.zoo are wholly owned subsidiaries of
Kermadec Telecom B.V.

In addition, we have representative
offices in China, Italy and Russia.

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|D. | PROPERTY,
PLANTS AND EQUIPMENT
|-- | ------------------------------

We
do not own any real estate. As of December 31, 2008, we leased an aggregate of
approximately 262,000 square feet in Israel for annual lease payments (including
management fees) of approximately $4.2 million and incurred annual parking expenses in
connection with these leases of approximately $0.4 million. These premises consist mainly
of our corporate headquarters in Tel-Aviv, Israel, and two separate warehouses located in
Israel. We have been occupying our main premises since April 2001, these premises serve as
our corporate headquarters, as well as the site at which we conduct our main research and
development activities and some quality assurance, final assembly and testing operations.
Our main lease expires in the year 2011. We also lease approximately 17,250 square feet of
office facilities in Mountain View, California, at an annual rent of approximately $0.2
million. These premises serve as the corporate headquarters of our U.S. subsidiary,
Alvarion Inc, and as our principal sales and marketing office in North America. We also
lease approximately 2,803 square feet of office facilities in Romania, at an annual rent
of approximately $0.7 million. These premises serve as the corporate headquarters of our
Romanian subsidiary, Alvarion SRL, and as our principal Research and development and
technical support office in Romania. In addition, we lease office space for the operation
of our facilities in France, Romania, China, Uruguay, Japan, Brazil, Mexico, Philippines,
Poland, Russia, Singapore, Italy, South-Africa and Spain.

We
believe that the facilities we currently lease are adequate for our current requirements.

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

Not
applicable.

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

The
following discussion of our financial condition and results of operations should be read
together with our consolidated financial statements and the related notes included
elsewhere in this annual report. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors, including,
but not limited to, those set forth in Item 3Key InformationRisk
Factors.

|A. | OPERATING
RESULTS
|-- | -----------------

Overview

We
are a leading provider of WiMAX and non-WiMAX wireless broadband systems. We supply
carriers, ISPs and private network operators with WiMAX and other wireless broadband
solutions. Our solutions are designed to cover the full range of frequency bands with
fixed, portable and mobile applications, to enable the delivery of personal broadband
services and primary broadband services such as business and residential broadband access,
corporate VPNs, toll quality telephony, mobile base station feeding, hotspot coverage
extension, community interconnection, services for various vertical markets such as
municipalities, public safety, mining, oil and gas, utilities, video surveillance and
border control.

We
believe we will see demand in the consumer and business/government segments for
bandwidth-intensive applications (video, data and voice) in the anticipated mobile
environment. Our vision is to deliver personal broadband networks, which will combine
broadband and mobility to subscribers by being at the forefront of exploiting the benefits
of OPEN architecture characteristics of WiMAX.

We
believe that one of our key challenges is to successfully manage the transition from our
non-WiMAX to WiMAX products and from one WiMAX solution to another. This challenge also
includes leveraging our experience and leadership in both non-standard BWA and current
WiMAX markets, combined with our brand strength, broad customer base and innovative
technology in order to play an important role in the WiMAX-based mobile broadband market
as well. Other key challenges are to become a major player in the personal broadband
equipment market and win support for our OPEN WiMAX strategy, which enables communication
service providers to choose the combination of vendors and partners that best fit their
specific requirements.

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As
a wireless broadband pioneer, we have been driving and delivering innovations for more
than 10 years from core technology development to creating and promoting industry
standards. Leveraging our key roles in the IEEE and HiperMAN standards committees and
experience in deploying OFDM-based systems, we have been in the forefront of the WiMAX
Forum in its focus on increasing the widespread adoption of standards-based products
in the wireless broadband market and leading the entire industry to mobile WiMAX
solutions.

Our
solutions are usually used in a point-to-multipoint architecture and address a wide scope
of end-user profiles, from the consumers, residential and SOHO markets, through SMEs and
multi-tenant units/multi-dwelling units as well as applications in various vertical
markets.

Our
products operate in licensed and license-free bands, ranging from 450 MHz to 28 GHz and
comply with various industry standards. Our core technologies include spread spectrum
radio, linear radio, digital signal processing, modems, MAC, IP-based mobile switches,
compact mobile networks, networking protocols and VLSI. We have intellectual property in
these technologies.

On
December 9, 2004, we acquired, through a cash merger, interWAVE, a provider of compact
mobile network equipment and services, which strengthened our know-how in mobility and
expanded our served market to include the mobile equipment market. Most of
interWAVEs operations were reported under the CMU business.

On
November 21, 2006, we sold substantially all of the assets and certain liabilities related
to our CMU business to LGC, a privately held U.S. company, in exchange for promissory
notes and convertible notes of LGC. In September 2007, LGC converted our convertible notes
into LGC shares and thus we became a shareholder of LGC. In November 2007, ADC acquired
all of LGC shares in a cash transaction. The CMU business was classified as discontinued
operations.

2008
Highlights

2008
was a year of expansion and adoption of WiMAX technology worldwide. We believe that our
strategy of engaging with operators for all applications early on and growing with our
customers has resulted in increased revenues from the sale of WiMAX equipment.

In
2008, our revenues increased by 19% to approximately $281.3 million from approximately
$236.6 million in 2007, primarily due to the continuous strong demand for WiMAX despite
the concerns over a spreading global recession. Our BreezeMAX revenues reached $171
million. This revenue strength allowed us to continue to invest in our Open WiMAX
initiatives, and remain cash flow positive.

We
successfully penetrated the mobile WiMAX market as we demonstrated that our WiMAX solution
could enhance operators business model with total cost of ownership benefits.

In
2008 we won turnkey projects, providing complete turnkey solutions from design and
planning to implementation, on our own and with partners. A few of the deals we won have
the potential to generate revenues in excess of $20 million each in the next two to three
years in various regions of the world. Towards the second half of 2009 and into 2010, we
expect to begin translating these deals to revenues as we reach various milestones. In
addition, we formed numerous OPEN WiMAX strategic relationships, adding technology,
integration and channel partners. In order to ensure the timely introduction of a host of
mobile WiMAX devices, we are working closely with Accton Wireless Broadband and we pursued
interoperability testing with major chips and device manufactures.

48

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During
2008, we were among the first three vendors to achieve mobile WiMAX certification. Our
equipment was deployed in the first commercial mobile WiMAX in North America. We believe
that there is a strong demand for broadband access, and governments all around the world
including Japan, Europe, Australia and the United States are creating programs to extend
broadband coverage as a matter of the national competitiveness.

In
addition, a host of new mobile data opportunities in public safety, border control,
utilities and other vertical markets are emerging. We believe WiMAX is the most cost
effective and mature technology available in the market which addresses all these
applications.

Corporate
and consumer spending has been reduced by periods of economic slowdown or recession around
the world or the public perception that these periods of economic slowdown or recession
may occur. This may create new challenges for us if these general economic conditions fail
to improve or deteriorate.

We
believe that our achievements in 2008 will enable us to continue to improve our long-term
performance and to meet our long-term Broadband Wireless and WiMAX technical, financial
and strategic objectives. During 2008, we increased our revenues by approximately 19% in
comparison to 2007 and experienced low revenue growth of our non-WiMAX products
(approximately 2% over 2007) due primarily to the continuing market transition to
WiMAX-based products.

In
addition, during 2008, we continued to increase our investments in our WiMAX solutions, in
particular mobile WiMAX products, and as a result, we increased our overall operating
expenses by approximately 14%; our gross margin decreased to approximately 47% of our
revenues, compared to approximately 50% of revenues in 2007. This decrease in gross margin
is mainly a result of the standardization of the market as competition increases, as well
as the shift in the mix of products that generate our revenues, such as an increase in the
volume of lower-margin Customer Premise Equipment.

During
2008 we entered into a strategic WiMAX agreement with Nortel to create an end-to-end WiMAX
solution. The agreement covered a joint product and business development alliance and
research and development funding. In January 2009, Nortel filed for bankruptcy protection
and subsequently repudiated the joint WiMAX agreement between us. As a result, towards the
end of the year 2008 we were not able to recognize approximately $2.4 million of revenues
that were already shipped in 2008 and provided for $338,000 as expenses for doubtful
accounts.

By
the end of 2008, due to the global slowdown and the credit crunch in the global capital
markets we implemented a cost reduction plan including the layoff of approximately 100 of
our employees and vacating certain leased premises. As a result we recorded a
restructuring charge of approximately $2.9 million in 2008.

49

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Our
net loss amounted to approximately $(5.5) million compared with net income of
approximately $12.5 million in 2007. This net loss was primarily a result of our
lower-than previously anticipated increase in revenues to approximately $281.3 million in
2008 compared to approximately $236.6 million in 2007, the increase in our cost of sales
to approximately $144.3 million compared to approximately $114.1 million and decrease in
gross margin from 49.8% to 47.5%, together with an increase in our operating expenses to
approximately $143.2 million compared to approximately $125.3 million in 2007 and a
decrease in our financial income to approximately $4.3 million due to the lower interest
rates that we obtained on our deposits and marketable securities. Our 2007 net income also
includes other income relating to the gain from the sale of the investment in LGC and the
income derived from the promissory notes which became due as a result of the acquisition
of LGC by ADC at the total amount of approximately $8.3 million and income from
discontinued operations of $5.4 million.

Critical
Accounting Principles

Our
financial statements are prepared in accordance with generally accepted accounting
principles in the United States, and audited in accordance with standards of the Public
Company Accounting Oversight Board (United States). A discussion of the significant
accounting policies that we follow in preparing our financial statements is set forth in
Note 2 to our consolidated financial statements included in Part III of this annual
report. In preparing our financial statements, we must make estimates and assumptions as
to certain matters, including, for example, the amount of new materials and components
that we will require to satisfy the demand for our products based on our sales estimates
and the period of time that will elapse before our products become obsolete. While we
endeavor diligently to assure that our estimates and assumptions have a reasonable basis
and reflect our best assessment as to the future circumstances in which we anticipate,
actual results may differ from the results estimated or assumed and the differences may be
substantial as to require subsequent write-offs, write-downs or other adjustments to past
results or current valuations.

The
following is a summary of certain critical principles, which have a substantial impact
upon our financial statements and which we believe are most important to keep in mind in
assessing our financial condition and operating result:

Revenue
Recognition. We generate revenues from selling our products indirectly through
distributors and OEMs, as well as selling them directly to end users.

Revenues
are recognized in accordance with Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements and Emerging Issues Task Force (EITF) No. 00-21,
Revenue Arrangements with Multiple Deliverables when the following criteria
are met: persuasive evidence of an arrangement exists, delivery has occurred, the
sellers price to the buyer is fixed or determinable, no further obligation exists
and collection is reasonably assured.

We
generally do not grant a right of return on our products. However, we have granted to
certain distributors limited rights of return on unsold products. Product revenues on
shipments to these distributors are recognized based on their history of actual returns
provided that all other revenue recognition criteria are met.

In
cases in which we are obligated to perform post delivery installation services, revenues
are recognized upon completion of the installation.

In
transactions, where a customers contractual terms include a provision for customer
acceptance, revenues are recognized either when such acceptance has been obtained or the
acceptance provision has lapsed.

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Accounts
Receivable. We are required to assess the collectability of our accounts receivable
balances. Generally, we do not require collateral; however, under certain circumstances we
require letters of credit, other collateral, additional guarantees or advance payments. A
considerable amount of judgment is required in assessing the ultimate realization of these
receivables including, but not limited to, the current credit-worthiness of each customer.
We regularly review the amounts due and related allowance by considering factors, such as
historical experience, credit quality, age of the accounts receivable balances and current
economic conditions that may affect a customers ability to pay. For certain accounts
receivable balances, we are also covered by foreign trade risk insurance. Should we
consider it necessary to increase the level of provision for doubtful accounts, required
for a particular customer, then additional charges will be recorded when they become
probable..

Inventory
Valuation. Our policy for valuation of inventory and commitments to purchase
inventory, including the determination of obsolete or excess inventory, requires us to
perform a detailed assessment of inventory at each balance sheet date which includes a
review of, among other factors, an estimate of future demand for products within specific
time frames, valuation of existing inventory, as well as product lifecycle and product
development plans. The business environment in which we operate the wide range of products
that we offer and the sales-cycles we experience all contribute to the exercise of
judgment relating to maintaining, utilizing and writing-off inventory. The estimates of
future demand that we use in the valuation of inventory are the basis for our revenue
forecast, which is also consistent with our short-term manufacturing plan. Inventory
reserves are also provided to cover risks arising from non-moving items. We write-down our
inventory for estimated obsolescence or excess inventory equal to the difference between
the cost of inventory and the estimated market value which is based on assumptions about
future demand and market conditions. We may be required to record additional inventory
write-downs if actual market conditions are less favorable than those projected by our
management.

Note
2g to our financial statements describes the write-offs and provisions that we made and
recorded in2006, 2007 and 2008 to reflect the decline from our expectations in the value
of inventory, which had become excessive, unmarketable or otherwise obsolete or the
inventory of new materials and components that we had purchased or committed to purchase
in anticipation of forecasted sales which we did not consummate. In addition, changes in
demand, which result in increased demand for our products, may lead to utilization of our
previously written-off products. Note 2g to our financial statements describes the effect
of the utilization of the related products of our prior years written-off
components, which are reflected in our revenues without additional cost in the cost of
sales in the period the inventory was utilized.

If
there were to be a sudden and significant decrease in demand for our products, or if there
were a higher incidence of inventory obsolescence because of rapidly changing technology
and customer requirements, we could be required to increase our inventory allowances and
our gross margin could be adversely affected. In addition, if the demand for our products
increases beyond our expectations following a write-off of inventory, we may need to
further utilize our previously written-down inventory. Such utilization may contribute to
our gross margin in future periods. Inventory management remains an area of management
focus as we balance the need to maintain strategic inventory levels to ensure competitive
lead times against the risk of inventory obsolescence because of rapidly changing
technology and customer requirements.

Goodwill.          We
review goodwill for impairment annually and whenever events or changes in
          circumstances indicate its carrying value may not be recoverable in accordance
          with SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill
          impairment is deemed to exist if the carrying value of a reporting unit exceeds
          its fair value. If the carrying value of a reporting units goodwill
          exceeds its implied fair value, then we would record an impairment loss equal
to           the difference.

We operate in one operating segment,
and this segment comprises our only reporting unit. As of December 31, 2008, we had total
goodwill of $57.1 million on our balance sheet. In calculating the implied fair value of
the reporting unit, we used market capitalization calculated based on our share price for
a reasonable period. As of the year ended December 31, 2008, no impairment loss was
identified.

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Warranties.We provide for the estimated cost of product warranties at the time the
          product is shipped. Our products sold are covered by a warranty for periods
          ranging from one year to two years. We accrue a warranty reserve for estimated
          costs to provide warranty services. Our estimate of costs to service the
          warranty obligations is based on historical experience and expectation of
future           conditions. We accrue for warranty costs as part of our cost of sales
based on           associated material costs and technical support labor costs. Material
cost is           primarily estimated based upon historical trends in the volume of
product           returns within the warranty period and the cost to repair or replace
the           equipment. Technical support labor cost is primarily estimated based upon
          historical trends in the rate of customer calls and the cost to support the
          customer calls within the warranty period. To the extent we experience
increased           warranty claim activity or increased costs associated with servicing
those           claims, our warranty accrual will increase, resulting in decreased gross
profit.

Stock-Based
Compensation Expense.We account for equity-based compensation in
accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value
recognition provisions of this statement, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as an expense over the
requisite service periods. Stock-based compensation expense recognized under SFAS 123(R)
for 2007 and 2008 was $7.4 million and $7.6 million, respectively. Determining the fair
value of stock-based awards at the grant date requires the exercise of judgment, including
the amount of stock-based awards that are expected to be forfeited. If actual forfeitures
differ from our estimates, equity-based compensation expense and our results of operations
would be impacted.

We estimate the fair value of
employee stock options using a Black-Scholes-Merton valuation model and for restricted
stock units and options granted with par value exercise price, the fair value is
calculated by multiplying the share price at the date of grant with the number of options
granted. The fair value of an award is affected by our stock price on the date of grant as
well as other assumptions, including the estimated volatility of our stock price over the
expected term of the awards, and the estimated period of time that we expect employees to
hold their stock options. The risk-free interest rate assumption is based upon United
States treasury interest rates appropriate for the expected life of the awards. We use the
historical volatility of our publicly traded stock options in order to estimate future
stock price trends. In order to determine the estimated period of time that we expect
employees to hold their stock options, we use historical behavioral patterns rates of
employee groups by job classification. In 2008, the expected term of options granted is
estimated based on historical experience and represents the period of time that options
granted are expected to be outstanding. Our expected dividend rate is zero since we do not
currently pay cash dividends on our common stock and do not anticipate doing so in the
foreseeable future.

Deferred
Taxes.We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we have considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event we were to determine that we would be able to
realize our deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. In addition, we are subject to the continuous examination of our
tax returns by the local tax authorities in each country that we have established
corporations. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for taxes. On January 1,
2007, we adopted FIN 48. The adoption of FIN 48 to our tax positions had no effect on our
Shareholders Equity for 2007.

52

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# Results of Operations

The
following tables present our total revenues attributed to the geographical regions based
on the location of our customers for the years ended December 31, 2006, 2007 and
2008:

|                  | 2006 | 2007 | 2008
|----------------- | ---- | ---- | ----
|
|
|
|
|Israel            |      |      | $   
|North America     |      |     
|(including the    |      |     
|United States and |      |     
|Canada)           |      |      |     
|Europe (excluding |      |     
|Russia, Romania,  |      |     
|Italy, Spain and  |      |     
|Denmark)(1)       |      |      |     
|Russia            |      |      |     
|Romania           |      |      |     
|Italy             |      |      |     
|Spain             |      |      |     
|Denmark           |      |      |     
|Africa            |      |      |     
|Asia              |      |      |     
|Latin America     |      |      |     
|                  |      |      |     
|                  |      |     
|                  |      |      | $   
|                  |      |      |     
|                  |      |      |     

---

(1)       
          We have listed Russia, Romania, Italy, Spain and Denmark separately within this
          table because they were each above 5% of our total revenues during at least one
          of the last 3 years. The following tables set forth, for the periods indicated,
          selected items from our consolidated statement of operations in U.S. dollars in
          thousands and as a percentage of total sales:

|                                                           | Year Ended December 31,
|---------------------------------------------------------- | -----------------------
|
|
|
|
|Sales                                                      |                        
|Cost of sales                                              |                        
|Write-off of excess  inventory and provision for inventory |                        
|purchase commitments                                       |                        
|                                                           |                        
|Gross profit                                               |                        
|                                                           |                        
|                                                           |                        
|Operating costs and expenses:                              |                        
|Research and development, gross                            |                        
|Less - grants and participations                           |                        
|                                                           |                        
|Research and development, net                              |                        
|Selling and marketing                                      |                        
|General and administrative                                 |                        
|Amortization of intangible assets                          |                        
|Restructuring and other related expenses                   |                        
|                                                           |                        

53

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|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|
|
|
|
|Total operating expenses                        |                        
|                                                |                        
|Operating loss                                  |                        
|Other income                                    |                        
|Financial income, net                           |                        
|                                                |                        
|Income (loss) from continuing operations        |                        
|Income (loss) from discontinued operations, net |                        
|                                                |                        
|Net income (loss)                               |                        
|                                                |                        

|                                                           | Year Ended December 31,
|---------------------------------------------------------- | -----------------------
|
|
|
|
|Statement of Operations Data:                              |                        
|Sales                                                      |                        
|Cost of sales                                              |                        
|Write-off of excess  inventory and provision for inventory |                        
|purchase commitments                                       |                        
|                                                           |                        
|Gross margin                                               |                        
|                                                           |                        
|Operating costs and expenses:                              |                        
|Research and development, gross                            |                        
|Less - grants and participations                           |                        
|                                                           |                        
|Research and development, net                              |                        
|Selling and marketing                                      |                        
|General and administrative                                 |                        
|Amortization of intangible assets                          |                        
|Restructuring and other related expenses                   |                        
|                                                           |                        
|                                                           |                        
|Total operating expenses                                   |                        
|                                                           |                        
|Operating loss                                             |                        
|Other income                                               |                        
|Financial income, net                                      |                        
|                                                           |                        
|Income (loss) from continuing operations                   |                        
|Income (loss)  from discontinued operations, net           |                        
|                                                           |                        
|Net income (loss)                                          |                        
|                                                           |                        
|                                                           |                        

54

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

On
November 21, 2006, we sold substantially all of the assets and certain liabilities related
to the CMU, a separate reporting unit, representing the majority of former interWAVE
business, to LGC. Pursuant to the terms of the sale agreement, LGC issued to us promissory
notes and a convertible note. At closing, we recognized such transaction as a divestiture
of operations and therefore the results of the CMU activities for all reported periods
were presented in one line item in the statement of operations below the results from
continuing operations under the Income (loss) from discontinued operations.
The results of the CMU operations are presented as discontinued operations for all periods
presented. Note 1c to our financial statements further describes this transaction.

Sales.
          Sales in 2008 were approximately $281.3 million, an increase of approximately
          19% compared with sales of approximately $236.6 million in 2007. In 2008,
          BreezeMAX revenues totaled approximately $171 million or 61% of total revenue,
          compared with approximately $124 million or 52% of revenue in 2007. The increase
          of our total sales in 2008 resulted primarily from the continued growth of the
          BreezeMAX revenues, which was caused by the continued transition in the market
          from non-WiMAX to WiMAX based solutions. Our revenues from non-WiMAX broadband
          wireless products remained at approximately the same level as the previous year.

Sales
in Europe, the Middle East and Africa reached approximately 56% of our sales in 2008 and
totaled $156 million, which represents an increase of approximately 18% over our 2007
sales in this region which were $132.8 million. This increase is mainly attributed to the
fact that some trials and small-scale WiMAX deployments in 2007 and 2006 emerged into
larger scale commercial deployments in 2008 and due to increased revenues primarily with a
customer in Denmark. In addition, we experienced continued progress in the spectrum
allocation process in this region and the adoption of our broadband wireless products by
well-capitalized independent operators. Sales in Central and Latin America accounted for
19% of our sales in 2008 compared to 21% of our sales in 2007 in this region, which
represents an increase of approximately 4% in percentage of total sales in this region
mainly due to sales to several repeated customers in Mexico, Peru, Chile and Paraguay.
Sales in North America accounted for approximately 15% of our sales in 2008, a minor
change from our sales in 2007 in this region. Sales in Asia Pacific accounted for
approximately 10% of our sales in 2008 compared to approximately 8% in 2007 in this
region.

Cost
of sales. Cost of sales consists primarily of cost of components, cost of product
manufacturing and assembly, labor, overhead and other costs associated with production.
Cost of sales was approximately $144 million in 2008, an increase of approximately 26.5%
compared with cost of sales of approximately $114 million in 2007. Cost of sales as a
percentage of sales increased to approximately 51.3% in 2008 from approximately 48.2% in
2007. This increase is primarily attributable to the change in the mix of products that
comprise our revenues. As the market moves towards standardization and more players enter
into this market making the market more competitive for us, and as we shift in the mix of
products that comprise our revenues, such as an increase in the volume of lower-margin
CPE, we expect our gross margin to gradually decrease and stabilize at around 45%.

Write-off
of excess inventory and provision for inventory purchase commitments. We periodically
assess our inventories valuation in accordance with obsolete and slow-moving items based
on revenue forecasts and technological obsolescence. Should inventories on-hand exceed our
estimates or become obsolete, for example, due to the transition in demand from non-WiMAX
to WiMAX products, it would be written down or written off. This would result in a charge
to our statement of operations and a corresponding reduction in our inventory and
shareholders equity. Changes in demand for our products and in our estimates for
demand create changes in provisions for obsolete inventory. As part of our ordinary course
of business we evaluate, on a quarterly basis, our actual inventory needs versus our sales
projections and write-off excess inventory and un-cancelable purchase commitments from our
suppliers and subcontractors. As a result, we recorded charges related to the write-off of
excess inventory and accrued a provision for inventory purchase commitments of new
materials and components that we had purchased or committed to purchase in anticipation of
forecasted sales that we did not consummate. In 2008, primarily as a result of the
increase of our sales and due to efficiency steps taken within our operations, our
write-off of excess inventory and our accrual of a provision for inventory purchase
commitments decreased and amounted in the aggregate to approximately $3.5 million for the
year ended December 31, 2008 compared to approximately $4.8 million for the year ended
December 31, 2007.

55

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Inventory
utilization. We perform periodically an inventory evaluation model in order to align
our inventory levels to the market conditions and anticipated customer demand. In 2008 and
2007, approximately $2.5 million and $2.9million, respectively, of inventory
previously written-off consistent with our inventory evaluation model was used as
components in our regular production course and were sold as finished goods to end users.
The sales of these related manufactured products were reflected in our revenues without
increasing the cost of sales in the period the inventory was utilized. This inventory
utilization increased our gross margin by 0.9% in 2008 and by 1.2% in 2007.

If
the demand for our products suddenly and significantly decreased, or if there were a
higher incidence of inventory obsolescence because of rapidly changing technology,
standardization and customer requirements, we could be required to increase our write-off
of excess inventory, and our gross margin could be adversely affected. Inventory
management remains an area of focus as we balance the need to maintain strategic inventory
levels to ensure competitive lead times compared with the risk of inventory obsolescence.
However, if the demand for our products increases beyond our expectations following
write-down of inventory, we may further utilize our written down inventory. Such
utilization may contribute to our gross margin in future periods. We cannot predict the
likelihood of utilizing previously written-off inventory in future operations.

Research
and development expenses, net. Gross research and development expenses consist
primarily of employee salaries, development-related raw materials and subcontractors, and
other related costs partially offset by research and development funding. Gross research
and development expenses were approximately $70 million in 2008, an increase of
approximately 27.3% compared with gross research and development expenses of approximately
$55 million in 2007. This increase is primarily attributable to an increase of
approximately 5% in our research and development personnel in 2008, the intense investment
in our WiMAX development and to certain research and development projects which were
partially funded by the NRE grants and participations. Gross research and development, as
a percentage of sales was 24.9% in 2008, compared with 23.2% in 2007. Grants and other
participations for funding approved research and development projects totaled
approximately $10.3 million in 2008 and $3.6 million in 2007. Research and development
expenses, net, were approximately $59.7 million in 2008, compared with approximately $51.4
million in 2007.

Selling
and marketing expenses. Selling and marketing expenses consist primarily of costs
relating to compensation attributable to employees engaged in selling and marketing
activities, promotion, advertising, trade shows and exhibitions, travel and related
expenses. Selling and marketing expenses were approximately $60.5 million in 2008, an
increase of approximately 8.2% compared with selling and marketing expenses of
approximately $55.9 million in 2007. This increase is primarily attributable to the
increase in revenues. Selling and marketing expenses as a percentage of sales decreased to
21.5% in 2008 from 23.6% in 2007.

General
and administrative expenses. General and administrative expenses consist primarily of
compensation costs for administration, finance and general management personnel, office
maintenance, insurance costs, professional fees and other administrative costs. General
and administrative expenses were approximately $18.8 million in 2008, an increase of
approximately 22.0% compared with general and administrative expenses of approximately
$15.4 million in 2007. This increase is related primarily to labor costs and legal
expenses. General and administrative expenses as a percentage of sales increased to 6.7%
in 2008 from 6.6% in 2007.

56

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Amortization
of intangibles assets. As a result of our mergers and acquisitions activity in prior
we years, had annual amortization charges of approximately $1.3 million recorded in 2008
compared to $2.5 million in 2007. The decrease is a result of the completion in 2008 of
the amortization of intangible assets with useful lives of 3.75 years.

Restructuring
costs. During 2008, we implemented a cost reduction plan including the layoff of
approximately 100 employees. We recorded a restructuring charge of approximately $2.9
million, which primarily consists of employees termination benefits, lease
abandonment and repayment of grants.

Financial
income, net. Financial income, net, was $4.3million in 2008, a decrease of
approximately 33.4% compared with financial income, net, of approximately $6.5 million in
2007. The decrease in financial income is attributed mainly to decrease yields on
investments compared to the previous year due to the decrease in the global interest
rates.

Net
income (loss). In 2008, net loss was approximately $(5.5) million, compared with net
income of approximately $12.5 million in 2007 which included income from discontinued
operations of approximately $ 5.4 million and other income of approximately $8.3 million.

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

Sales.
          Sales in 2007 were approximately $236.6 million, an increase of approximately
          30% compared with sales of approximately $181.6 million in 2006. In 2007,
          BreezeMAX revenues totaled approximately $124 million or 52% of total revenue,
          compared with approximately $72 million or 40% of revenue in 2006. The increase
          of our total sales in 2007 resulted primarily from the continued growth of the
          BreezeMAX revenues, which was caused by the continued transition in the market
          from non-WiMAX to WiMAX based solutions. Our revenues from non-WiMAX broadband
          wireless products remained at the same level as the previous year.

Sales
in Europe, the Middle East and Africa reached approximately 56% of our sales in 2007 and
totaled $132.9 million, which represents an increase of approximately 19% over our 2006
sales in this region which were $112 million. This increase is mainly attributed to the
fact that some trials and small-scale WiMAX deployments in 2006 emerged into larger scale
commercial deployments in 2007 by Innovative Challengers and incumbents. In addition, we
experienced continued progress in the spectrum allocation process in this region and the
adoption of our broadband wireless products by well-capitalized independent operators.
Sales in Central and Latin America accounted for 21.5% of our sales in 2007 compared to
17% of our sales in 2006 in this region, which represents an increase of approximately 65%
in percentage of total sales in this region mainly due to sales to several repeat
customers in Mexico, Peru, Chile and Paraguay. Sales in North America accounted for
approximately 14% of our sales in 2007, a minor change from our sales in 2006 in this
region. Sales in Asia Pacific accounted for approximately 9% of our sales in 2007 compared
to approximately 8% in 2006 in this region.

Cost
of sales. Cost of sales was approximately $114 million in 2007, an increase of
approximately 42.5% compared with cost of sales of approximately $80.4 million in 2006.
Cost of sales as a percentage of sales increased to approximately 48.3% in 2007 from
approximately 44.2% in 2006. This increase is primarily attributable to the change in the
mix of products that comprise our revenues.

Write-off
of excess inventory and provision for inventory purchase commitments. As part of our
ordinary course of business we evaluate, on a quarterly basis, our actual inventory needs
versus our sales projections and write-off excess inventory and un-cancelable purchase
commitments from our suppliers and subcontractors. As a result, we recorded charges
related to the write-off of excess inventory and accrued a provision for inventory
purchase commitments of new materials and components that we had purchased or committed to
purchase in anticipation of forecasted sales that we did not consummate. In 2007,primarily
as a result of the increase of our sales and due to efficiency steps taken within our
operations, our write-off of excess inventory and our accrual of a provision for inventory
purchase commitments was decreased and amounted in the aggregate to approximately $4.8
million in 2007 compared to approximately $9.5 million in 2006.

57

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---

Inventory
utilization. We perform periodically an inventory evaluation model in order to align
our inventory levels to the market conditions and anticipated customer demand. In 2007 and
2006, approximately $2.9 million and $3.6million, respectively, of inventory
previously written-off consistent with our inventory evaluation model was used as
components in our regular production course and were sold as finished goods to end users.
The sales of these related manufactured products were reflected in our revenues without
additional cost in the cost of sales in the period the inventory was utilized. This
inventory utilization increased our gross margin by 1.2% in 2007 and by 2% in 2006.

Research
and development expenses, net. Gross research and development expenses were
approximately $55 million in 2007, an increase of approximately 30.7% compared with gross
research and development expenses of approximately $42 million in 2006. This increase is
primarily attributable to an increase of approximately 16% in our research and development
personnel in 2007 as part of the intense investment in our WiMAX development. Gross
research and development, as a percentage of sales was 23.2% in 2007, compared to the same
percentage in 2006. Grants from the Government of Israel and other jurisdictions for
funding approved research and development projects totaled approximately $3.6 million in
2007 and $3.2 million in 2006. Research and development expenses, net, were approximately
$51.4 million in 2007, compared with approximately $38.8 million in 2006.

Selling
and marketing expenses. Selling and marketing expenses were approximately $55.9
million in 2007, an increase of approximately 24.5% compared with selling and marketing
expenses of approximately $44.9 million in 2006. This increase is primarily attributable
to the increase in revenues and the increase of approximately 10% in our selling and
marketing personnel in 2007. Selling and marketing expenses as a percentage of sales
decreased to 23.7% in 2007 from 24.7% in 2006.

General
and administrative expenses. General and administrative expenses were approximately
$15.4 million in 2007, an increase of approximately 12.4% compared with general and
administrative expenses of approximately $13.7 million in 2006. This increase is related
primarily to labor costs and legal expenses. General and administrative expenses as a
percentage of sales decreased to 6.6% in 2007 from 7.5% in 2006.

Amortization
of intangibles assets. As a result of the merger with Floware, we acquired an
identifiable intangible asset, which was defined as current technology with an aggregate
value of $16.8 million. This amount is being amortized over the useful life of the asset,
which is seven years. As a result of the acquisition of InnoWave in 2003, we acquired
other acquisition-related intangibles such as current technology and customer relations
with an aggregate value of $1.6 million, which amount is amortized over the useful life of
these assets, which ranges between 3.75 to 7.75 years. The 3.75 amortization period ended
during 2007. Amortization charges of approximately $2.5 million for all of these
acquisition-related intangibles were recorded in 2007 compared to $2.7 million in 2006.

Other
income. Other income of approximately $8.3 million in 2007 represents both the gain
from the sale of the investment in LGC and the income derived from the promissory notes
which became due as a result of the acquisition of LGC by ADC. These notes had been
recorded at a net amount of less than their face value upon the 2006 sale of the CMU as a
result of an evaluation of their discounting to fair value.

58

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---

Financial
income, net. Financial income, net, was approximately $6.5 million in 2007, an
increase of approximately 71.0% compared with financial income, net, of approximately $3.8
million in 2006. The increase in financial income is attributed mainly to higher yields on
investments compared to the previous year and to the interest on the LGC Notes which
started to accrue at the end of 2006 following the sale of the CMU and continued to accrue
during 2007.

Operating
loss from continuing operations. In 2007, we experienced an operating loss of
$(7.6) million, compared with operating loss of $(8.4) million in 2006. Our
operating loss as a percentage of sales was (3.3)% in 2007 compared with an operating loss
of (4.6)% in 2006.

Income
(loss) from discontinued operations. The income (loss) from discontinued operations
for the years ended December 31, 2007 and 2006 includes the activities of the CMU
operations. The income from discontinued operation for the year ended December 31, 2007 of
$5.4 million represents the cash collection from a former sale of CMU equipment and
services which occurred before the sale of the CMU. For the year ended December 31, 2006,
the loss from discontinued operations was $(36.2) million. The loss in 2006 consisted of
impairment of goodwill, which amounted to $(23.4) million, loss of the discontinued
operations, which amounted to $(7.6) million, and the loss from the sale of CMU
operations, which amounted to $(5.2) million.

Net
income (loss). In 2007, net income was approximately $12.5 million, compared with a
net loss of approximately $(40.8) million in 2006.

# Impact of Inflation and
Currency Fluctuations

A
devaluation of the U.S. dollar against the NIS has a direct influence on the U.S. dollar
cost of our operations.  The majority of our sales, and part of our expenses, are
denominated in dollars. However, a significant portion of our expenses, primarily labor
expenses, is denominated in NIS unlinked to the dollar. Inflation in Israel and/or the
devaluation of the dollar in relation to the NIS will have the effect of increasing the
cost in dollars of these expenses and will have a negative effect on our profitability.

Because
exchange rates between the NIS and the dollar fluctuate continuously, exchange rate
fluctuations as recently experienced in Israel and especially larger periodic devaluations
or revaluations, will have an impact on our profitability and period-to-period comparisons
of our results of operations. In 2008, we have experienced an increase in the dollar cost
of our operations in Israel. The effects of foreign currency re-measurements are reported
in our consolidated financial statements in the statement of operations.

To
protect against exchange rate fluctuations, we have instituted several foreign currency
hedging programs. These hedging activities consist of cash flow hedges of anticipated NIS
payroll and forward exchange contracts to hedge certain trade payables payments in NIS. In
2008, the cash flow hedges were all effective. For more information, see Item
11  Qualitative and Quantitative Market Risks.

The
following table presents information about the rate of inflation in Israel, the rate of
devaluation or appreciation of the NIS against the U.S. dollar, and the rate of inflation
of Israel adjusted for the devaluation:

|Year endedDecember 31, | Israeli inflationrate % | Israeli devaluation
(appreciation)rate % | Israeli inflationadjusted fordevaluation %
|---------------------- | ----------------------- | ---------------------------------------- | ------------------------------------------
|
|
|
|2004                   |                         |                                          |                                           
|2005                   |                         |                                          |                                           
|2006                   |                         |                                          |                                           
|2007                   |                         |                                          |                                           
|2008                   |                         |                                          |                                           

59

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We
cannot assure you that we will not be materially and adversely affected in the future if
inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing
of the devaluation lags behind inflation in Israel.

For
a discussion of certain policies or factors relating to our being an Israeli company and
our location in Israel, see Item 3  Key Information  Risk Factors  Risks
Relating to Our Location in Israel.

|B. | LIQUIDITY
AND CAPITAL RESOURCES
|-- | -------------------------------

The
following sections discuss the effects of changes in our balance sheets, cash flows and
commitments on our liquidity and capital resources.

# Balance Sheet and Cash
Flows

Total
cash, cash equivalents, short-term and long-term marketable securities and deposits were
$140.6 million as of December 31, 2008, an increase of approximately $1.7 million or
1.2% from $138.9 million at December 31, 2007. Total cash, cash equivalents,
short-term and long-term marketable securities and deposits as of December 31, 2007
reflect an increase of approximately $20 million or 17% from $118.4 million at December
31, 2006.

Total
cash and cash equivalents as of December 31, 2008 were $63.7 million, an increase of $11.6
million or 22.2% from $52.1 million at December 31, 2007. The increase resulted mainly
from collecting cash proceeds from the following sources: (i) positive cash provided by
operating activities; and (ii) the remainder of proceeds from the sale of our LGC shares
as a result of the acquisition of LGC by ADC. These were partially offset by the
repurchase of our shares. Total cash and cash equivalents as of December 31, 2007 were
$52.1 million, an increase of $11.3 million or 27.6% from $40.8 million as of December 31,
2006.

Our
continuing operating activities provided cash of approximately $9.0 million, $13.5 million
and $16.6 million in 2008, 2007 and 2006, respectively. The positive cash flow from
operating activities for 2008 consisted primarily of net loss adjusted for non-cash
activities, including stock-based compensation expenses, depreciation of fixed assets and
amortization of intangible assets plus an increase of trade payables and other accounts
payables and accrued expenses, partially offset by an increase in trade receivables,
inventories and other accounts receivables. The positive cash flow in 2007 resulted from
improvement in our operating results and an increase in other accounts payable partially
offset by the increase in inventory, which was lower than the accounts payable increase.
The cash flows provided in 2006 resulted from an increase in other accounts payable and a
decrease in trade receivables partially offset by our net loss in this period together
with a decrease in trade payables.

Our
continuing investing activities provided cash of approximately $6.9 million in 2008 and
used approximately $9.0 million and $9.2 million in 2007 and 2006, respectively. Our
continuing investing activities consist mainly of investments in bank deposits, marketable
securities and fixed assets. In 2008, our continuing investing activities provided
proceeds from the maturity of marketable securities as well as the remaining proceeds from
the LGC transaction which were partially offset by investments in bank deposits,
marketable securities and fixed assets. In 2007 and 2006, our continuing investing
activities used cash mainly for investments in bank deposits, marketable securities and
fixed assets partially offset by proceeds from the maturity of marketable securities and
bank deposits. In addition in 2007 these investments were offset by cash proceeds from the
sale of our investment in LGC. Capital expenditures were approximately $10.8 million, $6.9
million and $4.8 million in 2008, 2007 and 2006, respectively. These expenditures
principally financed the purchase of research and development equipment and manufacturing
equipment.

60

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Our
continuing financing activities used cash of approximately $4.3 million in 2008, and
provided cash of $2.3 million and $3.3 million in 2007 and 2006, respectively. In 2008,
the amount of cash used was attributable primarily to the repurchase of our shares in the
amount of $5 million, partially offset due to issuance of shares in connection with the
exercise of employees options, in the amount of approximately $0.7 million. In 2007,
the amount of cash provided was attributable primarily to proceeds from the issuance of
shares in connection with the exercise of employees options in the amount of
approximately $4.0 million partially offset by repayment of maturities of a long-term loan
of $1.7 million. In 2006, the amount of cash provided was attributable primarily to
proceeds from the issuance of shares in connection with the exercise of warrants and
employees options in the amount of approximately $5.0 million, partially offset by
repayment of maturities of a long-term loan of $1.7 million.

We
expect that cash provided or used by continuing operations may fluctuate in future periods
as a result of a number of factors, including fluctuations in our operating results,
shipment timing, accounts receivable collections, inventory management, and the timing of
other payments and investments.

Accounts
Receivable, Net. Accounts receivable, net was $59.8 million and $31.2 million as of
December 31, 2008 and 2007, respectively. DSOs as of December 31, 2008, December 31, 2007
and December 31, 2006 were 78 days, 47 days and 69 days, respectively. The increase in the
accounts receivable balance in 2008 is mainly a result of the increase in our revenues as
well as our increase in DSO. The DSOs in 2008 reflects our long terms target which ranges
between 60 and 80 days. Our DSOs in 2007 were exceptionally low mainly due to the fact
that we recognized a large amount of deferred revenues from shipments that occurred in
prior years.

Inventories.Inventories were $53.7 million as of December 31, 2008 compared to $42.7
          million at December 31, 2007. Inventories consist of raw materials, work in
          process and finished goods and inventories at customer sites that are not
          recognized as revenues yet. Inventory management remains an area of focus as we
          balance the need to maintain strategic inventory levels to ensure competitive
          lead times against the risk of inventory obsolescence because of rapidly
          changing technology and customer requirements. We are focusing our operational
          efforts to increase inventory turns in order to enhance our responsiveness to
          future customers needs and market changes.Our inventory turns
          were approximately 2.7 times in fiscal 2008 and 2007.

WORKING
CAPITAL

Our
working capital from continuing operations was approximately $115.8 million as of December
31, 2008 compared to $113.1 million as of December 31, 2007 and $97.2 million as of
December 31, 2006.

Commitments

Leases.We lease office space in several worldwide locations. Rent expense totaled
          $7.3 million, $5.4 million and $5.1 million in 2008, 2007 and 2006,
          respectively. We lease certain computers under operating lease agreements which
          expire in 2011. Computers leasing expenses totaled $0.6 million $0.3 million and
          $0.2 million in 2008, 2007 and 2006, respectively. We also lease various motor
          vehicles under operating lease agreements, which expire in 2011. Motor vehicles
          leasing expenses for the year ended December 31, 2008 were $3.4 million, for the
          year ended December 31, 2007 were $2.8 million and for the year ended December
          31, 2006 were $2.3 million.

61

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Future
annual minimum lease payments under all non-cancelable operating leases as of December 31,
2008 were as follows (in thousands):

|     | Rental of
premises | Lease of
computers | Lease of
motor vehicles
|---- | ------------------ | ------------------ | -----------------------
|
|
|
|
|2009 |                    |                    | $                      
|2010 |                    |                    |                        
|2011 |                    |                    |                        
|2012 |                    |                    |                        
|2013 |                    |                    |                        
|     |                    |                    |                        
|     |                    |                    |                        
|     |                    |                    | $                      
|     |                    |                    |                        

Royalties. We participated in programs sponsored by the Office of the Chief Scientist
          (OCS) of the Israeli Government for the support of research and
          development activities. We are obligated to pay royalties to the OCS, amounting
          to 3%-5% of the sales of the products and other related revenues generated from
          certain research and development projects, up to 100% of the amount granted by
          the OCS. The obligation to pay these royalties is contingent upon actual sales
          of the products, and in the absence of such sales, no payment is required. We
          did not receive royalty-bearing grants from the OCS during 2006, 2007 and 2008.

During
2008, we paid or accrued royalties to the OCS in the amount of $0.3 million. As of
December 31, 2008, the aggregate contingent liability to the OCS amounted to $4.4 million.

The
following table of our material contractual obligations as of December 31, 2008 summarizes
the aggregate effect that these obligations are expected to have on our cash flows in the
periods indicated:

|Contractual Obligations | Payments due by period
|----------------------- | ----------------------
|
|
|
|Rental Lease            |                       
|Motor Vehicle Lease     |                       
|Computers Lease         |                       
|Severance pay*          |                       
|                        |                       
|Total                   |                       
|                        |                       

*
Severance pay relates to accrued severance obligations mainly to our Israeli employees as
required under Israeli labor law. These obligations are payable only upon termination,
retirement or death of the respective employee. Of this amount, only $5.8 million is
unfunded.

Treasury
stock. In October 2008, following the approval of our board of directors and the
receipt of a court approval, we were authorized to use up to $30 million of our available
cash to repurchase our shares. Through December 31, 2008 we repurchased under this
repurchase program 1,449,999 ordinary shares at a weighted average price of approximately
$3.44 per share for an aggregate of $5.0 million.

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Under
the first repurchase program in 2002, our board of directors authorized a share repurchase
of up to $9 million of our ordinary shares. Under this 2002 repurchase plan, we had
repurchased until December 31, 2003 3,796,773 ordinary shares at a weighted average price
per share of approximately $2.07 for an aggregate of $7.9 million. Since then we had not
utilized the remainder of this re-purchase program. For more detail see Item 16E.

FUTURE
NEEDS

We
believe our cash balances and investments and governmental research and development grants
will be sufficient to satisfy our working capital needs, capital expenditures, investment
requirements, stock repurchases, commitments, future customer financings, and other
liquidity requirements associated with our existing operations through at least the next
twelve months. We believe that the most strategic uses of our cash resources include
working capital, strategic investments to gain access to new technologies, acquisitions,
financing activities and repurchase of shares. There are no transactions, arrangements and
other relationships with unconsolidated entities or other persons that are reasonably
likely to materially affect liquidity or the availability of our requirements for capital
resources. However, if our operations do not generate cash to the extent currently
anticipated by us, or if we grow more rapidly than currently anticipated, it is possible
that we will require more funds than anticipated. We expect that these sources will
continue to finance our operations in the long term, and will be complemented, if
required, by private or public financing.

# Effective Corporate Tax
Rate

Income
derived by Alvarion Ltd. is generally subject to the regular Israeli corporate tax rate,
which was 27% in 2008 and is progressively being reduced to a rate of 25% in 2010.
However, as detailed below, income derived in Israel from certain Approved
Enterprises will enjoy certain tax benefits for a specific definitive period. The
allocation of income derived from approved enterprises is dependent upon compliance of
certain requirements with the Investment Law.

As
described below, several of our manufacturing facilities have been granted Approved
Enterprise status under the Law for the Encouragement of Capital Investments, 1959,
as amended, or the Investment Law, and, consequently, are eligible, subject to compliance
with specified requirements, for tax benefits beginning when such facilities first
generate taxable income.

According
to the provision of the law, we have elected the alternative benefits track
provisions of the Investment Law, pursuant to which we have waived our right to grants and
instead receive a tax benefit on undistributed income derived from the Approved
Enterprise program. The tax benefits under the Investment Law may not be available
with respect to income derived from products manufactured outside of Israel or
manufactured in Israel but outside of the Approved Enterprises mentioned above and may be
affected by the current location of our facilities in Israel. The relative portion of
taxable income that should be allocated to each Approved Enterprise and expansion is
subject to the fulfillment of covenants with the tax authorities.

Several
of our facilities have been granted Approved Enterprise status:

(i)
          Nazareth Facilities: On December 31, 1997, our production facilities
          in Nazareth were granted Approved Enterprise status. Subject to compliance with
          applicable requirements, the income derived from the Nazareth Approved
          Enterprise is tax exempt for a period of 10 years.

The
periods of tax benefits with respect to Nazareth Approved Enterprises will commence with
the first year in which we earn our taxable income and exhaust our accumulated tax loss
carry forwards. The period of tax benefits for the Approved Enterprises are subject to
limits of the earlier of 12 years from the commencement of production or 14 years from
receiving the approval (these limits do not apply to the exemption period). The period of
benefits for Nazareth plan has not yet commenced and will expire in 2009.

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(ii)Status
Expansion of Nazareth and Migdal Ha-emek: In 2000, we received           approval of
our application for an expansion of our Approved Enterprise status           with respect
to our Nazareth facility. This expansion included, among other           things, our
Carmiel facility, which during 2004 was relocated to Migdal Ha-emek.           The income
derived from this Approved Enterprise is tax-exempt for a period of           10 years.
The relative portion of taxable income that should be exempt for a           10-year
period is subject to final covenants with the tax authorities. The           10-year
period of benefits will commence with the first year in which we earn           taxable
income. The period of benefits for this expansion plan has not yet           commenced
and will expire in 2012.

(iii)
Or Yehuda / Tel Aviv Facilities: In 1997, Floware submitted a request for
          Approved Enterprise status of its production facility in Or Yehuda. This
request           was approved. After the merger, Flowares enterprise was relocated
into our           facilities in Tel Aviv. The income derived from this Approved
Enterprise is tax           exempt for a period of two years and thereafter will be
subject to a reduced tax           rate between 10% and 25% for an additional period of
five to eight years. The           actual number of years and tax rate depends upon the
percentage of the           non-Israeli holders of our share capital. The period of
benefits will commence           with the first year that we earn taxable income. The
period of benefits for this           plan has not yet commenced and will expire in 2011.

In
order to maintain eligibility for the above programs and benefits, we must meet specified
conditions stipulated by the Investment Law, regulations published there-under and the
letters of approval for the specific investments in Approved Enterprises. In
the event of failure to comply with these conditions, any benefits that were previously
granted may be canceled, and we may be required to refund the amount of the benefits, in
whole or in part, including interest.

If
these retained tax-exempt profits are distributed they would be taxed at the corporate tax
rate applicable to such profits as if we had not elected the alternative system of
benefits, currently between 10%  25% for an Approved Enterprise. As of
December 31, 2008, our accumulated deficit does not include tax-exempt profits earned by
our Approved Enterprise.

On
April 1, 2005, an amendment to the Investment Law came into effect (the
Amendment) and has significantly changed the provisions of the Investment Law.
The Amendment limits the scope of enterprises that may be approved by the Investment
Center. The Investment Center is a statutory body in Israel responsible for providing
certain grants and/or tax benefits subject to certain criteria and limitations. These
criteria set for the approval of a facility as a Privileged Enterprise,
include a generally required provision that at least 25% of the Privileged
Enterprises income must be derived from export. Additionally, the Amendment enacted
major changes concerning the manner in which tax benefits are awarded under the Investment
Law so that companies no longer require the Investment Centers approval in order to
qualify for tax benefits. However, the Amendment provides that terms and benefits that
were included in any certificate of approval which was already granted will remain subject
to the provisions of the law as they were on the date of such approval.

Status
Expansion of our Production Facilities:Under the Amendment, in 2005 and 2007, we
submitted an expansion request for additional Privileged Enterprise approval
regarding our production facilities. A portion of the income derived from this 
Privileged Enterprise will be tax-exempt for a period of 10 years and the rest will
be taxed at a reduced rate of 10% to 25% (depending on the percentage of foreign
investment in the Company). The 10-year period of benefits will commence with the first
year in which we earn taxable income.

Our Israeli company had no taxable
income since inception nor any profit under our Approved or Privileged Enterprise plans.

64

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As
of December 31, 2008, in our Israeli company we had available tax loss carry forwards
amounting to approximately $129 million, which may be carried forward, in order to offset
taxable income in the future, for an indefinite period.

As
of December 31, 2008, the state and the U.S. federal tax losses carry forward of our U.S.
subsidiary amounted to approximately $8.7 million and $33 million, respectively. These
losses are available to be offset against any future U.S. taxable income of our U.S.
subsidiary and will expire in the years 2011 and 2028, respectively. The state and federal
tax loss carry forwards per income tax returns filed included uncertain tax positions
that were taken in prior years.  Due to the application of FIN 48, the filed net
operating losses are greater than the net operating loss deferred tax asset which was
recognized for financial statement purposes.

Utilization
of U.S. net operating losses may be subject to substantial annual limitations due to the
change in ownership provisions (annual limitations) of the
Internal Revenue Code of 1986, as amended and similar state provisions. The annual
limitation may result in the expiration of net operating losses before utilization.

# Reduction in Corporate
Tax Rate

On
July 25, 2005, the Israeli parliament passed the Law for the Amendment of the Income Tax
Ordinance (No.147 and Temporary Order)  2005 (the Amendment).

The
Amendment provides for a gradual reduction in the statutory company tax rate in the
following manner: in 2008, the tax rate was 27%; in 2009, the tax rate is 26%; and from
2010 onward, the tax rate will be 25%. Furthermore, beginning in 2010, upon reduction of
the company tax rate to 25%, real capital gains will be subject to tax of 25%.

Because
we have more than one Approved Enterprise, and/ or Privileged
Enterprise our effective tax rate in Israel will be a weighted combination of the
various applicable tax rates. We are likely to be unable to take advantage of all tax
benefits in Israel for an Approved Enterprise, which would otherwise be available to us,
because a portion of our operations may be considered by the Israeli tax authorities as
generated in areas that are defined as non-Approved or non-Privileged Enterprise areas. In
addition, because the tax authorities customarily review and reassess existing tax
benefits granted to merging companies, and we have yet to finalize with the tax
authorities the status of our tax benefits following the Floware merger and the InnoWave
acquisition, we cannot assure you that the tax authorities will not modify the tax
benefits that we enjoyed prior to these transactions.

Our
effective corporate tax rate may substantially exceed the Israeli tax rate. Our France,
Romania, Brazil, Hong-Kong, Singapore, Japan, Mexico, Poland, Israel, Uruguay, Spain, UK,
South-Africa, Italy, Argentina, Ecuador, Costa Rica, India, Chile and Philippines
subsidiaries will generally each be subject to applicable federal, state, local and
foreign taxation, and we may also be subject to taxation in other jurisdictions where we
own assets, have employees or conduct activities. Because of the complexity of these local
tax provisions, it is not possible to anticipate the actual combined effective corporate
tax rate that will apply to us.

# Government Grants

Under
an arrangement entered during 2003 with the Office of the Chief Scientist in Israels
Ministry of Industry and Trade (the OCS) we participate in new OCS programs
under which we are eligible to receive grants for research and development projects
without any royalty repayment obligations excluding OCS programs grants resulting from
InnoWaves former operations, which were not included in this arrangement.

In
addition to these grants, we obtain grants from the OCS to fund certain other research and
development projects as part of our participation in the MAGNET Consortium. These grants
do not bear any royalty repayment obligations. The MAGNET Program, in the OCS, sponsors
innovative generic industry-oriented technologies to strengthen the countrys
technological expertise and enhance competitiveness.

65

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We
also participate in certain European and Spanish governmental programs in Castilla y Leon,
Spain which finance certain local research and development projects. If we are unable to
meet the terms of these programs we may be required to return the grants received.

# Recently Issued
Accounting Standards

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements, the
identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business combination.
SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier
adoption is prohibited. The impact of SFAS 141R on our consolidated results of operations
and financial condition will depend on the nature and size of acquisitions, if any,
subsequent to the effective date.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51". SFAS No. 160
establishes accounting and reporting standards that require that: (i) the ownership
interests in subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position within equity,
but separate from the parents equity; (ii) the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of income; and (iii) changes in a
parents ownership interest, while the parent retains its controlling financial
interest in its subsidiary, be accounted for consistently. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. We do not expect that the adoption of SFAS No. 160 will have a
significant impact on our consolidated financial statements.

In
November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, Accounting
for Defensive Intangible Assets. EITF 08-7 clarifies the accounting for certain
separately identifiable intangible assets which an acquirer does not intend to actively
use but intends to hold to prevent its competitors from obtaining access to them. EITF
08-7 requires an acquirer in a business combination to account for a defensive intangible
asset as a separate unit of accounting which should be amortized to expense over the
period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited. We do not expect that the
adoption of EITF 08-7 will have a significant impact on our consolidated financial
statements.

In
April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008 and early adoption is prohibited.. The guidance is applicable to
intangible assets acquired after the effective date. The impact of FSP FAS 142-3 on
our consolidated results of operations and financial condition will depend on the amount
of intangibles acquired, if any, subsequent to the effective date.

In
February 2008, the FASB issued FSP No. FAS 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13", and FSP No. FAS 157-2, Effective Date of FASB Statement
No. 157". Collectively, the Staff Positions defer the effective date of
Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities except for items that are recognized or disclosed at
fair value on a recurring basis at least annually, and amend the scope of Statement 157.
As described in Note 10 to our financial statements, we adopted Statement 157 and the
related FASB staff positions except for those items specifically deferred under FSP
No. FAS 157-2.

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|C. | RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES
|-- | ----------------------------------------------

Our
product development plans are market driven and address the major, fast-moving trends that
influence the wireless industry. We believe that our future success will depend upon our
ability to maintain technological competitiveness, to enhance our existing products and to
introduce on a timely basis new commercially viable products addressing the demands of the
broadband wireless access market. Accordingly, we devote, and intend to continue to
devote, a significant portion of our personnel and financial resources to research and
development. As part of the product development process, we seek to maintain close
relationships with current and potential distributors, other resellers and end users,
strategic partners and leaders in industry segments in which we operate to identify market
needs and define appropriate product specifications.

As
of December 31, 2008, our research and development staff consisted of 371 full time
employees. Our research and development is conducted at our facilities in Israel, Romania
and Spain. We occasionally use independent subcontractors for portions of our development
projects.

Our
gross research and development expenses were approximately $42 million or 23% of sales in
2006, $55 million or 23% of sales in 2007, and $70 million or 22% of sales in 2008. The
Government of Israel and other jurisdictions for funding-approved research and development
projects reimbursed us for approximately $3.2 million in 2006, $3.6 million in 2007 and
$10.3 million in 2008.

|D. | TREND
INFORMATION
|-- | -----------------

See
  Operating Results- 2008 Highlights above.

|E. | OFF-BALANCE
SHEET ARRANGEMENTS
|-- | ------------------------------

None.

|F. | TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|-- | ---------------------------------------------

See
  Liquidity and Capital Resources  Working Capital  Commitments.

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

|A. | DIRECTORS
AND SENIOR MANAGEMENT
|-- | -------------------------------

The
following table lists the name, age and position of each of our directors and executive
officers as of May 1, 2009:

|Name                   | Age | Position                                                  
|---------------------- | --- | ----------------------------------------------------------
|
|
|
|
|Anthony Maher          | 63  | Chairman of the Board of Directors (1)(4)(5)              
|Oded Eran              | 57  | Director (1)(3)                                           
|Benny Hanigal          | 58  | Director (1)(5)                                           
|Professor Raphael Amit | 61  | Director(1)(2)(3)(4)                                      
|Robin Hacke            | 49  | Director (1)(2)(3)(5)                                     
|Amnon Yacoby           | 59  | Director (1)(3)                                           
|Dr. David Kettler      | 66  | Director (1)(4)(5)                                        
|Zvi Slonimsky          | 59  | Director                                                  
|Tzvika Friedman        | 47  | Chief Executive Officer and President                     
|Efrat Makov            | 41  | Chief Financial Officer                                   
|                      
|Rudy Leser             | 44  | Corporate Vice President, Strategic Initiatives           
|Mohammad Shakouri      | 46  | Corporate Vice President, Innovation and Marketing        
|Avi Mazaltov           | 47  | President, Operations and Infrastructure Division         
|Avi Wellingstein       | 48  | President, Customers' Business Division                   
|Avinoam Barak          | 46  | President, Wireless Network Division                      
|Haim Srur              | 44  | Corporate Vice President, Human Resources                 
|Amir Tirosh            | 40  | Corporate Vice President, Strategy & Corporate Development
|Greg Daily             | 45  | President, Alvarion, Inc.                                 

| | (1) | Independent
Director under rules of the SEC and NASDAQ Marketplace Rules (see explanation
below).
| | --- | ---------------------------------------------------------------------------------------------------

| | (2) | External
Director within the meaning of the Israeli Companies Law           (see explanation
below).
| | --- | ------------------------------------------------------------------------------------------------------

| | (3) | Member
of our audit committee.
| | --- | ------------------------------

| | (4) | Member
of our compensation committee.
| | --- | -------------------------------------

| | (5) | Member
of our nominating and corporate governance committee.
| | --- | ------------------------------------------------------------

Mr.
          Anthony Maherhas served as the chairman of our board of directors
          since March 2004. He was a member of Flowares board of directors from 1997
          and until its merger with us and has, since the merger, served as a member of
          our board of directors. Until January 2002, Mr. Maher was a Member of the
          Executive Management Board of the Information and Communication Networks Group
          of Siemens AG. Since 1978, Mr. Maher has held various engineering, marketing and
          managerial positions at Siemens. Prior to that, he was employed by Bell
          Telephone Laboratories in Naperville, Illinois, contributing to hardware and
          software design, as well as System engineering. Mr. Maher also serves as
          director of Adva Optical Networks, Inc., Broadlight, Verivue and Xtellus Inc.
          Mr. Maher holds M.Sc. and B.Sc. degrees in Electrical Engineering and Physics
          from the University of Illinois.

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Mr.
          Oded Eran has served as a member of our board of directors since September
          2003. Mr. Eran is a corporate lawyer, who has been a member of the Israeli law
          firm of Goldfarb, Levy, Eran, Meiri & Co. since 1986. From 1983 to 1986, Mr.
          Eran was an associate lawyer at the New York law firm of Kronish, Lieb, Weiner
          & Hellman. Mr. Eran is a member of the Israeli Bar (1981) and the New York
          Bar (1984). He holds LLB and LLM degrees from the Tel Aviv University Faculty of
          Law.

Mr.
          Benny Hanigalhas served as a member of our board of directors since our
          inception and served as chairman of our board of directors until February 1999.
          Since August 2001, Mr. Hanigal has been a partner in Sequoia Capital Venture
          Fund. In 1985, Mr. Hanigal founded Lannet Ltd., of which Mr. Hanigal served as
          President and Chief Executive Officer until 1995. In 1995, Lannet was acquired
          by Madge Networks N.V., which thereafter employed Mr. Hanigal until he left in
          June 1997. From January 1998 until 2001, Mr. Hanigal served as a managing
          director of a company that manages one of the Star funds. Since December 2007,
          Mr. Hanigal has served as the Chairman of the board of directors of EZchip
          Semiconductor. Mr. Hanigal has a B.Sc. degree in Electrical Engineering from the
          Technion -Israel Institute for Technology.

Professor
Raphael Amithas served as one of our external directors since September
2003. He serves on the audit and on the Compensation Nominating and Governance committees.
Prior to joining our board of directors , Professor Amit served as Chairman of the board
of directors of Creo Products Inc (NASDAQ: CREO until May 2005). Professor Amit has been
the Robert B. Goergen Professor of Entrepreneurship and a Professor of Management at the
Wharton School of the University of Pennsylvania since July 1999. Professor Amit also
serves as the Academic Director of Whartons Goergen Entrepreneurial Management
Programs. Prior thereto, Professor Amit was the Peter Wall Distinguished Professor at the
Faculty of Commerce and Business Administration, University of British Columbia (UBC),
where he was the founding director of the W. Maurice Young Entrepreneurship and Venture
Capital Research Center. From 1983 to 1990, Professor Amit served on the faculty of the
J.L. Kellogg Graduate School of Management at Northwestern University, where he received
the J.L. Kellogg Research Professorship and the Richard M. Paget Research Chair in
Business Policy. Professor Amit holds B.A. and M.A. degrees in Economics from the Hebrew
University and a Ph.D. in Management from the Northwestern Universitys J.L. Kellogg
Graduate School of Management. Professor Amit serves on the editorial boards of the
Strategic Management Journal and The European Journal of Management. Professor Amit has
served as a consultant to a broad range of organizations in North America and Europe on
strategic, entrepreneurial management and new venture formation issues.

Ms.
          Robin Hacke was appointed as one of our external directors upon our merger
          with Floware in August 2001. Ms. Hacke served as a member of Flowares
          board of directors from its initial public offering in August 2000 and was
          appointed as an external director of Floware in December 2000. In September
          2007, Ms. Hacke became Director of Capital Formation at Living Cities, a funding
          collaborative of foundations and financial institutions. Since August 2003, Ms.
          Hacke has been the Managing Director of Pentaport Venture Advisors Inc., a
          company that advises investment companies, including Portview Communications
          Partners LP. From 1990 to 2002, Ms. Hacke served as the Chief Executive Officer
          of HK Catalyst Strategy and Finance Ltd., a company that Ms. Hacke founded that
          provided advisory services to investment companies and high-tech enterprises.
          From 1986 to 1990, Ms. Hacke held various management positions at Aitech Ltd.,
          an Israeli start-up company. Prior to that, Ms. Hacke was an investment banker
          at Shearson Lehman Brothers in New York. Ms. Hacke is a member of the board of
          directors of Mintera Inc.,, a privately held company. Ms. Hacke holds an A.B.
          magna cum laude degree from Harvard-Radcliffe College and an MBA degree from
          Harvard Business School.

Mr.
          Amnon Yacoby has served as a member of our board of directors since our
          merger with Floware in August 2001. Mr. Yacoby founded Floware and
          served as its Chief Executive Officer and as a member of its board of directors
          until its merger with us. Following our merger with Floware until the end of
          2001, Mr. Yacoby served as our co-Chief Executive Officer. In 2004, Mr. Yacoby
          founded Aternity, Inc. and serves as its Chairman and CEO. In 1987, Mr. Yacoby
          founded RAD Network Devices Ltd., a developer of data networking devices, and
          served as its president and Chief Executive Officer until 1995. From 1972 to
          1986, he served in the Israel Defense Forces Electronic Research
          Department in various positions, most recently as head of the department. He
          twice received the Israel Security Award. Mr. Yacoby holds B.Sc. and M.Sc.
          degrees in Electrical Engineering from the Technion  Israel Institute of
          Technology.

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Dr.
          David Kettlerjoined our board of directors in May 2004. He provides
          consulting on telecom and information technology through DAK Solutions, LLC in
          Atlanta. Previously, Dr. Kettler served as the BellSouth Vice President in
          charge of the Science & Technology organization and Chief Architect for the
          BellSouth Network until his retirement at the end of 2000. Prior to BellSouth,
          Dr. Kettler spent over 15 years at AT&T Bell Laboratories and in Strategic
          Planning at AT&T Corporate Headquarters. After his retirement from BellSouth
          he served a few years as Managing Director and General Partner of H.I.G. Capital
          Management. He has actively contributed to Computer Science &
          Telecommunications Board Committee Reports on the Internet and Broadband. Dr.
          Kettler also serves on the College of Computing Advisory Board of Georgia
          Institute of Technology and numerous research and economic development steering
          committees. He has proactively engaged university/industry activities, led
          numerous consortia projects and facilitated the technology transfer from
          research laboratories toward commercialization. Dr. Kettler is an IEEE Fellow.
          He earned his BEE, MSEE, and Ph.D.EE from the University of Virginia and is past
          Chairman of the ECE Industrial Advisory Board and presently serves as a Trustee
          on the School of Engineering and Applied Sciences Trustee Board.

Mr.
          Zvi Slonimsky became a member of our board of directors and served as our
          co-Chief Executive Officer following our merger with Floware in August 2001. Mr.
          Slonimsky is the chairman of Teledata, as well as chairman of Surf and Maradin
          and board member of Sequans and New Era Biotech. He also provides telecom and
          information technology consulting through EIR ZS in Tel Aviv. From 2002 to 2005,
          he served as our sole Chief Executive Officer. Prior thereto, he served as our
          President and Chief Operating Officer since May 1999. Mr. Slonimsky had been
          President and Chief Executive Officer of MTS Ltd., a company supplying add-on
          software to PBXs, since its inception in December 1995 as a spin off from C. Mer
          Industries until 1999. Mr. Slonimsky joined C. Mer in November 1992 as Vice
          President of its products division. Before joining C. Mer, he was the General
          Manager of Sorek Technology Center from September 1991 to November 1992. From
          1989 to 1991, Mr. Slonimsky was the General Manager of DSPG Ltd., the
          Israeli-based subsidiary of DSPG, Inc. Prior to DSPG, he held various management
          positions in Tadiran Ltd., an Israeli communication equipment manufacturer. Mr.
          Slonimsky holds the B.Sc. and M.Sc. degrees in Electrical Engineering from the
          Technion  Israel Institute of Technology and an MBA degree from Tel-Aviv
          University.

Mr.
          Tzvika Friedmanwas appointed as our Chief Executive Officer and President
          in October 2005 and was a member of our board of directors from July 2005
          through August 2008. He joined Floware in October 2000 as its President and
          Chief Operating Officer and served in this capacity in Alvarion since our merger
          with Floware. From 1998 to 2000, Mr. Friedman served as Corporate Vice President
          and General Manager of the DCME division at ECI Telecom. From 1992 to 1996, Mr.
          Friedman served as vice president Marketing and Sales of ECI Telecoms SDH
          division. Mr. Friedman holds a B.Sc.E.E. in Electrical Engineering, a M.Sc.E.E.
          in Electrical Engineering from Tel Aviv University and a Sloan Program M.Sc.M.
          in Management from the London Business School.

Ms.
          Efrat Makovjoined Alvarion in March 2007 and has served as our Chief
          Financial Officer since April 2007. Most recently, Ms. Makov served as Chief
          Financial Officer at Aladdin Knowledge Systems Ltd. where she was responsible
          for the finance, operations, information systems and human resources functions
          from September 2005 through January 2007. From September 2002 through
          August 2005, she served as Corporate Controller and Vice President of Finance at
          Check Point Software Technologies Ltd. and from August 2000 through August 2002,
          as the Director of Finance for NUR Macroprinters Ltd. Prior to that, Ms.
          Makov spent seven years in public accounting with Arthur Andersen in New York,
          London and Tel Aviv. Ms. Makov is a Certified Public Accountant in Israel
          and the United States and holds a B.A. in Accounting and Economics from Tel Aviv
          University.

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Mr.
          Rudy Leser has been a member of our executive management team since 2000,
          beginning with Floware and continuing through the merger with Alvarion. In
          August 2008, Mr. Leser was appointed Corporate Vice President of Strategic
          Initiatives,to create new strategic developments for Alvarion. He
          previously served as our Corporate Vice President of Strategy and Marketing and
          was responsible for many activities within the Company including overall
          business strategy, product line management, product marketing, strategic
          marketing, partnerships and marketing communications. Prior to Alvarion, Mr.
          Leser was a leader in the early development of the broadband industry and held
          several management positions in the telecommunication industry for companies
          such as Metalink Broadband Access Ltd. Mr. Leser holds a B.Sc. and an M.Sc. in
          Aerospace Engineering from the Technion  Israel Institute of Technology.

Dr.
          Mo Shakouriwas appointed as our Corporate Vice President of Innovation and
          Marketing in March 2008 and assumed his newrole as of April 1, 2008. Dr.
          Shakouri joined us in February 2001 and has extensive experience in wireless
          communication systems and fiber optic networks. Dr. Shakouri serves as a Vice
          President of WiMAX Forum, a member of WiMAX Forum board of directors, advisory
          board for the Wireless Communication Alliance and is an IEEE MTT-SVC 2004
          chairman. Prior to joining Alvarion, Dr. Shakouri worked at Lucent Technologies
          where he was responsible for managing, building and developing network solutions
          for European and South American broadband wireless markets. Before joining
          Lucent, he spent fourteen years in technical and management positions with
          Hewlett Packard developing microwave and fiber optic communication components
          and systems. He co-founded the wireless systems division, where he was
          responsible for the engineering team developing low-cost residential digital
          wireless systems for U.S. and Asian markets. Dr. Shakouri earned his doctorate
          in electrical engineering from Stanford University on Subpicosecond GaAs Wafer
          Probe Systems.

Mr.
          Avi Mazaltov was appointed as our President of the Operations and
          Infrastructure Division in January 2006. Mr. Mazaltov joined the Company as Vice
          President of Operations in June 2002. Prior to joining Alvarion, Mr. Mazaltov
          held several positions at Teva Pharmaceuticals, including Pharmaceuticals Plant
          Manager and Solid Dosage Global Operations Director. Before joining Teva
          Pharmaceuticals, Mr. Mazaltov held the position of Supply Chain Director at Time
          & Frequency LTD a subsidiary of Tadiran Ltd. Mr. Mazaltov holds a B.Sc.
          degree in Industrial Engineering and Management from Ben-Gurion University.

Mr.
          Avi Wellingstein joined Alvarion in January 2006 as President of the
          Customers Business Division. Prior to joining Alvarion, Mr. Wellingstein
          led the Comverse InSight Open Services Environment group as Vice President and
          Chief Commercial Officer, responsible for its worldwide business. His previous
          positions at Comverse included Corporate Vice President and Chief Procurement
          Officer. Before joining Comverse, Mr. Wellingstein was Vice President of Sales
          and Marketing of Orbotech Pacific. Mr. Wellingstein holds a B.Sc. degree in
          Engineering and an MBA in Information Technology and Marketing from Tel Aviv
          University.

Mr.
          Avinoam Barak joined Alvarion at the end of 2005. He was appointed as
          President of the Wireless Network Division in April 2009. From January 2006
          until April 2009 he was President of the Broadband Wireless Access Division. In
          the five years prior to joining Alvarion, Mr. Barak served as General Manager of
          the Networking Business Unit in Radvision. Before joining Radvision, he served
          as a Communication Systems Business Unit Manager at MLM, a division of Israel
          Aircraft Industries, as well as various senior engineering and project
          management positions. Mr. Barak holds a B.Sc. degree in Computer Engineering
          from the Technion-Israel Institute for Technology and an MBA in Information
          Systems and Finance from Bar Ilan University.

Mr.
          Haim Srur was appointed Vice President of Human Resources following our
          merger with Floware in August 2001. Prior to Mr. Srurs present position,
          he served as Flowares Vice President Human Resources since December 2000.
          Prior to joining Floware, Mr. Srur held the position of Human Resources Director
          of the R&D and Operations Divisions at Teva Pharmaceutical Industries. Prior
          to joining Teva, he worked as an independent consultant in human resources and
          organizational management to start-up companies. Mr. Srur holds a Masters degree
          in Organizational Sociology from Bar-Ilan University, Israel.

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Mr.
          Amir Tiroshjoined our management team in January 2007 as Corporate Vice
          President of Strategy and Corporate Development, bringing with him over 10 years
          of experience in management and business development. Before joining Alvarion,
          Mr. Tirosh worked in M-Systems (NASDAQ: FLSH), which was acquired by SanDisk
          (NASDAQ: SNDK), as the Corporate Vice President and General Manager of the
          Embedded Business Unit, and as the Corporate Vice President of Corporate
          Business Development, leading M&A, investment and strategic agreements of
          the company. Prior to M-Systems, Mr. Tirosh served as the Director of Corporate
          Business Development at Teva Pharmaceutical Industries Ltd., the worlds
          largest generic drug company, where he managed the process of new business
          opportunities, focusing mainly on M&A and joint ventures. Mr. Tirosh holds a
          B.Sc. degree in Industrial Engineering and Management from the Technion 
          Israel Institute of Technology, and an MBA from Tel Aviv University.

Mr. Greg Daily joined Alvarion, Inc., Alvarions North American
          subsidiary, in January 2006 and was named President in August 2006. Prior to Mr.
          Dailys current position, he was leading venture-backed private companies
          in general management and executive sales roles.  He was most recently
          President and Chief Executive Officer of Pedestal Networks. Prior to Pedestal he
          worked for 10 years at ADC Telecommunications, serving in various positions
          including General Manager of Transport Products division, General Manager of its
          Optical Networking Group, Group Vice-President of North American Sales and other
          sales management positions. Mr. Daily holds both Master and Bachelor of Science
          degrees in Engineering Management and Electrical Engineering from the University
          of Missouri at Rolla and is a graduate of the executive development program at
          the Kellogg School of Management at Northwestern University.

There
are no family relationships between any of our directors and executive officers.

|B. | COMPENSATION
OF DIRECTORS AND OFFICERS
|-- | --------------------------------------

The
aggregate direct labor costs associated with all of our directors and executive officers
as a group (20 persons) for the year ended December 31, 2008 (including persons who served
as directors and executive officers during 2008 and whom are no longer serving in such
capacity as of May 1, 2009) was approximately $3.9 million, which included, with respect
to certain executive officers, payments made pursuant to their bonus plans. This amount
also includes approximately $0.4 million that was set aside or accrued to provide pension,
retirement, social security or similar benefits. The amount does not include amounts
expended by us for vehicles made available to our officers; expenses, including business
travel, professional and business association dues and expenses; reimbursements to
directors and officers; and other fringe benefits commonly reimbursed or paid by companies
in Israel. Our directors received an aggregate of approximately $0.3 million in
compensation in 2008.

From
time to time, we grant options and awards under our equity incentive plans (described
below) to our executive officers and directors.

Option
grants to directors (including the chairman of our board of directors) who are not
executive officers are made pursuant to an automatic option grant program. Several of our
non-employee directors who are elected or re-elected to our board of directors are granted
upon each of his or her election or re-election, an option to purchase 10,000 ordinary
shares per each year of the term for which he or she is elected or re-elected. The options
vest in equal quarterly installments over the term of election or re-election, commencing
at the end of the third month following the date of election or re-election. All options
to our non-employee directors pursuant to the automatic option grant program are granted
at an exercise price equal to 100% of the closing price of the ordinary shares on the
NASDAQ Global Market on the last trading day immediately preceding the date of the
election or re-election.

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During
2008, we granted all of our directors and executive officers as a group (20 persons)
options to purchase an aggregate of 672,000, of our ordinary shares at exercise prices
ranging from NIS 0.01 to $7.40, with expiration dates ranging from April 2012 to June
2018, including options granted to 10 of our executive officers to purchase an aggregate
of 561,000 of our ordinary shares at an exercise price of NIS 0.01 (the par value of our
ordinary shares), vesting based on performance criteria, with an expiration date ranging
from June 2014 to November 2014.

As
of December 31, 2008, our directors and executive officers held outstanding options to
purchase an aggregate of 5,506,297 ordinary shares, at exercise prices ranging from NIS
0.01 to $15.4 with expiration dates ranging from January 2009 to June 2018.

|C. | BOARD
PRACTICES
|-- | ---------------

# Appointment of Directors
and Terms of Office

Our
board of directors currently consists of 9 members. Under our articles of association, our
board of directors is to consist of between four and 10 members. Our directors are elected
by our shareholders at an annual general shareholders meeting. Our directors generally
commence the terms of their office at the close of the annual general shareholders meeting
at which they are elected and, other than our external directors, serve in office until
the close of the third annual general shareholders meeting following the meeting at
which they are elected, and may be re-elected by the shareholders. Annual general
shareholders meetings are required to be held at least once every calendar year, but not
more than 15 months after the last preceding annual general shareholders meeting. In the
intervals between the annual general meetings of the shareholders, the general meetings of
our shareholders or our board of directors may appoint new directors to fill any vacancy
created in our board of directors, except for vacancies of an external director.

The
terms of office of the directors, including compensation, must be approved, under the
Israeli Companies Law, by the audit committee, the board of directors and the general
meeting of the shareholders. The appointment and terms of office of our Chief Executive
Officer and Chief Financial Officer are determined by our board of directors with the
recommendation of our compensation committee. The terms of office of our other executive
officers are determined by our compensation committee.

The
terms of office of Messrs. Maher and Eran expire at our 2009 annual general meeting of the
shareholders; the terms of office of Messrs. Kettler, Slonimsky and Yacoby expire at our
2010 annual general meeting of the shareholders; and the term of office of Mr. Hanigal,
expires at our 2011 annual general meeting of the shareholders. Dr. Barel resigned from
our board of directors effective as of April 15, 2009. The terms of office of our external
directors, Ms. Hacke and Professor Amit, expire in August 2010 and September 2009,
respectively, as described below.

# Service Contracts of
Directors

None
of our directors has the right to receive any benefit upon termination of his or her
office or any service contract he or she may have with us.

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External Directors

We
are subject to the provisions of the Israeli Companies Law. Under the Israeli Companies
Law, companies incorporated under the laws of Israel whose shares have been offered to the
public in or outside of Israel are required to appoint at least two directors who qualify
as external directors under the Israeli Companies Law. At least one of the external
directors is required to have financial and accounting expertise (unless
another member of the audit committee, who is an independent director under the NASDAQ
Marketplace Rules, has financial and accounting expertise) and any other
external director must have accounting and financial expertise or
professional expertise, as such terms are defined by regulations promulgated
under the Israeli Companies Law. Our board of directors has determined that Professor Amit
has financial and accounting expertise and Ms. Hacke has professional
expertise.

A
person may not be appointed as an external director if the person or the persons
relative, partner, employer or any entity under the persons control, has, as of the
date of the persons appointment as external director, or had, during the preceding
two years, any affiliation with the company or any entity controlling, controlled by or
under common control with the company. Under the Israeli Companies Law, the term
affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

An
office holder is defined as any director, managing director, general manager,
chief executive officer, executive vice president, vice president, other manager directly
subordinate to the general manager or any other person assuming the responsibilities of
any of these positions regardless of that persons title. Each person listed in the
table under Director and senior management in Item 6.A. above is an office
holder.

A
person may not serve as an external director if that persons position or other
business creates, or may create, a conflict of interest with the persons
responsibilities as an external director or may otherwise interfere with such
persons ability to serve as a director. If at the time any external director is to
be elected all members of the board of directors are of the same gender, then the external
director to be elected must be of the other gender. There is also a restriction on
interlocking boards of directors: a director of a company may not be elected as an
external director of another company if, at that time, a director of the other company is
acting as an external director of the first company.

Under
the Israeli Companies Law, each committee of a companys board of directors is
required to include at least one external director, except for the audit committee, which
requires that all external directors be members of such committee. The term of office of
an external director is three years and may be extended for an additional three year
terms. However, Israeli companies listed on certain stock exchanges outside Israel,
including the NASDAQ Global Market, such as our company, may appoint an external director
for additional terms of not more than three years subject to certain conditions. Such
conditions include the determination by the audit committee and board of directors, that
in view of the directors professional expertise and special contribution to the
companys board of directors and its committees, the appointment of the external
director for an additional term is in the best interest of the company. An external
director can be removed from office only under very limited circumstances.

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The
external directors must be elected by the majority of the shareholders in a general
meeting, provided that either (i) the shares voting in favor of the external
directors election includes at least one-third of the shares of non-controlling
shareholders, or (ii) the total shares of non-controlling shareholders voted against the
election does not represent more than one percent of the total voting rights in the
company. Until the lapse of two years from his or her termination of office, a company may
not engage a former external director to serve as an office holder and may not employ or
receive professional services from that person, either directly or indirectly, including
through an entity controlled by that person.

Ms.
          Robin Hacke and Professor Raphael Amit qualify as our external directors under
          the Israeli Companies Law. We have appointed the external directors to the
          committees of our board of directors as required by the Israeli Companies Law.

# Independent Directors

NASDAQ
Marketplace Rules require that the board of directors of a NASDAQ-listed company have a
majority of independent directors, each of whom satisfies the independence
requirements of NASDAQ, and its audit committee must have at least three members and be
comprised only of independent directors, each of whom satisfies the respective
independence requirements of NASDAQ and the SEC. Our board of directors has
determined that each of Mr. Maher, Dr. Barel, Mr. Eran, Mr. Hanigal, Professor Amit,
Ms. Hacke, Mr. Yacoby and Dr. Kettler qualifies as an independent director under the
requirements of NASDAQ, and that each of Professor Amit, Ms. Hacke, Mr. Eran and Mr.
Yacoby (who serve on our audit committee) qualifies as an independent director under the
requirements of the SEC and NASDAQ.

Pursuant
to a recent amendment to the Israeli Companies Law, an Israeli company, whose shares are
publicly traded, may elect to adopt a provision in its articles of association pursuant to
which a majority of its board of directors will constitute individuals complying with
certain independence criteria prescribed by the Israeli Companies Law. We have not
included such a provision in our articles of association since our board of directors
complies with the independence requirements of the NASDAQ regulations described above.

# Committees of the Board
of Directors

Our
board of directors has established an audit committee, a compensation committee and a
nominating and corporate governance committee.

# Audit Committee

Pursuant
to the Israeli Companies Law and the NASDAQ Marketplace Rules,, the board of directors of
a public company must appoint an audit committee. The responsibilities of the audit
committee include monitoring the management of the Companys business and suggesting
appropriate courses of action, as well as approving related party transactions, reviewing
and recommending on board members compensation and other matters as required by Israeli
law and NASDAQ rules. The audit committee must be comprised of at least three directors,
including all the external directors. The audit committee may not include the chairman of
the board of directors, any director employed by the company or providing to the company
services on a regular basis, or a controlling shareholder or his relative. Our audit
committee assists the board of directors in fulfilling its responsibilities to ensure the
integrity of our financial reports, serves as an independent and objective monitor of our
financial reporting process and internal controls systems, including the activities of our
independent auditor and internal audit function, and provides an open avenue of
communication between the board of directors and the independent auditors, internal
auditor and financial and executive management.

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The
members of our audit committee are Professor Amit, Ms. Hacke, Mr. Eran and Mr.
Yacoby, each of whom is an independent director under the requirements of the SEC and
NASDAQ. Professor Amit qualifies as a financial expert for purposes of the rules of the
SEC. As stated above, Ms. Hacke and Professor Amit qualify as external directors under the
Israeli Companies Law.

# Compensation Committee

The
compensation committee of our board of directors consists of Mr. Maher, Dr. Barel,
Professor Amit and Dr. Kettler. As stated above, Dr. Barel has resigned from our board of
directors effective April 15, 2009. At such time, he will no longer serve as a member of
our compensation committee. Our board of directors has adopted a compensation committee
charter setting forth the responsibilities of the committee, which include:

| |  | reviewing
and recommending to the board of directors for its determination all compensation
          arrangements of our chief executive officer and chief financial officer;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reviewing
and determining all compensation arrangements of our other executive officers,
          including our corporate vice presidents and division presidents; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | overseeing
our equity incentive plans and cash incentives and deferred compensation plans.
| | - | ------------------------------------------------------------------------------------------

# Nominating and Corporate
Governance Committee

The
nominating and corporate governance committee of our board of directors consists of Mr.
Maher, Dr. Kettler, Ms. Hacke and Mr. Hanigal. Our board of directors has adopted a
nominating and corporate governance committee charter setting forth the responsibilities
of the committee, which include:

| |  | seeking
and recommending to the board of directors nomination of qualified candidates for
          election to the board of directors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | recommending
to the board of directors the directors that shall serve on each committee of the
          board of directors;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | leading
and monitoring a process to assess effectiveness of the board of directors;
| | - | -----------------------------------------------------------------------------------

| |  | developing
and recommending to the board of directors a set of corporate governance guidelines,
          periodically reviewing such guidelines and recommending changes; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | overseeing
the evaluation of the board of directors.
| | - | ----------------------------------------------------

# Internal Auditor

The
Israeli Companies Law also requires the board of directors of a public company to appoint
an internal auditor recommended by the audit committee. The role of the internal auditor
is to examine, among other things, whether the companys acts comply with applicable
law and orderly business procedure. The internal auditor may be an employee of the company
but may not be an interested party or office holder, or a relative of any interested party
or office holder, and may not be a member of the companys independent accounting
firm or its representatives. The Israeli Companies Law defines an interested
party as a holder of 5% or more of our shares or voting rights, any person or entity
that has the right to nominate or appoint at least one of our directors or our general
manager, or any person who serves as one of our directors or as our general manager. Our
current internal auditor, Mr. Eyal Weitzman, has served in this role since February 2006.

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# Fiduciary Duties and
Approval of Related Party Transactions

Fiduciary
Duties. The Israeli Companies Law codifies the fiduciary duties that office
holders, which under the Israeli Companies Law includes directors and executive officers,
owe to a company. An office holders fiduciary duties consist of a duty of care and a
duty of loyalty.

The
duty of care requires an office holder to act with the level of care that a reasonable
office holder in the same position would employ under the same circumstances. This
includes the duty to use reasonable means to obtain information regarding the advisability
of a given action submitted for his approval or performed by him by virtue of his
position, and all other relevant information material to these actions.

The
duty of loyalty requires an office holder to act in good faith and for the companys
benefit, including to avoid any conflict of interest between the office holders
position in the company and any other position held by him or his personal affairs, and
prohibits any competition with the company, or the exploitation of any business
opportunity of the company in order to receive personal advantage for himself or others.
This duty also requires disclosing to the company any information or documents relating to
the companys affairs that the office holder has received as a result of his position
as an office holder. A company may approve any of the acts mentioned above provided that
all the following conditions apply: the office holder acted in good faith and neither the
act nor the approval of the act prejudices the good of the company and the office holder
disclosed the essence of his personal interest in the act, including any substantial fact
or document, a reasonable time before the date for discussion of the approval.

Compensation
Under the Israeli Companies Law, unless the articles of association provide otherwise, all
arrangements as to compensation of office holders who are not directors require approval
of the board of directors and, with respect to indemnification and insurance of these
office holders, also require audit committee approval.  Arrangements regarding the
compensation of directors, as well as indemnification and/or insurance for directors,
require the approval of the audit committee, the board of directors and the shareholders,
in that order.

Disclosure
of Personal Interest. The Israeli Companies Law requires that an office holder
promptly disclose to the company any personal interest that he or she may have and all
related material information known to him or her, in connection with any existing or
proposed transaction by the company. Personal interest, as defined by the
Israeli Companies Law, includes a personal interest of any person in an act or transaction
of the company, including a personal interest of his relative or of a corporation in which
that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or
more of the voting rights, a director or general manager, or in which he or she has the
right to appoint at least one director or the general manager. Personal
interest does not apply to a personal interest stemming merely from holding shares
in the company.

The
office holder must make the disclosure of his personal interest no later than the first
meeting of the companys board of directors that discusses the particular
transaction. This duty does not apply to the personal interest of a relative of the office
holder in a transaction unless it is an extraordinary transaction". The
Israeli Companies Law defines an extraordinary transaction as a transaction
that is not in the ordinary course of business, not on market terms or that is likely to
have a material impact on the companys profitability, assets or liabilities, and a
relative as a spouse, sibling, parent, grandparent, descendent, spouses
descendant and the spouse of any of the foregoing.

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Approvals.
          The Israeli Companies Law provides that a transaction with an office holder or a
          transaction in which an office holder has a personal interest requires approval
          of the board of directors, unless the transaction is an extraordinary
          transaction or the articles of association provide otherwise. The transaction
          may not be approved if it is adverse to the companys interest. If the
          transaction is an extraordinary transaction, or if it concerns exculpation,
          indemnification or insurance of an office holder, then the approvals of the
          companys audit committee and the board of directors are required.
          Exculpation, indemnification, insurance or compensation of a director also
          requires shareholder approval. The audit committee may not approve the
          transaction unless, at the time of the approval, at least two members of the
          audit committee were external directors and at least one of them was present at
          the meeting at which the audit committee approved the transaction.

A
director who has a personal interest in a matter that is considered at a meeting of the
board of directors or the audit committee generally may not attend that meeting or vote on
that matter, unless a majority of the board of directors or the audit committee has a
personal interest in the matter. If a majority of the board of directors or the audit
committee has a personal interest in the transaction, shareholder approval would also be
required.

# Controlling Shareholder
 Disclosure and Approval

The
Israeli Companies Law imposes on a controlling shareholder of a public company the same
disclosure requirements described above as it imposes on an office holder. For this
purpose, a controlling shareholder is any shareholder who has the ability to
direct the activities of a company, including any shareholder that holds 25% or more of
the voting rights if no other shareholder owns more than 50% of the voting rights in the
company. Two or more shareholders with a personal interest in the approval of the same
transaction are deemed to be one shareholder.

Approval
of the audit committee, the board of directors and our shareholders, in that order, is
required for:

| |  | extraordinary
transactions, including a private placement, with a controlling shareholder or in
                  which a controlling shareholder has a personal interest; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
terms of compensation or employment of a controlling shareholder or his or her relative,
as                   our officer holder or employee.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

The
shareholders approval must include the majority of shares voted at the meeting. In
addition to the majority vote, the shareholder approval must satisfy either of two
additional tests:

| |  | the
majority includes at least one-third of the shares voted by shareholders who have no
                  personal interest in the transaction; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares, other than shares held by the disinterested shareholders, that
voted against the approval of the transaction does not exceed 1% of the aggregate voting
rights of our company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Duties of Shareholders

Under
the Israeli Companies Law, a shareholder has a duty to act in good faith and in a
customary manner towards the company and other shareholders, and to refrain from abusing
his or her power in the company, including when voting in a shareholders meeting or in a
class meeting on matters such as the following:

| |  | an
amendment to the company's articles of association;
| | - | ------------------------------------------------------

| |  | an
increase in the company's authorized share capital;
| | - | ------------------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | approval
of related party transactions that require shareholder approval.
| | - | -------------------------------------------------------------------------

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In
addition, any controlling shareholder, any shareholder who knows that he or she possesses
the power to determine the outcome of a shareholders meeting or a shareholders class
meeting and any shareholder who has the power to prevent the appointment of an office
holder, is under a duty to act with fairness towards the company. The Israeli Companies
Law does not define the substance of this duty of fairness, except to state that the
remedies generally available upon a breach of contract will also apply in the event of a
breach of the duty to act with fairness, taking into account the position in the company
of those who breached the duty of fairness.

# Exculpation, Insurance
and Indemnification of Directors and Officers

Indemnification of Office
Holder

Our
articles of association provide that, to the extent permitted by the Israeli Companies
Law, we may indemnify our office holders for the following liabilities or expenses
incurred by an office holder as a result of an act done by him or her in his or her
capacity as an office holder:

| |  | a
financial liability imposed on him or her in favor of another person by a court judgment,
                  including a settlement, judgment or an arbitrator's award approved by a
court;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
costs of litigation, including attorneys fees, expended by our office holders as a
result of an investigation or proceeding instituted against the office holders by a
competent authority, provided that such investigation or proceeding was concluded without
the filing of an indictment against the office holders or the imposition of any financial
liability in lieu of criminal proceedings, or was concluded without the filing of an
indictment against the office holders and a financial liability was imposed on the office
holders in lieu of criminal proceedings with respect to a criminal offense in which proof
of criminal intent is not required; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by an office holder or
charged to him or her by a court, in a proceeding filed against him or her by the company
or on its behalf or by another person, or in a criminal charge from which he or she was
acquitted, or in a criminal charge of which he was convicted of a crime which does not
require a finding of criminal intent.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Israeli Companies Law and our articles of association provide that, subject to certain
limitations, we may undertake to indemnify an office holder of the company
retrospectively, and may also undertake in advance to indemnify an office holder of the
company, provided the undertaking is limited to events which the board of directors
believes can be anticipated at the time of such undertaking, in light of the
companys activities as conducted at such time and is in an amount or based on
criteria that the board of directors determines is reasonable under the circumstances and,
provided, further, that such undertaking lists the events which the board of directors
believes can be anticipated in light of the companys activities as conducted at such
time, and the amount or based on criteria that the board determines is reasonable under
the circumstances.

79

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Insurance of Office
Holders

Our
articles of association provide that, to the extent permitted by the Israeli Companies
Law, we may obtain insurance to cover any liabilities imposed on our office holders as a
result of an act done by him in his capacity as an office holder, in any of the following:

| |  | a
breach of his duty of care to us or to another person;
| | - | --------------------------------------------------------

| |  | a
breach of his duty of loyalty to us, provided that he acted in good faith and had
reasonable              grounds to assume that his act would not prejudice us; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
financial liability imposed upon him in favor of another person.
| | - | --------------------------------------------------------------------

Exculpation of Office
Holders

In
addition, our articles of association provide that, to the extent permitted by the Israeli
Companies Law, we may exculpate an office holder in advance from liability, in whole or in
part, for damages resulting from a breach of his duty of care to us.

Limitations on
Exculpation, Indemnification and Insurance

These
provisions are specifically limited in their scope by the Israeli Companies Law, which
provides that a company may indemnify or insure an office holder against a breach of duty
of loyalty only to the extent that the office holder acted in good faith and had
reasonable grounds to assume that the action would not prejudice the company. In addition,
a company may not indemnify, insure or exculpate an office holder against a breach of duty
of care if committed intentionally or recklessly (excluding mere negligence), or committed
with the intent to derive an unlawful personal gain, or for a fine or forfeit levied
against the office holder in connection with a criminal offense.

We
have obtained directors and officers liability insurance for the benefit of our
office holders to the full extent permitted by the Israeli Companies Law.

Following
approval by our audit committee, board of directors and shareholders, in 2001, 2004 and
2005, we entered into agreements with our office holders under which we undertook to
indemnify and exculpate our office holders. In connection with our merger with Floware, we
have also assumed similar agreements entered into between Floware and its officer holders.
The indemnification agreements provide that we will indemnify an office holder for any
expenses incurred by the office holder in connection with any claims (as these terms are
defined in the agreements) that fall within one or more categories of indemnifiable events
listed in the agreements, related to any act or omission of the office holder while
serving as our office holder (or serving or having served, at our request, as an employee,
consultant, office holder or agent of any of our subsidiaries, or any other corporation or
partnership). In addition, under these agreements, we exempt and release our office
holders from any and all liability to us related to any breach by them of their duty of
care to us, to the maximum extent permitted by law.

|D. | EMPLOYEES
|-- | ---------

As
of December 31, 2008, we had 976 employees, of which 371 were engaged in research and
development, 164 in operations, 349 in sales and marketing, and 92 in administration and
management. Of our full-time employees, as of December 31, 2008, 676 were located in
Israel, 44 in the United States and 256 at our other branch offices, which offices are
listed in Item 4  Information on the Company  Organizational
Structure.

80

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We
consider our relations with our employees to be good and have never experienced any
strikes or work stoppages. Substantially all of our employees have employment agreements,
and none are represented by a labor union.

We
are subject to labor laws and regulations in Israel and in other countries where our
employees are located. Although our Israeli employees are not parties to any collective
bargaining agreement, we are subject to certain provisions of collective bargaining
agreements among the Government of Israel, the General Federation of Labor in Israel and
the Coordinating Bureau of Economic Organizations, including the Industrialists
Association, that are applicable to our Israeli employees by virtue of expansion orders of
the Israeli Ministry of Industry, Trade and Labor. Israeli labor laws are applicable to
all of our employees in Israel. Those provisions and laws principally concern the length
of the work day, minimum daily wages for workers, procedures for dismissing employees,
determination of severance pay and other conditions of employment.

We
contribute funds on behalf of our employees to an individual insurance policy known as
Managers Insurance. This policy provides a combination of savings plan, insurance
and severance pay benefits to the insured employee. It provides for payments to the
employee upon retirement or death and secures a substantial portion of the severance pay,
if any, to which the employee is legally entitled upon termination of employment. Each
participating employee contributes an amount equal to 5% of such employees base
salary, and we contribute between 13.83% and 15.83% of the employees base salary.
Employees are also entitled, instead of or combined with the Managers Insurance
above, to a pension fund to which the employee contributes an amount ranging from 5% to
5.5% of such employees base salary, and we contribute an amount equal to 14.83% of
the employees base salary. We also provide our employees with an Education Fund, to
which each participating employee contributes an amount equal to 2.5% of the
employees base salary, and we contribute an amount of up to 7.5% of the
employees base salary. Both of the above contributions are limited to maximum
amounts promulgated under the Israeli tax regulations which are tax exempt. We also
provide our employees with additional health insurance coverage for instances of severe
illnesses. Outside of Israel, we offer alternative local plans of pension, health
insurance, and social security as provided under the applicable laws in such
jurisdictions.

As
an Israeli employer, Israeli law requires us to provide salary increases as partial
compensation for increases in the Israeli consumer price index or as set by local law.
Employees and employers also are required to pay predetermined sums, which include a
contribution to provide a range of social security benefits.

# Management Employment
Agreements

We
maintain written employment agreements with substantially all of our key employees. These
agreements provide, among other matters, for monthly salaries, our contributions to
Managers Insurance or Pension Fund and an Education Fund, and severance benefits.
All of our agreements with our key employees are subject to termination by either party
upon the delivery of notice of termination as provided therein.

|E. | SHARE
OWNERSHIP
|-- | ---------------

The
following table sets forth certain information as of April 20, 2009 for (i) each of our
executive officers and directors that beneficially owns more than 1% of our outstanding
ordinary shares and (ii) our executive officers and directors as a group. The
information in the table below is based on 61,956,133 ordinary shares outstanding as of
April 20, 2009. Each of our outstanding ordinary shares has identical rights in all
respects.

81

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|Name | Number ofOrdinary Shares (1) | Percentage of OutstandingOrdinary Shares
|---- | ---------------------------- | ----------------------------------------
|
|
|
|
|    | Tzvika Friedman (2)          |                                        
|    
|    | Amnon Yacoby (3)             |                                        
|    
|    | All directors and           
|     | executive                   
|     | officers as a               
|     | group (19                   
|     | persons)(3)                  |                                        

| | (1)
The number of ordinary shares beneficially owned includes the shares issuable pursuant to
        options that are exercisable within 60 days of April 20, 2009. Shares issuable
pursuant to such         options are deemed outstanding for computing the percentage of
the person holding such options         but are not outstanding for computing the holding
percentage of any other person.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)
Based on information provided by Mr. Friedman and other information available to us.
        Includes options to purchase 855,315 of our ordinary shares which are exercisable
within 60 days         of April 20, 2009. The exercise price of a substantial portion of
these options is greater than         our current share market price.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3)
Based on information provided by Mr. Yacoby and other information available to us.
Includes         options to purchase 126,530 of our ordinary shares which are exercisable
within 60 days of April         20, 2009. The exercise price of some of these options is
greater than our current share market         price. (4) Includes options to purchase
3,375,640 of our ordinary shares which are exercisable         within 60 days of April
20, 2009.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Except
as set forth in the table above, none of our other directors or executive officers listed
above under "  Directors and Senior Management" held more than 1% of our outstanding
shares as of April 20, 2009.

As
of April 20, 2009, our directors and executive officers listed above under "  Directors
and Senior Management", as a group, held 5,122,259 options to purchase our ordinary
shares at a weighted average exercise price of $7.71 with expiration dates ranging from
December 15, 2009 until June 25, 2018. The voting rights of our directors and executive
officers do not differ from the voting rights of other holders of our ordinary shares.

Equity Incentive Plans

As
of December 31, 2008, a total of 30,916,260 ordinary shares have been reserved for
issuance upon exercise of options granted to our employees, officers, directors and
consultants pursuant to our share option plans.  These ordinary shares have been reserved
pursuant to our 2006 Global Share Based Incentive Plan (the "2006 Plan"), 2002 Global
Share Option Plan (the "2002 Plan"), Key Employee Share Incentive Plan (1994), as
amended, Key Employee Share Incentive Plan (1996), Key Employee Share Incentive Plan
(1997), 1999 U.S. Stock Option Plan, interWAVE's 1994 Stock Option Plan, interWAVE's 1999
Stock Option Plan and Floware's Key Employee Share Incentive Plan (1996).

Options
granted under the share option plans usually vest over a period of four years.

82

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As
of December 31, 2008, options to purchase 10,910,755 of our ordinary shares were
outstanding under the share option plans, including options issued pursuant to the terms
of the Floware merger and interWAVE amalgamation, at a weighted average exercise price of
$7.50 per share.  Unless a shorter period is specified in the notice of grant or unless
the applicable share option plan has an earlier termination date, each of the outstanding
options to purchase 10,910,755 of our ordinary shares expire between six and ten years
from the date of grant. As of December 31, 2008, options to purchase 4,094,082 of our
ordinary shares were available for issuance under the share option plans.

As
of December 28, 2005, 1,834,452 unvested out-of-the-money options with an exercise price
higher than $10 per share and related to the vesting period from January 1, 2006 through
January 1, 2007 had been accelerated. The options were accelerated to reduce the expense
impact in 2006 and beyond of a new accounting standard for stock-based compensation.
Because we have accounted for stock-based compensation prior to January 1st, 2006 using
the intrinsic value method prescribed in Accounting Principles Board (APB) No. 25, and
because these options were priced above current market, the acceleration of vesting of
these options did not require accounting recognition in our financial statements.
However, the impact of the vesting acceleration on pro forma stock-based compensation
required to be disclosed in the financial statement footnotes under the provisions of
SFAS No. 123, was an increase in compensation cost by approximately $5.2 million.

In
2006, our board of directors, based on the recommendation of our compensation nominating
and corporate governance committee, adopted the 2006 Plan.  Under the 2006 Plan, we may
grant restricted share units, restricted shares, options and other equity awards to
employees, directors, consultants, advisers and service providers of our Company and its
subsidiaries.  Pursuant to the 2006 Plan, 1,500,000 ordinary shares were initially
reserved for issuance upon the exercise of awards granted under the 2006 Plan.  The
number of ordinary shares available for issuance under the 2006 Plan is reset annually on
April 1 of each year (commencing April 1, 2007) to equal 4% of our total outstanding
shares as of the applicable reset date.  As such, on April 1, 2008, the number of
ordinary shares available for issuance under the 2006 Plan was increased by 2,448,666. As
of December 31, 2008, options to purchase 5,009,818 of our ordinary shares were
outstanding under the 2006 Plan.

The
2006 Plan was approved solely by our board of directors pursuant to NASDAQ rules
permitting foreign private issuers to follow home country rules in such matters.
 According to Israeli Company Law, incentive plans as well as their underlying pool do
not require shareholders' approval, with the exclusion of grants to board members, which
requires shareholders' approval. At the same time the new plan was approved by our board
of directors, the board set new guidelines for awarding options that take into
consideration factors like option-related expensing requirements, potential dilution and
employee retention as well as generally accepted guidelines and practices in the United
States. The number of eligible employees was reduced significantly and actual grants to
each employee were reduced compared to prior guidelines.

83

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In
connection with our acquisition of interWAVE, we assumed interWAVE's 1994 Stock Option
Plan and 1999 Stock Option Plan (the options under which are referred to as the assumed
options). Each assumed option to purchase interWAVE  ordinary shares outstanding pursuant
to interWAVE's Employee Stock Option Plan was converted into an option to purchase, on
the same terms and conditions as applied to the interWAVE option, to a number of our
ordinary shares equal to the number of interWAVE ordinary shares that the holder of such
interWAVE option was entitled to acquire, multiplied by 0.2978056 (the "ratio"), at an
exercise price per share equal to the former exercise price per share under the interWAVE
option, divided by 0.2978.  This ratio reflects the quotient obtained by dividing the per
share consideration of interWAVE by our share price.  For these purposes, our share price
means the average closing price of our ordinary shares on the NASDAQ over the five
trading days up to and including the second trading day preceding the closing.  Effective
upon the closing of the acquisition of interWAVE, 25% of the unvested portion of any
assumed interWAVE options accelerated and the remaining unvested options continued to
vest according to the original vesting schedule. In connection with this, outstanding
assumed options to purchase interWAVE ordinary shares were converted into options to
purchase approximately 423,156 of our ordinary shares.

In
addition, in connection with our merger with Floware, each option to purchase Floware
ordinary shares outstanding pursuant to Floware's Employee Stock Option Plan was
converted into an option to purchase, on the same terms and conditions as applied to the
Floware option (subject to any applicable accelerated vesting or other provisions as were
triggered in connection with the merger), a number of Alvarion ordinary shares equal to
the number of Floware ordinary shares that the holder of such Floware option was entitled
to acquire, multiplied by 0.767 (the exchange ratio in the merger), at an exercise price
per share equal to the former exercise price per share under the Floware option, divided
by 0.767.  In connection with the merger, outstanding options to purchase Floware
ordinary shares were converted into options to purchase approximately 5,230,469 of our
ordinary shares.

The
share option plans are administered by the board of directors which designates the
optionees, dates of grant, vesting period and the exercise price of options.  Each
grantee is responsible for all personal tax consequences of the grant and the exercise of
the options.  Unless otherwise approved by our board of directors, employees usually may
exercise vested options granted under the share option plans for a period of three months
following the date of termination of their employment with us or any of our subsidiaries
and options that have not vested on the date of termination expire.  Under Israeli law,
the issuance of options must be approved by our board of directors and issuance of
options to directors must be approved by the shareholders.

84

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

|A. | MAJOR
SHAREHOLDERS
|-- | ------------------

As
of April 20 2009, we are not aware of any person who beneficially owns 5% or more of our
outstanding ordinary shares.   Each of our outstanding ordinary shares has identical
rights in all respects.

Based
on a review of the information provided to us by our transfer agent, as of April 20,
2009, there were 67 holders of record of our ordinary shares, including 53 holders of
record with a U.S. mailing address, including banks, brokers and nominees.  As of April
20, 2009, these 53 holders of record with a U.S. mailing address held approximately
59,451,485 ordinary shares, representing approximately 96% of the aggregate 61,956,133
  ordinary shares outstanding as of such date.  Because these holders of record include
banks, brokers and nominees (including one U.S. nominee company, CEDE &Co., which held
approximately 96% of our outstanding ordinary shares as of such date), the beneficial
owners of these ordinary shares may include persons who reside outside the United States.

To
the best of our knowledge, we are not directly or indirectly owned or controlled by
another corporation, by any foreign government or by any other natural or legal person or
persons severally or jointly and currently there are no arrangements that may, at a
subsequent date, result in a change in our control.

|B. | RELATED
PARTY TRANSACTIONS
|-- | --------------------------

None.

|C. | INTERESTS
OF EXPERTS AND COUNSEL
|-- | --------------------------------

Not
applicable.

85

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|ITEM 8. |  | FINANCIAL INFORMATION FINANCE
|------- |  | -----------------------------

|A. | CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|-- | -------------------------------------------------------

The
Financial Statements required by this item can be found at the end of this annual report,
beginning on page F-1.

Legal
Proceedings

Initial
Public Offering Securities Litigation

On
November 21, 2001, a purported Class Action (the "Action") lawsuit was filed against
interWAVE, certain of its former officers and directors, and certain of the underwriters
for interWAVE's initial public offering (the "IPO"). On April 19, 2002, the plaintiffs
filed an amended complaint. The amended complaint alleged that the prospectus from
interWAVE's IPO failed to disclose certain alleged improper actions by various
underwriters for the offering, in violation of the Securities Act of 1933, as amended and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Similar complaints
have been filed concerning more than 300 other IPOs; all of these cases have been
coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. On October
8, 2002, the Court entered an Order of Dismissal as to all of the individual defendants
in the IPO litigation, without prejudice. In 2007, a settlement that had been pending
with the Court since 2004, was terminated by stipulation. After a ruling by the Second
Circuit Court of Appeals in six "focus" cases in the coordinated proceedings (interWAVE
is not one of the six test cases) a stipulation of Settlement (the "Settlement") was
submitted to the Second Circuit, and in 2005, the Second Circuit granted preliminary
approval. Under the Settlement, interWAVE would have been dismissed of all claims in
exchange for a contingent payment guarantee by the insurance companies made it unlikely
that the settlement would receive final Court approval. Plaintiffs filed amended master
allegations and amended complaints in the six test cases. In 2008, the Court largely
denied the defendants' motion to dismiss the amended complaints.

The
parties have reached a global settlement of the litigation. Under the settlement, which
remains subject to the Court approval, the insurers would pay the full amount of the
settlement share allocated to the Company, and the Company would bear no financial
liability. InterWAVE, as well as the officer and director defendants who were previously
dismissed from the Action pursuant to tolling agreements, would receive complete
dismissals from the case. It is uncertain whether the settlement will receive final Court
approval. If the settlement does not receive final Court approval, and litigation against
the Company continues, the Company believes that it has meritorious defenses and intends
to defend the Action vigorously. However, the litigation results cannot be predicted at
this point.

Securities
Class Action Lawsuits

On
January 19, 2007 and February 2, 2007, purported securities class action lawsuits were
filed in the United States District Court for the Northern District of California, and on
February 13, 2007 and March 9, 2007, purported securities class action lawsuits were
filed in the United States District Court for the Southern District of New York (one of
which was subsequently dismissed voluntarily by the plaintiff).  The four complaints were
substantially identical.  Each complaint named as defendants the Company and certain of
its current and former officers and directors.  Each complaint generally alleged
violations of certain U.S. federal securities laws and sought unspecified damages on
behalf of a class of purchasers of Alvarion common stock between November 3, 2004 and May
12, 2006. The plaintiffs alleged, among other things, that the defendants made false and
misleading statements concerning Alvarion's business prospects, purportedly violating
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder.  On
May 4, 2007, in response to motions filed by Alvarion, the two New York lawsuits were
transferred to California.  On April 9, 2007, three separate groups of plaintiffs filed
motions with the California court, requesting appointment as lead plaintiff.  On
September 20, 2007, the Court consolidated the lawsuits into one matter, and on October
30, 2007, the Court appointed two lead plaintiffs to represent the alleged class.  The
Court ordered the appointed lead plaintiffs to file a consolidated amended complaint on
or before January 14, 2008. On or about January 9, 2008, counsel for the court-appointed
lead plaintiffs informed that the lead plaintiffs may dismiss the lawsuit rather than
file an amended complaint. On January 23, 2008, the parties filed a stipulated request
for dismissal of the lawsuit, which the Second Circuit approved on January 24, 2008.  The
court-approved dismissal terminated this consolidated securities class action lawsuit.
 Pursuant to the dismissal stipulation, each side will bear its own costs.

86

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Except
as otherwise disclosed in this annual report, we are not a party to any material
litigation or arbitration, either in Israel or any other jurisdiction, and we are not
aware of any pending or threatened litigation or arbitration that would have a material
adverse effect on our business, financial condition or results of operations.

Export Sales

Export
sales constitute a significant portion of our sales.  In 2008, export sales were
approximately $280 million, constituting approximately 99.6% of our total sales.  For a
more detailed discussion regarding the allocation of our revenues by geographic regions
based on the location of our customers, see "Item 5  Operating and Financial Review and
Prospects  Operating Results."

Dividend Policy

We
have never declared or paid any cash dividend on our ordinary shares.  We do not
anticipate paying any cash dividend on our ordinary shares in the foreseeable future.  We
currently intend to retain all future earnings to finance operations and expand our
business.

|B. | SIGNIFICANT
CHANGES
|-- | -------------------

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

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

|A. | OFFER
AND LISTING DETAILS
|-- | -------------------------

The
following table sets forth the high and low sales prices for our ordinary shares as
reported by the NASDAQ Global Market, in U.S. dollars, and as reported by the Tel Aviv
Stock Exchange, in NIS, for each of the last five years:

|     | NASDAQ Global Market | Tel Aviv Stock Exchange
|---- | -------------------- | -----------------------
|
|
|
|
|2004 | $ 17.15              | $ 8.50                 
|2005 | $ 14.23              | $ 7.26                 
|2006 | $ 10.96              | $ 4.92                 
|2007 | $ 15.21              | $ 6.03                 
|2008 | $   9.69             | $ 2.54                 

The
following table sets forth, for each of the full financial quarters in the years
indicated, the high and low sales price for our ordinary shares as reported by the NASDAQ
Global Market, in U.S. dollars, and as reported by the Tel Aviv Stock Exchange, in NIS:

|               | NASDAQ Global Market | Tel Aviv Stock Exchange
|-------------- | -------------------- | -----------------------
|
|
|
|
|First Quarter  | $   8.49             | $ 6.03                 
|Second Quarter | $   9.97             | $ 7.80                 
|Third Quarter  | $ 14.99              | $ 9.50                 
|Fourth Quarter | $ 15.21              | $ 8.58                 

|2008           |        | Low    | High      | Low      
|-------------- | ------ | ------ | --------- | ---------
|
|
|
|
|First Quarter  | $ 9.69 | $ 5.20 | NIS 37.50 | NIS 18.32
|Second Quarter | $ 9.15 | $ 6.07 | NIS 31.13 | NIS 21.31
|Third Quarter  | $ 7.18 | $ 5.50 | NIS 25.55 | NIS 18.60
|Fourth Quarter | $ 5.91 | $ 2.54 | NIS 20.18 | NIS 10.05

|2009          |        | Low    | High      | Low      
|------------- | ------ | ------ | --------- | ---------
|
|
|
|
|First Quarter | $ 4.15 | $ 2.36 | NIS 16.25 | NIS 10.23

88

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The
following table sets forth the high and low sales price for our ordinary shares as
reported by the NASDAQ Global Market, in U.S. dollars, and the Tel Aviv Stock Exchange, in
NIS, for the most recent six months:

|              | NASDAQ Global Market | Tel Aviv Stock Exchange
|------------- | -------------------- | -----------------------
|
|
|
|
|December 2008 | $ 4.22               | $ 2.98                 
|January 2009  | $ 4.15               | $ 3.00                 
|February 2009 | $ 3.76               | $ 2.98                 
|March 2009    | $ 3.37               | $ 2.36                 
|April 2009    | $ 3.45               | $ 2.93                 
|May 2009      | $ 3.59               | $ 2.75                 

As of May 30, 2009, the exchange rate
of the NIS to the US$ was $1 to NIS 3.96

|B. | PLAN
OF DISTRIBUTION
|-- | --------------------

Not
applicable.

|C. | MARKETS
|-- | -------

Our
ordinary shares began trading on the NASDAQ Global Market on March 23, 2000 under the
symbol BRZE. Prior to that date, there was no market for our ordinary shares.
On August 1, 2001, upon the completion of our merger with Floware and the change of our
name to Alvarion Ltd., our symbol was changed to ALVR. On August 1, 2001,
our ordinary shares also began to trade on the Tel Aviv Stock Exchange. As of the date of
this annual report, our ordinary shares trade on both the NASDAQ Global Market and the Tel
Aviv Stock Exchange under the symbol ALVR.

|D. | SELLING
SHAREHOLDERS
|-- | --------------------

Not
applicable.

|E. | DILUTION
|-- | --------

Not
applicable.

|F. | EXPENSES
OF THE ISSUE
|-- | ---------------------

Not
applicable.

89

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|ITEM 10. |  | ADDITIONAL INFORMATION
|-------- |  | ----------------------

|A. | SHARE
CAPITAL
|-- | -------------

Not
applicable.

|B. | MEMORANDUM
AND ARTICLES OF ASSOCIATION
|-- | --------------------------------------

We
are registered under the Israel Companies Law as a public company with the name Alvarion
Ltd. Our registration number with the Israeli Registrar of Companies is 51-172231-6.

The
following is a summary description of certain provisions of our Memorandum of Association
and Articles of Association.

Our
Articles of Association permit us to engage in any lawful business. Our purpose is to
operate in accordance with business considerations to generate profits (provided, however,
that we may donate reasonable amounts to worthy causes, as our board of directors may
determine in its discretion, even if such donations are not within the framework of
business considerations).

Our
Articles of Association permit us to enter into a business transaction with any of the
directors of our Company or enter into a business transaction with a third party in which
a director has a personal interest, subject to compliance with the Israeli Companies Law.
See Item 6  Directors, Senior Management and Employees  Board
Practices.

Directors
who do not hold other positions in our Company and who are not external directors may not
receive any compensation from our Company, unless such compensation is approved by our
shareholders, subject to applicable law.

Our
board of directors may, from time to time, in its discretion, cause us to borrow or secure
the payment of any sum or sums of money for our purposes, on such terms and conditions as
it deems appropriate.

Our
authorized share capital consists of 120,080,000 ordinary shares, par value NIS 0.01 per
share.

Shareholders
are entitled to receive dividends or bonus shares, upon the recommendation of our board of
directors and resolution of our shareholders. The shareholders entitled to receive
dividends or bonus shares are those who are registered in the shareholders register on the
date of the resolution approving the distribution or allotment, or on such later date, as
may be determined in such resolution. Any right to a declared dividend by us to our
shareholders terminates after seven years from our declaration of the dividend if such
dividend has not been claimed by the shareholder within such time. After seven years, the
unclaimed dividend will revert back to us.

Every
shareholder has one vote for each share held by such shareholder of record. With certain
exceptions, no shareholder is entitled to vote at any general meeting (or be counted as a
part of the lawful quorum thereat), unless all calls and other sums then payable in
respect of his shares have been paid.

A
shareholder seeking to vote with respect to a resolution that requires that the majority
of such resolutions adoption include at least a certain percentage of all those not
having a personal interest (as defined in the Israeli Companies Law) in it, must notify us
at least two business days prior to the date of the general meeting, whether or not he has
a personal interest in the resolution, as a condition for his right to vote and be counted
with respect to such resolution.

90

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Upon
our liquidation, the liquidator, with the approval of a general meeting of the
shareholders, may distribute all or part of the property to our shareholders, and may
deposit any part of such property with trustees in favor of the shareholders, as deemed
appropriate by the liquidator.

Rights
attached to our ordinary shares may be modified or abrogated by a resolution adopted at a
general meeting of the shareholders by more than 50% of the issued shares of such a class,
or an ordinary majority, other than certain rights relating to the election of
directors that may be modified or abrogated only with the approval of more than 75% of the
shareholders who are entitled to vote at the meeting.

An
annual general meeting of our shareholders, or annual meeting, must be held
once in every calendar year, within a period of not more than 15 months from the preceding
annual meeting, either within or outside of Israel. All general meetings of our
shareholders other than annual meetings are called extraordinary meetings. Our
board of directors has discretion over when to convene an extraordinary meeting. However,
our board of directors must convene an extraordinary meeting upon demand by: (i) any
two directors of our Company; or a quarter of the directors of our Company, whichever is
lower; or (ii) upon the demand of one or more shareholders holding alone or together at
least (a) 5% of the issued share capital of our Company and 1% of the voting rights or (b)
5% of the voting rights. Our board of directors, upon demand to convene an extraordinary
meeting, is required to announce the convening of the general meeting within 21 days from
the receipt of the demand, provided, however, that the date fixed for the extraordinary
meeting may not be more than 35 days from the publication date of the announcement of the
extraordinary meeting, or such other period as may be permitted by the Israeli Companies
Law or the regulations thereunder.

Directors,
other than external directors, are elected, and the terms of their office commences from
the close of the annual general shareholders meeting at which they are elected,
unless a later date is stated , until the third annual general shareholders meeting
following the meeting at which such directors were elected. See Item 6 
Directors, Senior Management and Employees  Board Practices. Any director may
be removed from his office by way of a resolution adopted by the vote of the holders of
75% of the voting power represented at a meeting.

The
shareholders who are entitled to participate and vote at a general meeting are those
shareholders who are registered in our shareholders register on the date determined by our
board of directors, provided that such date not be more than 40 days, nor less than 4 days
prior to the date of the general meeting, except as otherwise permitted by the regulations
under the Israeli Companies Law. Shareholders entitled to attend a general meeting are
entitled to receive notice of such meeting at least 21 days prior to the date fixed for
such meeting (or at least 35 days for those cases prescribed under the Israeli Companies
Law).

The
quorum required for a meeting of shareholders consists of at least two shareholders
present in person or by proxy holding at least 331/3% of the
voting power. A meeting adjourned for lack of a quorum will be adjourned to the same day
in the next week at the same time and place, or any other time and place as the chairman
of our board of directors may determine with the consent of the holders of a majority of
the voting power represented at the meeting in person or by proxy. At the reconvened
meeting, the required quorum consists of any two shareholders. The chairman of the board
of directors presides as chairman at each of our shareholders meetings. The chairman of
the meeting has neither an additional nor a casting vote.

There
are no limitations imposed by our Articles of Association or the Israeli Companies Law on
the right to own our shares including the rights of non-resident or foreign shareholders
to hold or exercise voting rights of our shares, except with respect to subjects of
countries which are in a state of war with Israel.

Certain
provisions of Israeli corporate and tax law may have the effect of delaying, preventing or
making more difficult a merger or other acquisition of our Company, as detailed in
Item 3  Key Information  Risk Factors  Risks Relating to Our Location in
Israel. Provisions of 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
market price of our ordinary shares.

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For
example, the Israeli Companies Law provides that certain ownership thresholds in public
companies may be crossed only by means of a tender offer made to all shareholders. A
purchaser must conduct a tender offer in order to purchase shares in publicly held
companies if, as a result of the purchase, the purchaser would hold more than 25% of the
voting rights of a company in which no other shareholder holds more than 25% of the voting
rights, or the purchaser would hold more than 45% of the voting rights of a company in
which no other shareholder holds more than 45% of the voting rights. A tender offer is not
required if: (i) the shares are acquired in a private placement that is approved by
the shareholders with the knowledge that as a result the purchaser would hold more than
25% or 45% of the voting rights, as applicable, (ii) the purchaser crosses the 25%
threshold by purchasing shares from a shareholder who held more than 25% of the voting
rights immediately prior to the transaction, or (iii) the purchaser crosses the 45%
threshold by purchasing shares from a shareholder who held more than 45% of the voting
rights immediately prior to the transaction.

Under
the Israeli Companies Law, a person may not purchase shares of a public company if,
following the purchase, the purchaser would hold more than 90% of the companys
shares or of any class of shares, unless the purchaser makes a tender offer to purchase
all of the target companys shares or all the shares of the particular class, as
applicable. If, as a result of the tender offer, the purchaser acquires more than 95% of
the companys shares or a particular class of shares, the Companies Law provides that
the purchaser automatically acquires ownership of the remaining shares. However, if the
purchaser is unable to purchase 95% or more of the companys shares or class of
shares, the purchaser may not own more than 90% of the shares or class of shares of the
target company.

In
addition, the Israeli Companies Law requires the parties to a proposed merger to
file a merger proposal with the Israeli Registrar of Companies, specifying certain
terms of the transaction. Each merging companys board of directors and shareholders
must approve the merger. Shares in one of the merging companies held by the other merging
company or certain of its affiliates are disenfranchised for purposes of voting on the
merger. A merging company must inform its creditors of the proposed merger. Any creditor
of a party to the merger may seek a court order blocking the merger, if there is a
reasonable concern that the surviving company will not be able to satisfy all of the
obligations of the parties to the merger. Moreover, a merger may not be completed until at
least 50 days have passed from the time that the merger proposal was filed with the
Israeli Registrar of Companies and at least 30 days have passed from the approval of
the shareholders of each of the merging companies. The information contained under the
heading Description of Ordinary Shares in our Registration Statement on Form
F-1 (Registration Number 333-11572), is incorporated herein by reference.

Our
transfer agent and registrar is American Stock Transfer & Trust Company at 59 Maiden
Lane, New York, NY 10038.

|C. | MATERIAL
CONTRACTS
|-- | ------------------

None.

|D. | EXCHANGE
CONTROLS
|-- | -----------------

Non-residents
of Israel who own our ordinary shares may freely convert all amounts received in Israeli
currency in respect of such ordinary shares, whether as a dividend, liquidation
distribution or as proceeds from the sale of the ordinary shares, into freely-repatriable
non-Israeli currencies at the rate of exchange prevailing at the time of conversion
(provided in each case that the applicable Israeli income tax, if any, is paid or
withheld).

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Since
January 1, 2003, all exchange control restrictions on transactions in foreign currency in
Israel have been eliminated, although there are still reporting requirements for foreign
currency transactions. Legislation remains in effect, however, pursuant to which currency
controls may be imposed by administrative action at any time.

The
State of Israel does not restrict in any way the ownership or voting of our ordinary
shares by non-residents of Israel, except with respect to subjects of countries that are
in a state of war with Israel.

|E. | TAXATION
FINANCE
|-- | ----------------

# General

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

Holders
of our ordinary shares should consult their own tax advisors as to the United States,
Israeli or other tax consequences of the purchase, ownership and disposition of ordinary
shares, including, in particular, the effect of any foreign, state or local taxes.

# Israeli Taxation

The
following is a summary of the principal Israeli tax laws applicable to companies in
Israel, with special reference to their effect on us, and certain Israeli government
programs benefiting us. This section also contains a discussion of certain Israeli tax
consequences to persons acquiring ordinary shares. This summary does not discuss all the
acts of Israeli tax law that may be relevant to a particular investor in light of his or
her personal investment circumstances or to certain types of investors subject to special
treatment under Israeli law, such as traders in securities or persons that own, directly
or indirectly, 10% or more of our outstanding voting share capital. To the extent that the
discussion is based on new tax legislation which has not been subject to judicial or
administrative interpretation, there can be no assurance that the views expressed in this
discussion will be accepted by the tax authorities. This discussion should not be
construed as legal or professional tax advice and is not exhaustive of all possible tax
considerations.

Shareholders
and potential investors are urged to consult their own tax advisors as to the Israeli or
other tax consequences of the purchase, ownership and disposition of ordinary shares,
including, in particular, the effect of any foreign, state or local taxes.

# General Corporate Tax
Structure

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

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

Tax Benefits Under the Law for
the Encouragement of Industry (Taxes), 1969

Under
the Law for the Encouragement of Industry (Taxes), 1969 (the Industry Encouragement
Law). Industrial Companies are entitled to the following preferred corporate tax
benefits, among others:

| |  | deduction
of purchases of know-how and patents over an eight-year period for tax purposes;
| | - | ------------------------------------------------------------------------------------------

| |  | right
to elect, under specified conditions, to file a consolidated tax return with additional
              related Israeli Industrial Companies;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | accelerated
depreciation rates on equipment and buildings; and
| | - | --------------------------------------------------------------

| |  | deductions
over a three-year period of expenses involved with the issuance and listing of shares on
the Tel Aviv Stock Exchange or, on or after January 1, 2003, on a recognized stock market
outside of Israel.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Eligibility
for benefits under the Industry Encouragement Law is not contingent upon the approval of
any governmental authority. Under the Industry Encouragement Law, an Industrial Company is
defined as a company resident in Israel, if at least 90% of the income of which, in any
tax year, determined in Israeli currency, exclusive of income from government loans,
capital gains, interest and dividends, is derived from an Industrial Enterprise owned by
it. An Industrial Enterprise is defined as an enterprise owned by an
Industrial Company, whose major activity in a given tax year is industrial production
activity.

We
believe that we currently qualify as an Industrial Company within the definition of the
Industry Encouragement Law. No assurance can be given that we will continue to qualify as
an Industrial Company, or will be entitled to receive any benefits under the Industry
Encouragement Law in the future.

Law
for the Encouragement of Capital Investments, 1959

Tax
Benefits Prior to the 2005 Amendment

The
Law for Encouragement of Capital Investments, 1959, as in effect prior to April 1, 2005
which is referred to below as the Capital Investments Law, provides that capital
investments in a production facility or other eligible assets may, upon application to the
Israeli Investment Center of the Ministry of Industry, Trade and Labor, be designated as
an Approved Enterprise. Each certificate of approval for an Approved
Enterprise relates to a specific investment program in the Approved Enterprise, delineated
both by the financial scope of the investment and by the physical characteristics of the
facility or the asset. An Approved Enterprise is entitled to certain benefits, including
Israeli government cash grants, state-guaranteed loans and tax benefits.

Tax
Benefits

Taxable
income derived from an Approved Enterprise under the Capital Investments Law is subject to
a reduced corporate tax rate of 25%. That income is eligible for further reductions in tax
rates depending on the percentage of the foreign investment in our share capital. The tax
rate is 20% if the foreign investment is 49% or more but less than 74%, 15% if the foreign
investment is 74% or more but less than 90%, and 10% if the foreign investment is 90% or
more. The lowest level of foreign investment during the year will be used to determine the
relevant tax rate for that year. These tax benefits are granted for a limited period not
exceeding seven years, or 10 years for a company whose foreign investment level exceeds
25%, from the first year in which the Approved Enterprise has taxable income, after the
year in which production commenced (as determined by the Israeli Investment Center of the
Ministry of Industry, Trade and Labor, or the Investment Center). The period of benefits
may in no event, however, exceed the lesser of 12 years from the year in which the
production commenced (as determined by the Investment Center) or 14 years from the year of
receipt of Approved Enterprise status (these limits do not apply to the exemption period).

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An
Approved Enterprise may elect to forego any entitlement to the grants otherwise available
under the Capital Investments Law and, in lieu of the foregoing, may participate in an
Alternative Benefits Program. Under the Alternative Benefits Program, a
companys undistributed income derived from an Approved Enterprise will be exempt
from company tax for a period of between two and 10 years from the first year of taxable
income, depending on the geographic location of the Approved Enterprise within Israel, and
the company will be eligible for a reduced tax rate of 10%-25% for the remainder of the
benefits period. There can be no assurance that the current benefit programs will continue
to be available, or that we will continue to qualify for benefits under the current
programs.

We
believe that our capital investments qualify to receive tax benefits as an Approved
Enterprise, however no assurance can be given that such investments will be approved as in
fact qualifying for such tax benefits by the Israeli tax authorities. Additionally, no
assurance can be given that we will, in the future, be eligible to receive additional tax
benefits under this law. For a discussion of the risks our business and prospects for
growth face in connection with tax benefits under Israeli law, see Risk
Factors  If we fail to comply with these conditions in the future, the tax benefits
received could be canceled and we could be required to pay increased taxes in the future.
We could also be required to refund tax benefits, with interest and adjustments for
inflation based on the Israeli consumer price indexandRisk
Factors  We currently contemplate that a portion of our products will be
manufactured outside of Israel. This could materially reduce the tax benefits to which we
would otherwise be entitled. We cannot assure you that the Israeli tax authorities will
not adversely modify the tax benefits that we could have enjoyed prior to these events.

We
currently have Approved Enterprise programs under the Capital Investments Law, which to
our belief, entitle us to certain tax benefits. The tax benefit period for these programs
has not yet commenced. We have elected the Alternative Benefits Program which provides for
the waiver of grants in return for tax exemption. Accordingly, our income is tax exempt
for a period of two years commencing with the year we first earn taxable income relating
to each expansion program, and is subject to corporate taxes at the reduced rate of 10% to
25%, for an additional period of five to eight years, depending on the percentage of the
companys ordinary shares held by foreign shareholders in each taxable year. The
exact rate reduction is based on the percentage of foreign ownership in each tax year. See
note 11 to our consolidated financial statements. A company that has elected to
participate in the Alternative Benefits Program and that subsequently pays a dividend out
of the income derived from the Approved Enterprise during the tax exemption period will be
subject to corporate tax in respect of the gross amount distributed, including withholding
tax thereon, at the rate that would have been applicable had the company not elected the
Alternative Benefits Program, ranging from 10% to 25%. 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 within 12 years after the benefits period. The
withholding tax rate will be 25% after such period. In the case of a company with over 25%
foreign investment level, as defined by law, the 12-year limitation on reduced withholding
tax on dividends does not apply. This tax should be withheld by the company at the source,
regardless of whether the dividend is converted into foreign currency. See
Withholdings and Capital Gains Taxes Applicable to Non-Israeli Shareholders.

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From
time to time, the Israeli government has discussed reducing the benefits available to
companies under the Capital Investments Law. The termination or substantial reduction of
any of the benefits available under the Capital Investments Law could materially impact
the cost of our future investments.

The
benefits available to an Approved Enterprise are conditional upon the fulfillment of
certain conditions stipulated in the Capital Investments Law and its regulations and the
criteria set forth in the specific certificate of approval, as described above. In the
event that these conditions are violated, in whole or in part, we would be required to
refund the amount of tax benefits, together with linkage differences to the Israeli CPI
and interest. We believe that our Approved Enterprise programs operate in compliance with
all such conditions and criteria.

Foreign
investors Company (FIC)

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
of which more than 25% of its share capital and combined share and loan capital 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 ten-year benefit
period. As specified above, depending on the geographic location of the approved
enterprise within Israel, income derived from the Approved Enterprise program may be
entitled to the following:

| |  | exemption
from tax on its undistributed income up to ten years;
| | - | ---------------------------------------------------------------

| |  | an
additional period of reduced corporate tax liability at rates ranging between 10% and
25%,               depending on the level of foreign (i.e., non-Israeli) ownership of our
shares;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
12-year limitation period for reduced tax rate of 15% on dividend from the approved
enterprise does not apply to Foreign Investors Company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

Tax
Benefits Subsequent to the 2005 Amendment

On
April 1, 2005, an amendment to the Investment Law went into effect (the 2005
Amendment). As a result of the 2005 Amendment, a company is no longer obliged to
acquire Approved Enterprise status in order to receive the tax benefits previously
available under the Alternative Benefits provisions, and therefore generally there is no
need to apply to the Investment Center for this purpose (Approved Enterprise status
remains mandatory for companies seeking grants). Rather, the Company may claim the tax
benefits offered by the Investments 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 Authority for a pre-ruling regarding their
eligibility for benefits under the Amendment. Among other things, the 2005 Amendment
provides tax benefits to both local and foreign investors and simplifies the approval
process. The period of tax benefits for a new Privileged Enterprise begins in the
Year of Commencement. This year is the later of (i) the year in which taxable
income is first generated by a company, or (ii) a year selected by the company for
commencement, on the condition that the company meets certain provisions provided by the
Investment Law (Year of Election). The 2005 Amendment does not apply to investment
programs approved prior to December 31, 2004. The new tax regime applies to new investment
programs only. Therefore, our existing Approved Enterprises will not be subject to the
provisions of the 2005 Amendment.

Israeli
Transfer Pricing Regulations

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

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Measurement
of Taxable Income

Results
for tax purposes are measured in real terms, in accordance with the changes in the Israeli
Consumer Price Index, or changes in exchange rate of the NIS against the dollar, for a
foreign investors company. Until taxable year 2002, we measured our results
for tax purposes in accordance with changes in the Israeli consumer price index.
Commencing with taxable year 2003, we have elected to measure our results for tax purposes
on the basis of the changes in the exchange rate of NIS against the U.S. dollar.

Tax
Benefits of Research and Development

Israeli
tax law permits, under certain conditions, a tax deduction in the year incurred for
expenditures, including capital expenditures, in scientific research and development
projects, if the expenditures are approved by the relevant government ministry, determined
by the field of research, and if the research and development is for the promotion of the
enterprise and is carried out by, or on behalf of, a company seeking such deduction.
Expenditures not so approved are deductible over a three year period; however,
expenditures made out of proceeds made available to us through government grants are not
deductible.

Withholding
and Capital Gains Taxes Applicable to Non-Israeli Shareholders

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 generally required
to withhold income tax at the rate of 25% on all distributions of dividends, although,
with respect to U.S. taxpayers, if the dividend recipient holds 10% or more of our voting
stock for a certain period prior to the declaration and payment of the dividend, we are
only required to withhold at a 12.5% rate. Notwithstanding the foregoing, with regard to
dividends generated by an Approved Enterprise, we are required to withhold income tax at
the rate of 15%.

Israeli
law generally imposes a capital gains tax on the sale of publicly traded securities.
Pursuant to changes made to the Israeli Income Tax Ordinance in January 2006, capital
gains on the sale of our ordinary shares will be subject to Israeli capital gains tax,
generally at a rate of 20% unless the holder holds 10% or more of our voting power during
the 12 months preceding the sale, in which case it will be subject to a 25% capital gains
tax. However, as of January 1, 2003, nonresidents of Israel are exempt from capital gains
tax in relation to the sale of our ordinary shares for so long as (i) our ordinary shares
are listed for trading on a stock exchange outside of Israel, (ii) the capital gains are
not accrued or derived by the nonresident shareholders permanent enterprise in
Israel, (iii) the ordinary shares in relation to which the capital gains are accrued or
derived were acquired by the nonresident shareholder after the initial listing of the
ordinary shares on a stock exchange outside of Israel, and (iv) neither the shareholder
nor the particular capital gain is otherwise subject to certain sections of the Israeli
Income Tax Ordinance. As of January 1, 2003, nonresidents of Israel are also exempt from
Israeli capital gains tax resulting from the sale of securities on the Tel Aviv Stock
Exchange; provided that the capital gains are not accrued or derived by the nonresident
shareholders permanent enterprise in Israel.

In
addition, under the income tax treaty between the United States and Israel, a U.S.
resident holder of ordinary shares that are not listed for trading on a stock exchange
outside of Israel will be exempt from Israeli capital gains tax on the sale, exchange or
other disposition of such ordinary shares unless the holder owns, directly or indirectly,
10% or more of our voting power during the 12 months preceding such sale, exchange or
other disposition.

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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.

Israel
presently has no estate or gift tax.

United
States Federal Income Tax Considerations with Respect to the Acquisition, Ownership andDisposition
of Our Ordinary Shares

The
following is a discussion of certain U.S. federal income tax consequences applicable to
U.S. Holders (as defined below) who beneficially own our ordinary shares. The
discussion is based on the Internal Revenue Code of 1986, as amended, or the Code,
applicable U.S. Treasury Regulations promulgated thereunder, and existing administrative
rulings and court decisions in effect as of the date of this annual report, all of which
are subject to change at any time, possibly with retroactive effect. For purposes of this
discussion, it is assumed that U.S. Holders of our ordinary shares hold such stock as a
capital asset within the meaning of Section 1221 of the Code, that is, generally for
investment. This discussion does not address all aspects of United States federal income
taxation that may be relevant to a particular U.S. Holder of our ordinary shares in light
of his or her circumstances or to a U.S. Holder of our ordinary shares subject to special
treatment under United States federal income tax law, including, without limitation:

| |  | banks,
other financial institutions, "financial services entities," real estate investment
             trusts, insurance companies or mutual funds;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | broker-dealers,
including dealers in securities or currencies, or taxpayers that elect to apply
             a mark-to-market method of accounting;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | shareholders
who hold our ordinary shares as part of a hedge, straddle, or other risk
             reduction, constructive sale or conversion transaction;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | tax-exempt
entities;
| | - | --------------------

| |  | persons
who have a functional currency other than the U.S. dollar;
| | - | ------------------------------------------------------------------

| |  | persons
who have owned at any time or who own, directly, indirectly, constructively or by
attribution, ten percent or more of the total voting power of our share capital;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | grantor
trusts;
| | - | ---------------

| |  | certain
expatriates or former long-term residents of the United States; and
| | - | ---------------------------------------------------------------------------

| |  | shareholders
who acquired our ordinary shares pursuant to the exercise of an employee stock option or
right or otherwise as compensation.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

In
addition, not discussed is the application of: (i) foreign, state or local tax laws
on the ownership or disposition of our ordinary shares; (ii) United States federal
and state estate and/or gift taxation; or (iii) the alternative minimum tax.

If
a partnership (or any entity treated as a partnership for U.S. federal income tax
purposes) holds ordinary shares, the tax treatment of the partnership and a partner in
such partnership will generally depend on the activities of the partnership. Such a
partner or partnership should consult its tax advisor as to its tax consequences.

As
used in this section, the term U.S. Holder refers to any beneficial owner of
our ordinary shares that is any of the following:

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

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| |  | a
corporation (or other entity treated as a corporation for U.S. federal income tax
purposes)              created or organized in the United States or under the laws of the
United States, any State              or political subdivision thereof, or the District
of Columbia;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate the income of which is includible in gross income for U.S. federal income tax
             purposes regardless of its source;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | a
trust (i) if a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more United States persons have the
authority to control all of such trusts substantial decisions; or (ii) that has in
effect a valid election under applicable U.S. Treasury Regulations to be treated as a
U.S. person.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Certain
aspects of U.S. federal income tax relevant to a holder of our ordinary shares that is not
a U.S. Holder (a Non-U.S. Holder) are also discussed below.

Each
holder of our ordinary shares is advised to consult his or her own tax advisor with
respect to the specific tax consequences to him or her of purchasing, holding or disposing
of our ordinary shares, including the applicability and effect of federal, state, local
and foreign income and other tax laws to his or her particular circumstances.

Distributions

Subject
to the discussion below under the heading Passive Foreign Investment Company
Status, to the extent paid out of our current or accumulated earnings and profits,
as determined under United States federal income tax principles, a distribution made with
respect to our ordinary shares (including the amount of any non-U.S. withholding tax
thereon) will be includible for U.S. federal income tax purposes in the income of a U.S.
Holder as a taxable dividend. Dividends that are received by U.S. Holders that are
individuals, estates or trusts will be taxed at the rate applicable to long-term capital
gains (a maximum rate of 15%) for taxable years beginning on or before December 31, 2010,
provided that such dividends meet the requirement of qualified dividend income
as defined by the Code. Dividends that fail to meet such requirements, and dividends
received by corporate U.S. Holders, are taxed at ordinary income rates. No dividend
received by a U.S. Holder will be a qualified dividend (1) if the U.S. Holder held the
ordinary share with respect to which the dividend was paid for less than 61 days during
the 121-day period beginning on the date that is 60 days before the ex-dividend date with
respect to such dividend, excluding for this purpose, under the rules of Code Section
246(c), any period during which the U.S. Holder has an option to sell, is under a
contractual obligation to sell, has made and not closed a short sale of, is the grantor of
a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished
its risk of loss by holding other positions with respect to, such ordinary share (or
substantially identical securities) or (2) to the extent that the U.S. Holder is under an
obligation (pursuant to a short sale or otherwise) to make related payments with respect
to positions in property substantially similar or related to the ordinary share with
respect to which the dividend is paid. If we were to be a passive foreign investment
company (as such term is defined in the Code), or PFIC, for any taxable year,
dividends paid on our ordinary shares in such year or in the following taxable year would
not be qualified dividends. In addition, a non-corporate U.S. Holder will be able to take
a qualified dividend into account in determining its deductible investment interest (which
is generally limited to its net investment income) only if it elects to do so; in such
case the dividend will be taxed at ordinary income rates.

To
the extent that a distribution exceeds our earnings and profits and provided that we were
not a PFIC, such distribution will be treated as a non-taxable return of capital to the
extent of the U.S. Holders adjusted tax basis in our ordinary shares and thereafter
as taxable capital gain. Dividends paid by us generally will not be eligible for the
dividends received deduction allowed to corporations under the Code. Dividends paid in a
currency other than the U.S. dollar will be includible in income of a U.S. Holder in a
U.S. dollar amount based on the spot rate of exchange on the date the distribution is
included in income, without reduction for any non-U.S. taxes withheld at source,
regardless of whether the payment is in fact converted into U.S. dollars on such date. A
U.S. Holder who receives a foreign currency distribution and converts the foreign currency
into U.S. dollars subsequent to receipt may have foreign exchange gain or loss, based on
any appreciation or depreciation in the value of the foreign currency against the U.S.
dollar, which will generally be U.S. source ordinary income or loss.

99

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Subject
to certain conditions and limitations set forth in the Code (including certain holding
period requirements), U.S. Holders generally will be able to elect to claim a credit
against their United States federal income tax liability for any non-U.S. withholding tax
deducted from dividends received in respect of our ordinary shares. For purposes of
calculating the foreign tax credit, dividends paid on our ordinary shares generally will
be treated as income from sources outside the United States and foreign source
passive income for U.S. foreign tax purposes. In lieu of claiming a tax
credit, U.S. Holders that itemize deductions may instead claim a deduction for foreign
taxes withheld, subject to certain limitations. The rules relating to the determination of
the amount of non-U.S. income taxes that may be claimed as foreign tax credits are complex
and U.S. Holders should consult their tax advisors to determine whether and to what extent
a credit would be available.

Disposition
of the Ordinary Shares

Subject
to the discussion below under the heading Passive Foreign Investment Company
Status, upon the sale, exchange or other disposition of our ordinary shares, a U.S.
Holder generally will recognize gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between the U.S. dollar value of the amount realized on the
disposition of our ordinary shares and the U.S. Holders adjusted tax basis in our
ordinary shares, which is usually the U.S. dollar cost of the ordinary shares. Such gain
or loss generally will be long-term capital gain or loss if our ordinary shares have been
held for more than one year on the date of the disposition. Non-corporate U.S. Holders are
currently subject to a reduced rate of taxation on long-term capital gains (15% for
taxable years beginning on or before December 31, 2010). The deductibility of a capital
loss recognized on the sale or exchange of ordinary shares is subject to limitations. Any
gain or loss generally will be treated as United States source income or loss for United
States foreign tax credit purposes. In addition, a U.S. Holder who receives foreign
currency upon the sale or exchange of our ordinary shares and converts the foreign
currency into U.S. dollars subsequent to receipt may have foreign exchange gain or loss,
based on any appreciation or depreciation in the value of the foreign currency against the
U.S. dollar, which will generally be United States source ordinary income or loss.

Passive
Foreign Investment Company Status

Generally
a non-U.S. corporation is treated as a PFIC for U.S. federal income tax purposes if
either:

| |  | 75%
or more of its gross income (including the pro rata share of gross income of any
             corporation (U.S. or foreign) of which such corporation is considered to own
25% or more of              the ordinary shares by value) for the taxable year is passive
income; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 50%
or more of its gross assets (including its pro rata share of the assets of any
corporation in which such corporation is considered to own 25% or more of the ordinary
shares by value) during the taxable year computed on a quarterly average basis produce or
are held for the production of passive income.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
a result of the combination of our substantial holdings of cash, cash equivalents and
securities and the decline in the market price of our ordinary shares from its historical
highs, there is a risk that we could be classified as a PFIC, for U.S. federal income tax
purposes. Based upon our market capitalization during taxable years 2004 through 2007, and
2008, and each taxable year prior to 2001, we do not believe that we were a PFIC for any
such year.

100

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| |  | In
addition, based upon an independent valuation of our assets as of the end of each quarter
of 2001 and based upon our valuation of our assets for 2002 and 2003, we do not believe
that we were a PFIC for 2001, 2002 or 2003 despite the relatively low market price of our
ordinary shares during much of those taxable years. We cannot assure you, however, that
the United States Internal Revenue Service (IRS) or the courts would agree
with our conclusion if they were to consider our situation. In addition, the test for
determining PFIC status are applied annually and it is difficult to make accurate
predictions of our future income and assets and the future price of our ordinary shares,
which are all relevant to the determination of whether we are classified as a PFIC. There
is no assurance that we will not become a PFIC in 2009 or subsequent taxable years.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
we were deemed to be a PFIC for any taxable year during which a U.S. Holder held our
shares and such holder failed to make either a QEF election or a
mark-to-market election (as described below) for the first taxable year during
which we were a PFIC and the U.S. Holder held our shares:

| |  | gain
recognized (including gain deemed recognized if our ordinary shares are used as security
for a loan) by the U.S. Holder upon the disposition of, as well as income recognized upon
receiving certain excess distributions in respect of, our ordinary shares
would be taxable as ordinary income;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. Holder would be required to allocate such distribution and/or disposition gain
ratably over such holders entire holding period for our ordinary shares; the U.S.
Holders income for the current taxable year would include (as ordinary income)
amounts allocated to the current year (i.e., the year of the distribution or disposition)
and to any period prior to the first day of the first taxable year for which we were a
PFIC;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
amount allocated to each year other than (i) the year of the distribution or disposition
and (ii) any year prior to our becoming a PFIC, would be subject to tax at the highest
individual or corporate marginal tax rate, as applicable, in effect for that year, and an
interest charge would be imposed with respect to the resulting tax liability;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. Holder would be required to file an annual return on IRS Form 8621 regarding
distributions received in respect of, and gain recognized on dispositions of, our
ordinary shares; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
U.S. Holder who acquired our ordinary shares upon the death of a U.S. Holder would not
receive a step-up of the income tax basis to fair market value for such shares. Instead,
such U.S. Holder would have a tax basis equal to the lesser of the decedents basis,
or the fair market value of the ordinary shares on the date of the decedents death.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although
a determination as to a non-U.S. corporations PFIC status is made annually, an
initial determination that a non U.S. corporation is a PFIC for any taxable year generally
will cause the above-described consequences to apply for all future taxable years to U.S.
Holders who held shares in the corporation at any time during a taxable year when the
corporation was a PFIC and who made neither a QEF election nor a mark-to-market election
(as discussed below) with respect to such shares with their tax return for the year that
included the last day of the corporations first taxable year as a PFIC. This will be
true even if the corporation ceases to be a PFIC in later years. However, with respect to
a PFIC during the U.S. Holders holding period that does not make any distributions
or deemed distributions, the above tax treatment would apply only to U.S. Holders who
realize gain on their disposition of shares in the PFIC.

Generally,
if a U.S. Holder makes a valid QEF election with respect to our ordinary shares:

| |  | the
U.S. Holder would be required for each taxable year for which we are a PFIC to include in
income such holders pro-rata share of our: (i) ordinary earnings as ordinary
income and (ii) net capital gain as long-term capital gain, in each case computed
under U.S. federal income tax principles, even if such earnings or gains have not been
distributed, unless the shareholder makes an election to defer this tax liability and
pays an interest charge; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. Holder would not be required under these rules to include any amount in income for
any taxable year during which we do not have ordinary earnings or net capital gain.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

101

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The
QEF election is made on a shareholder-by-shareholder basis. Thus, any U.S. Holder of our
ordinary shares can make its own decision whether to make a QEF election. A QEF election
applies to all of our ordinary shares held or subsequently acquired by an electing U.S.
Holder and can be revoked only with the consent of the IRS. A shareholder makes a QEF
election by attaching a completed IRS Form 8621, using the information provided in the
PFIC annual information statement, to a timely filed U.S. federal income tax return. In
order to permit our shareholders to make a QEF election, we must supply them with certain
information. We will supply U.S. Holders with the information needed to report income and
gain pursuant to the QEF election in the event that we are classified as a PFIC for any
taxable year and will supply such additional information as the IRS may require in order
to enable U.S. Holders to make the QEF election. It should be noted that U.S. Holders may
not make a QEF election with respect to warrants or rights to acquire our ordinary shares.
Under certain circumstances, a U.S. Holder that has not made a timely QEF election may
obtain treatment similar to that afforded a shareholder who has made a timely QEF
election. Such a U.S. Holder may make an election in a taxable year subsequent to the
first taxable year during the U.S. Holders holding period that we are classified as
a PFIC to treat such holders interest in our Company as subject to a deemed sale of
its PFIC stock and recognize gain, but not loss, on such deemed sale in accordance with
the general PFIC rules, including the interest charge provisions, described above and
thereafter treating such interest in our Company as an interest in a QEF. In addition,
under certain circumstances U.S. Holders may make a retroactive QEF election, but may be
required to file a timely protective statement to preserve their ability to make a
retroactive QEF election. U.S. Holders should consult their tax advisors regarding the
advisability of filing a protective statement.

Alternatively,
a U.S. Holder of shares in a PFIC can elect to mark the shares to market annually
recognizing as ordinary income or loss each year the shares are held, as well as on the
disposition of the shares in a taxable year that we are a PFIC, an amount equal to the
difference between the shareholders adjusted tax basis in the PFIC stock and its
fair market value. Under current law, U.S. Holders may not make a mark-to-market election
with respect to warrants or rights to acquire our ordinary shares. Ordinary loss generally
is recognized only to the extent of net mark-to-market gains previously included in income
by the U.S. Holder under the election in prior taxable years. As with the QEF election, a
U.S. Holder who makes a mark-to-market election would not be subject to the deemed ratable
allocations of gain, distributions and interest charges (described above). A
mark-to-market election applies for so long as our ordinary shares are marketable
stock (e.g., regulatory traded on the NASDAQ Global Market) and is
irrevocable without obtaining the consent of the IRS. However, under Treasury Regulations,
a U.S. Holder who makes a mark-to-market election would not include mark-to-market gain or
loss for any taxable year in which we are not a PFIC.

The
PFIC rules described above are complex. U.S. Holders of our ordinary shares (or warrants
or rights to acquire our ordinary shares) are urged to consult their tax advisors about
the PFIC rules, including the advisability, procedure and timing of making a QEF or
mark-to-market election, in connection with their holding of our ordinary shares.

Tax
Consequences for Non-U.S. Holders of Our Ordinary Shares

Except
as described in Information Reporting and Backup Withholding below, a Non-U.S.
Holder of our ordinary shares will not be subject to U.S. federal income or withholding
tax on the payment of dividends on, and the proceeds from the disposition of, our ordinary
shares, unless in the case of U.S. federal income taxes:

102

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| |  | such
item is effectively connected with the conduct by the Non-U.S. Holder of a trade or
business in the United States and, in the case of a resident of a country which has a
treaty with the United States, such item is attributable to a permanent establishment or,
in the case of an individual, a fixed place of business, in the United States, or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
the case of the disposition or our ordinary shares, the Non-U.S. Holder is an individual
who holds our ordinary shares as a capital asset and is present in the United States for
183 days or more in the taxable year of the disposition, and certain other conditions are
met.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Information
Reporting and Backup Withholding

U.S.
          Holders (other than certain exempt recipients such as corporations) generally
          are subject to information reporting requirements and backup withholding
          (currently at a rate of 28%) with respect to dividends paid in the U.S. on, and
          the proceeds from the disposition of, our ordinary shares, unless they:

| |  | furnish
a correct taxpayer identification number and certify that they are not subject to
             backup withholding on an IRS Form W-9; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
proof that they are otherwise exempt from backup withholding.
| | - | ---------------------------------------------------------------------

Non-U.S.
          Holders generally are not subject to information reporting or backup withholding
          with respect to dividends paid on, or upon the disposition of, our ordinary
          shares, provided that such Non-U.S. Holder provides a taxpayer identification
          number, certifies to its foreign status, or otherwise establishes an exemption.

Backup
withholding is not an additional tax. The amount of any backup withholding is allowable as
a credit against the U.S. or Non-U.S. Holders United States federal income tax
liability, provided that such holder provides the requisite information to the IRS.

|F. | DIVIDENDS
AND PAYING AGENTS
|-- | ---------------------------

Not
applicable.

|G. | STATEMENT
BY EXPERTS
|-- | --------------------

Not
applicable.

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

We
are subject to the informational requirements of the Exchange Act applicable to foreign
private issuers and fulfill the obligation with respect to such requirements by filing
reports with the SEC. As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic reports and
financial statements with the SEC as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act. However, we file with the SEC an annual
report on Form 20-F containing consolidated financial statements audited by an independent
accounting firm. We also furnish reports on Form 6-K containing unaudited consolidated
financial information after the end of each of the first three quarters. You may read and
copy any document we file with the SEC without charge at the SECs Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may be
obtained by mail from the Public Reference Branch of the SEC at such address, at
prescribed rates. Please call the SEC at l-800-SEC-0330 for further information on the
public reference room. A copy of each report submitted in accordance with applicable U.S.
law is also available for public review at our principal executive offices.

103

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In
addition, the SEC maintains an Internet website at http://www.sec.gov that contains
reports, proxy statements, information statements and other material that are filed
through the SECs Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
We began filing our reports through the EDGAR system in November 2002.

The
Israeli Securities Authority maintains an Internet website at http://www.isa.gov.il
that contains reports proxy statements, information statements and other material that are
filed through the electronic disclosure system (MAGNA). We began filing our reports
through the MAGNA system in August 2003.

|I. | SUBSIDIARY
INFORMATION
|-- | ----------------------

Not
applicable.

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

We
are exposed to financial market risk associated with changes in foreign currency exchange
rates. To mitigate these risks, we use derivative financial instruments. The majority of
our revenues and expenses are generated in U.S. dollars. A portion of our expenses,
however, is denominated in NIS. In order to protect ourselves against the volatility of
future cash flows caused by changes in foreign exchange rates, we use currency forward
contracts and currency options. We hedge the part of our forecasted expenses denominated
in NIS. If our currency forward contracts and currency options meet the definition of a
hedge, and are so designated, changes in the fair value of the contracts will be offset
against changes in the fair value of the hedged assets or liabilities through earnings.
For derivative instruments not designated as hedging instruments, the gain or loss is
recognized in current earnings during the period of change. Our hedging program reduces,
but does not eliminate, the impact of foreign currency rate movements and due to a general
economic slowdown along with the devaluation of the dollar, our results of operations may
be adversely affected.

Our
investment portfolio includes held to maturity marketable securities. These securities
include investments issued by agencies of the U.S. government that have implied guaranty
by the U.S. government or were nationalized by U.S government, treasury bills of U.S
government, or investments issued by highly rated corporations. As of December 31, 2008,
the long-term rating of the securities in our portfolio were rated at least as A.
Securities representing about 21% of the portfolio are rated as AAA. The recent declines
in interest rates have reduced and are expected to continue to reduce our interest income.

The table below provides information
regarding our investments in cash, cash equivalents and marketable Securities, as of
December 31, 2008.

|                                 | Amortized cost | Total
Amortized
cost | Fair
value at Dec.
31, 2008
|-------------------------------- | -------------- | -------------------- | ---------------------------
|
|
|
|
|US Government agencies           |                |                      | $                          
|Corporate bonds                  |                |                      |                            
|                                 |                |                      |                            
|Cash and short term bank deposit |                |                      |                            
|                                 |                |                      |                            
|Total                            |                |                      |                            

104

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# Foreign Currency Risk

A majority of our revenues is
generated in U.S. dollars. In addition, most of our costs are denominated and determined
in U.S. dollars and Israeli shekels. According to the salient economic factors indicated
in SFAS No. 52, Foreign Currency Translation, our cash
flow, sale price, sales market, expense, financing and inter-company transactions, and
arrangement indicators, are predominantly denominated in U.S. dollars. In addition, the
U.S. dollar is the primary currency of the economic environment in which we operate, and
thus, the U.S. dollar is our functional and reporting currency.

In our balance sheet, we re-measure
into U.S. dollars all monetary accounts (principally cash and cash equivalents and
liabilities) that are maintained in other currencies. For this re-measurement, we use the
relevant foreign exchange rate at the balance sheet date. Any gain or loss that results
from this re-measurement is reflected in the statement of income as appropriate.

We measure and record non-monetary
accounts in our balance sheet in U.S. dollars. For this measurement, we use the U.S.
dollar value in effect at the date that the asset or liability was initially recorded in
our balance sheet (the date of the transaction).

To hedge against the risk of overall
changes in cash flows resulting from foreign currency trade payables and salary payments
during the year, we have instituted a foreign currency cash flow hedging program. We hedge
portions of our forecasted expenses denominated in NIS with currency forwards and options.
These forward and option contracts are designated as cash flow hedges and are all
effective. As of December 31, 2008, we recorded accumulated other comprehensive loss in
the amount of approximately $1.2 million from our currency forward and option transactions
with respect mainly to trade payables and payroll expenses. Such amount will be recorded
into earnings during 2009.

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

Not
applicable.

105

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PART II

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

None.

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

Not
applicable.

|ITEM 15. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------

|a. | Disclosure
Controls and Procedures
|-- | ----------------------------------

The
Companys management, with the participation of its chief executive officer and chief
financial officer, evaluated the effectiveness of the Companys disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act) as of December 31, 2008. Based on this evaluation, the Companys chief executive
officer and chief financial officer have concluded that, as of such date, the
Companys disclosure controls and procedures were (i) designed to ensure that
material information relating to the Company, including its consolidated subsidiaries, is
made known to its management, including the Companys chief executive officer and
chief financial officer, by others within those entities, as appropriate to allow timely
decisions regarding required disclosure, particularly during the period in which this
report was being prepared and (ii) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms.

|b. | Managements
Annual Report on Internal Control Over Financial Reporting
|-- | -----------------------------------------------------------------------

Our
management, under the supervision of our Chief Executive Officer and Chief Financial
Officer, is responsible for establishing and maintaining adequate internal control over
our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.
The Companys internal control over financial reporting is designed to provide
reasonable assurance to the Companys management and board of directors regarding the
reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that:

| |  | pertain
to the maintenance of our records that in reasonable detail accurately and fairly
             reflect our transactions and asset dispositions;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance that our transactions are recorded as necessary to permit the
preparation of our financial statements in accordance with generally accepted accounting
principles;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance that our receipts and expenditures are made only in accordance with
authorizations of our management and board of directors (as appropriate); and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

106

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Due
to its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. In addition, 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.

Under
the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2008
based on the framework for Internal Control  Integrated Framework set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
our assessment under that framework and the criteria established therein, our management
concluded that the Companys internal control over financial reporting were effective
as of December 31, 2008.

Our financial statements and internal
control over financial reporting has been audited by Kost, Forer, Gabbay & Kasierer (A
member of Ernst & Young Global), an independent registered public accounting firm.

|c. | Attestation
Report of the Registered Public Accounting Firm
|-- | -----------------------------------------------------------

This
annual report includes an attestation report of our registered public accounting firm
regarding internal control over financial reporting in page F-3 of our audited
consolidated financial statements set forth in Item 18  Financial
Statements, and are incorporated herein by reference.

|d. | Changes
in Internal Control Over Financial Reporting
|-- | ----------------------------------------------------

There
were no changes in our internal controls over financial reporting identified with the
evaluation thereof that occurred during the period covered by this annual report that have
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 Professor Amit, a member of our audit committee, is
qualified as an audit committee financial expert and is
independent, each as defined in the applicable SEC and NASDAQ regulations.

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

In
2003, we adopted a Code of Ethics that applies to our Chief Executive Officer, Chief
Financial Officer and all other senior officers. In March 2008 we updated the Code of
Ethics. The updated Code of Ethics was included as an Exhibit to our Annual Report on Form
20-F for the year ended December 31, 2007.

107

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|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- |  | --------------------------------------

The
following is a summary of the fees billed to us for audit, audit related and non-audit
services provided by Kost, Forer, Gabbay & Kasierer to us for the years ended December
31, 2007 and December 31, 2008:

|Fee Category       | 2007 Fees | 2008 Fees
|------------------ | --------- | ---------
|
|
|
|
|Audit Fees         |           |          
|                   |           |          
|Audit-Related Fees |           |          
|                   |           |          
|Tax Fees           |           |          
|                   |           |          
|                   |           |          
|All Other Fees     |           |          
|                   |           |          
|                   |           |          
|Total Fees         |           |          
|                   |           |          

Audit Fees: Consists of the
aggregate fees billed and accrued for professional services rendered for the audit of our
annual financial statements and services that are normally provided by Kost, Forer, Gabbay
& Kasierer in connection with statutory and regulatory filings or engagements.

Audit Related Fees: Consists
of the aggregate fees billed for assurance and related services that are reasonably
related to the performance of the audit or review of our financial statements and are not
reported under Audit Fees.

Tax Fees: Consists of the
aggregate fees billed for professional services rendered for tax compliance, tax advice
and tax planning. These services include assistance regarding international and Israeli
tax services.

All Other Fees: Consists of
the aggregate fees billed for products and services other than the services reported
above. We did not have such services in 2008 and 2007.

Our
audit committee has adopted a policy for pre-approval of audit and non-audit services.
Under the policy, the audit committee proposed services either may be pre-approved without
consideration of specific case-by-case services by the audit committee (general
pre-approval) or they may require the specific pre-approval of the audit committee
(specific pre-approval). The audit committee employs a combination of these
two approaches. Unless a type of service has received general pre-approval, it will
require specific pre-approval by the audit committee if it is to be provided by the
independent auditor. The term of any general pre-approval is 12 months from the date of
pre-approval, unless the audit committee considers a different period and states
otherwise. The audit committee reviews annually and pre-approves the services that may be
provided by the independent auditor without obtaining specific pre-approval from the audit
committee. The audit committee adds to or subtracts from the list of general pre-approved
services from time to time, based on subsequent determinations. Pre-approval fee levels or
budgeted amounts for all services to be provided by the independent auditor are to be
established annually by the audit committee. Any proposed services exceeding these levels
or amounts require specific pre-approval by the audit committee.

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

Not
applicable.

108

---

---

|ITEM 16E. |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|--------- |  | ----------------------------------------------------------------------

In
October 2008, following the approval of our board of directors and the receipt of a court
approval, we were authorized to use up to $30 million of our available cash to repurchase
our shares. Through December 31, 2008 we repurchased under this repurchase program
1,449,999 ordinary shares at a weighted average price of approximately $3.44 per share for
an aggregate of $5.0 million.

The
table below provides detailed information.

|Period                   | (a)
Total
Number of
Ordinary Shares
Purchased | (b)
Average
Price per
Ordinary Share | (c)
Total
Number of
Ordinary Shares
Purchased as
Part of Publicly
Announced Plans
or Programs | (d)
Approximate
Dollar Amount
Available for
Repurchase
under the Plans
or Programs
|------------------------ | --------------------------------------------- | ------------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------
|
|
|
|
|November 1 - November 30 |                                               |                                      |                                                                                               | 707,776                                                                           
|December 1 - December 31 |                                               |                                      |                                                                                               | 742,223                                                                           
|                         |                                               |                                      |                                                                                               |                                                                                   
|                         |                                               |                                     
|Total                    |                                               |                                      |                                                                                               | 1,449,999                                                                         
|                         |                                               |                                      |                                                                                               |                                                                                   

Under
the first repurchase program in 2002, our board of directors authorized a share repurchase
of up to $9 million of our ordinary shares. Under this 2002 repurchase plan, we had
repurchased until December 31, 2003 3,796,773 ordinary shares at a weighted average price
per share of approximately $2.07 for an aggregate of $7.9 million. Since then, we had not
utilized the remainder of this re-purchase program.

|ITEM 16F. |  | CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
|--------- |  | --------------------------------------------

Not
applicable.

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

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.

We
do not comply with the NASDAQ requirement that we obtain shareholder approval for certain
dilutive events, such as for the establishment or amendment of certain equity based
compensation plans. Instead, we follow Israeli law and practice in accordance with which
the establishment or amendment of certain equity based compensation plans is approved by
our board of directors.

109

---

---

As
a foreign private issuer listed on the NASDAQ Global Select Market, we may also follow
home country practice with regard to, among other things, executive officer compensation,
director nomination, composition of the board of directors and quorum at
shareholders meetings. In addition, we may follow our home country law, instead of
the NASDAQ Marketplace Rules, which require that we obtain shareholder approval for an
issuance that will result in a change of control of the company, certain transactions
other than a public offering involving issuances of a 20% or more interest in the company
and certain acquisitions of the stock or assets of another company.

For
a discussion of the requirements of Israeli law in this regard, see Item 6.C.
Directors, Senior Management and Employees Board Practices, and Item
10.B. Additional Information  Memorandum and Articles of
Association.

# PART III

|ITEM 17. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

We
have responded to Item 18 in lieu of this item.

|ITEM 18. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

The
financial statements required by this item are at the end of this annual report, beginning
on page F-1.

110

---

---

|ITEM 19. |  | EXHIBITS
|-------- |  | --------

The exhibits filed with or
incorporated into this annual report are listed on the index of exhibits below.

|Exhibit No. |  | Description
|----------- |  | -----------

---

|1.1 |  | Memorandum
of Association (English translation accompanied by Hebrew original) (1)
|--- |  | ----------------------------------------------------------------------------------

|1.2 |  | Articles
of Association*
|--- |  | ------------------------

|1.3 |  | Certificate
of Name Change (English translation accompanied by Hebrew original) (2)
|--- |  | -----------------------------------------------------------------------------------

|2.1 |  | Form
of Ordinary Share Certificate (3)
|--- |  | --------------------------------------

|2.2 |  | Form
of Warrant (1)
|--- |  | -------------------

|4.1 |  | Lease
Agreement, dated April 16, 2000, between the Registrant and Bet Dror Ltd. And Ziviel
                Investments Ltd. (English summary accompanied by Hebrew original) (1)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Form
of Indemnity Agreement for Directors and Executive Officers(4)
|--- |  | -------------------------------------------------------------------

|4.3 |  | Addendum,
dated September 2000, to Lease Agreement between the Registrant and Bet Dror
                Ltd. and Ziviel Investments Ltd. (English summary accompanied by Hebrew
original) (5)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Sublease
Agreement, dated July 5, 2001, between Floware Wireless Systems Ltd. and Ceragon
                Networks Ltd. (English summary accompanied by Hebrew original) (5)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8 |  | Subsidiaries
of Alvarion Ltd.*
|- |  | ------------------------------

|10.1 |  | Consent
of Kost, Forer, Gabay & Kasierer*
|---- |  | -----------------------------------------

|11 |  | Amended
Code of Ethics(4)
|-- |  | -------------------------

|12.1 |  | Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
                of 2002 *
|---- |  | --------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
                of 2002*
|---- |  | -------------------------------------------------------------------------------------------------------------------

|13.1 |  | Certification
of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 *
|---- |  | ------------------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 *
|---- |  | ------------------------------------------------------------------------------------------------------------------------

---

|* | Filed
herewith
|- | --------------

|(1) | Incorporated
herein by reference to the Registration Statement on Form F-1 (File No. 333-11572).
|--- | ------------------------------------------------------------------------------------------------

|(2) | Incorporated
by reference to the Registration Statement on Form S-8 (File No. 333-13786).
|--- | -----------------------------------------------------------------------------------------

|(3) | Incorporated
by reference to the Registration Statement on Form S-8 (File No. 333-14142).
|--- | -----------------------------------------------------------------------------------------

|(4) | Incorporated
by reference to the Annual Report on Form 20-F for the fiscal period ending
         December 31, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
by reference to the Annual Report on Form 20-F for the fiscal period ending
         December 31, 2001.
|--- | --------------------------------------------------------------------------------------------------------------------

111

---

---

# SIGNATURES

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.

|June 18, 2009 |  | ALVARION LTD.By: /s/ Tzvika Friedman
Tzvika FriedmanChief Executive Officer
|------------- |  | -----------------------------------------------------------------------------------------

112

---

---

# ALVARION LTD. AND ITS
SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2008

# IN U.S. DOLLARS

# INDEX

|                                                        | Page          
|------------------------------------------------------- | --------------
|
|
|
|
|Report of Independent Registered Public Accounting Firm | F - 2 - F - 3 
|                                                       
|Consolidated Balance Sheets                             | F - 4 - F - 5 
|                                                       
|Consolidated Statements of Operations                   | F - 6         
|                                                       
|Statements of Changes in Shareholders' Equity           | F - 7         
|                                                       
|Consolidated Statements of Cash Flows                   | F - 8         
|                                                       
|Notes to Consolidated Financial Statements              | F - 9 - F - 35



---

---

| | Kost Forer Gabbay & Kasierer3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il
| | -----------------------------------------------------------------------------------------------------------------------

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of

# ALVARION LTD.

We
have audited the accompanying consolidated balance sheets of Alvarion Ltd. (the
Company) and its subsidiaries as of December 31, 2007 and 2008, and the related
consolidated statements of operations, shareholders equity, and cash flows for each
of the three years in the period ended December 31, 2008. 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
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. 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 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 2008, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December
31, 2008, in conformity with accounting principles generally accepted in the United
States.

As
discussed in Note 2k to the consolidated financial statements, in 2007, the Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
 An Interpretation of FASB Statement No. 109", effective January 1, 2007.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company and its subsidiaries internal control
over financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated June 17, 2009 expressed an unqualified
opinion thereon.

|                              |                                                             
|----------------------------- | ------------------------------------------------------------
|
|
|
|
|Tel-Aviv, IsraelJune 17, 2009 | KOST FORER GABBAY & KASIERERA Member of Ernst & Young Global

F - 2

---

---

| | Kost Forer Gabbay & Kasierer3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il
| | -----------------------------------------------------------------------------------------------------------------------

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of

# ALVARION LTD.

We
have audited Alvarion Ltd.s (the Company) and its subsidiaries
internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The
Company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 included in the accompanying Managements Annual Report on
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, the Company and its subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on the
COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company and its
subsidiaries as of December 31, 2007 and 2008 and the related consolidated statements of
operations, shareholders equity and cash flows for each of the three years in the
period ended December 31, 2008 and our report dated June 17, 2009 expressed an
unqualified opinion thereon.

|                              |                                                             
|----------------------------- | ------------------------------------------------------------
|
|
|
|
|Tel-Aviv, IsraelJune 17, 2009 | KOST FORER GABBAY & KASIERERA Member of Ernst & Young Global

F - 3

---

---

|ALVARION 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                                |             
|Marketable securities (Note 3)                          |             
|Trade receivables, net                                  |             
|Other accounts receivable and prepaid expenses (Note 4) |             
|Inventories (Note 5)                                    |             
|                                                        |             
|                                                        |             
|Total current assets                                    |             
|                                                        |             
|                                                        |             
|LONG-TERM INVESTMENTS AND RECEIVABLES:                  |             
|Investment in affiliate                                 |             
|Marketable securities (Note 3)                          |             
|Severance pay fund                                      |             
|                                                        |             
|                                                        |             
|Total long-term investments and receivables             |             
|                                                        |             
|                                                        |             
|PROPERTY AND EQUIPMENT, NET (Note 6)                    |             
|                                                        |             
|                                                        |             
|INTANGIBLE ASSETS, NET (Note 7)                         |             
|                                                        |             
|                                                        |             
|GOODWILL                                                |             
|                                                        |             
|                                                        |             
|Total assets                                            |             
|                                                        |             

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

F - 4

---

---

|ALVARION 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:                                                             |             
|Trade payables                                                                   |             
|Other accounts payable and accrued expenses (Note 8)                             |             
|                                                                                 |             
|                                                                                 |             
|Total current liabilities                                                        |             
|                                                                                 |             
|                                                                                 |             
|ACCRUED SEVERANCE PAY                                                            |             
|                                                                                 |             
|                                                                                 |             
|LONG-TERM LIABILITIES (Note 12)                                                  |             
|                                                                                 |             
|                                                                                 |             
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)                                  |             
|                                                                                 |             
|SHAREHOLDERS' EQUITY:                                                            |             
|Share capital (Note 11) -                                                        |             
|Ordinary shares of NIS 0.01 par value -                                          |             
|Authorized: 85,080,000 and 120,080,000 shares at December 31, 2007 and 2008      |             
|respectively; Issued: 66,846,030 and 67,176,667 shares at December 31, 2007      |             
|and 2008, respectively; Outstanding: 63,049,257 and 61,929,895  shares at        |             
|December 31, 2007 and 2008, respectively                                         |             
|Additional paid-in capital                                                       |             
|Treasury shares at cost: 3,796,773 and 5,246,772 shares at December 31, 2007 and |             
|2008, respectively                                                               |             
|Other accumulated comprehensive income (loss)                                    |             
|Accumulated deficit                                                              |             
|                                                                                 |             
|                                                                                 |             
|Total shareholders' equity                                                       |             
|                                                                                 |             
|                                                                                 |             
|Total liabilities and shareholders' equity                                       |             
|                                                                                 |             

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

F - 5

---

---

|ALVARION LTD. AND ITS SUBSIDIARIES              
|------------------------------------------------
|                                                
|CONSOLIDATED STATEMENTS OF OPERATIONS           
|                                                
|U.S. dollars in thousands, except per share data

|                                                                   | Year ended December 31,
|------------------------------------------------------------------ | -----------------------
|
|
|
|
|Sales (Note 13)                                                    |                        
|Cost of sales                                                      |                        
|Write-off of excess inventory and provision for inventory purchase |                        
|commitments (Note 2g)                                              |                        
|                                                                   |                        
|                                                                   |                        
|Gross profit                                                       |                        
|                                                                   |                        
|                                                                   |                        
|Operating costs and expenses:                                      |                        
|Research and development, net (Note 14a)                           |                        
|Selling and marketing                                              |                        
|General and administrative                                         |                        
|Amortization of intangible assets                                  |                        
|Restructuring and other related expenses (Note 2z)                 |                        
|                                                                   |                        
|                                                                   |                        
|Total operating costs and expenses                                 |                        
|                                                                   |                        
|                                                                   |                        
|Operating loss                                                     |                        
|                                                                   |                        
|Other income (Note 1c)                                             |                        
|Financial income, net (Note 14b)                                   |                        
|                                                                   |                        
|                                                                   |                        
|Income (loss) from continuing operations (Note 12c)                |                        
|                                                                   |                        
|Income (loss) from discontinued operations, net (Note 1c)          |                        
|                                                                   |                        
|                                                                   |                        
|Net income (loss)                                                  |                        
|                                                                   |                        
|                                                                   |                        
|Net earnings (loss) per share (Note 14c):                          |                        
|Basic:                                                             |                        
|Continuing operations                                              |                        
|Discontinued operations                                            |                        
|                                                                   |                        
|                                                                   |                        
|                                                                   |                        
|                                                                   |                        
|Diluted:                                                           |                        
|Continuing operations                                              |                        
|Discontinued operations                                            |                        
|                                                                   |                        
|                                                                   |                        
|                                                                   |                        
|                                                                   |                        

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

F - 6

---

---

|ALVARION LTD. AND ITS SUBSIDIARIES           
|---------------------------------------------
|                                             
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|                                             
|U.S. dollars in thousands, except share data 

|                                                       | Ordinary shares | Additional
paid-in
capital | Treasury
shares | Other
accumulated
comprehensive
income
(loss) | Accumulated
deficit | Total
comprehensive
income (loss) | Total
shareholders'
equity
|------------------------------------------------------ | --------------- | -------------------------- | --------------- | --------------------------------------------- | ------------------- | --------------------------------- | --------------------------
|
|
|
|
|Balance at January 1, 2006                             |                 |                            |                 | 59,400,992                                    |                     | $                                 | 160                       
|                                                       |                 |                           
|Reclassification of other deferred                     |                 |                           
|stock compensation due to                              |                 |                           
|implementation of SFAS 123(R)                          |                 |                            |                 | -                                             |                     |                                   | -                         
|Exercise of employee stock options                     |                 |                            |                 | 2,228,219                                     |                     |                                   | 5                         
|Stock-based compensation expenses                      |                 |                           
|related to SFAS 123(R)                                 |                 |                            |                 | -                                             |                     |                                   | -                         
|Stock-based compensation expenses related              |                 |                           
|to SFAS 123(R), relating to discontinued operations    |                 |                            |                 | -                                             |                     |                                   | -                         
|Unrealized losses on foreign currency cash flow hedges |                 |                            |                 | -                                             |                     |                                   | -                         
|Net loss                                               |                 |                            |                 | -                                             |                     |                                   | -                         
|                                                       |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                           
|Total comprehensive loss                               |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                           
|Balance at December 31, 2006                           |                 |                            |                 | 61,629,211                                    |                     |                                   | 165                       
|                                                       |                 |                           
|Exercise of employee stock options                     |                 |                            |                 | 1,420,046                                     |                     |                                   | 3                         
|Stock-based compensation expenses                      |                 |                           
|related to SFAS 123(R)                                 |                 |                            |                 | -                                             |                     |                                   | -                         
|Unrealized gains on foreign currency cash flow hedges  |                 |                            |                 | -                                             |                     |                                   | -                         
|Net income                                             |                 |                            |                 | -                                             |                     |                                   | -                         
|                                                       |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                           
|Total comprehensive income                             |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                           
|Balance at December 31, 2007                           |                 |                            |                 | 63,049,257                                    |                     |                                   | 168                       
|                                                       |                 |                           
|Exercise of employee stock options                     |                 |                            |                 | 330,637                                       |                     |                                   | 1                         
|Purchase of treasury shares                            |                 |                            |                 | (1,449,999                                    | )                   |                                   | (4                        
|Stock-based compensation expenses                      |                 |                           
|related to SFAS 123(R)                                 |                 |                            |                 | -                                             |                     |                                   | -                         
|Unrealized losses on foreign currency cash flow hedges |                 |                            |                 | -                                             |                     |                                   | -                         
|Net loss                                               |                 |                            |                 | -                                             |                     |                                   | -                         
|                                                       |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                           
|Total comprehensive loss                               |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                            |                 |                                               |                     |                                   |                           
|                                                       |                 |                           
|Balance at December 31, 2008                           |                 |                            |                 | 61,929,895                                    |                     | $                                 | 165                       
|                                                       |                 |                            |                 |                                               |                     |                                   |                           

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

F - 7

---

---

|ALVARION 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:                                                         |                        
|Loss (income) from discontinued operations                                    |                        
|Depreciation                                                                  |                        
|Stock-based compensation expenses related to SFAS 123(R)                      |                        
|Accrued interest, amortization of premium and accretion of discounts on       |                        
|held-to-maturity marketable securities and bank deposits                      |                        
|Amortization of other intangible assets                                       |                        
|Decrease (increase) in trade receivables, net                                 |                        
|Decrease (increase) in other accounts receivable and prepaid expenses         |                        
|Decrease (increase) in inventories                                            |                        
|Increase (decrease) in trade payables                                         |                        
|Increase in other accounts payable and accrued expenses                       |                        
|Increase in long-term liabilities                                             |                        
|Accrued severance pay, net                                                    |                        
|                                                                              |                        
|                                                                              |                        
|Net cash provided by continuing operating activities                          |                        
|                                                                              |                        
|Net cash provided by (used in) discontinued operating activities              |                        
|                                                                              |                        
|                                                                              |                        
|Net cash provided by operating activities                                     |                        
|                                                                              |                        
|                                                                              |                        
|Cash flows from investing activities:                                         |                        
|Purchase of property and equipment                                            |                        
|Investment in affiliates                                                      |                        
|Proceeds from bank deposits                                                   |                        
|Investment in bank deposits                                                   |                        
|Investment in held-to-maturity marketable securities                          |                        
|Proceeds from maturity of held-to-maturity marketable securities              |                        
|Proceeds related to the LGC transaction                                       |                        
|                                                                              |                        
|                                                                              |                        
|Net cash provided by (used in) continuing investing activities                |                        
|                                                                              |                        
|Net cash used in discontinued investing activities                            |                        
|                                                                              |                        
|                                                                              |                        
|Net cash provided by (used in) investing activities                           |                        
|                                                                              |                        
|                                                                              |                        
|Cash flows from financing activities:                                         |                        
|Proceeds from exercise of employee stock options                              |                        
|Repayment of long-term debt                                                   |                        
|Purchase of treasury shares                                                   |                        
|                                                                              |                        
|                                                                              |                        
|Net cash provided by (used in) financing activities                           |                        
|                                                                              |                        
|                                                                              |                        
|Increase in cash and cash equivalents from continuing operations              |                        
|Increase (decrease) in cash and cash equivalents from discontinued operations |                        
|                                                                              |                        
|                                                                              |                        
|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                              |                        
|                                                                              |                        
|                                                                              |                        
|Supplemental disclosure of cash flows activities:                             |                        
|Cash paid during the year for interest                                        |                        
|                                                                              |                        
|Cash paid during the year for taxes                                           |                        
|                                                                              |                        
|                                                                              |                        
|Non-cash transactions:                                                        |                        
|Notes received in connection with the CMU net assets sale                     |                        
|                                                                              |                        
|Conversion of the LGC convertible note into Common stock                      |                        
|                                                                              |                        
|Purchase of property and equipment accrued in trade payables                  |                        
|                                                                              |                        

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

F - 8

---

---

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

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

| | a. | Alvarion
Ltd. together with its worldwide subsidiaries (the Company)                is
a provider of wireless broadband systems. The Company supplies top-tier
               carriers, Internet Service Providers (ISPs) and private
network                operators with solutions based on the Worldwide Interoperability
for Microwave                Access (WiMAX) standard as well as other
wireless broadband                solutions.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
for geographic markets and major customers, see Note 13.
| | -----------------------------------------------------------

| | b. | Alvarion
Ltd. has wholly-owned active subsidiaries in the United States, France,
               Romania, Brazil, Hong-Kong, Singapore, Japan, Mexico, Poland, Israel,
Uruguay,                Spain, UK, South-Africa, Italy, Argentina, Ecuador, Costa Rica,
India, Chile and                Philippines primarily engaged in marketing, pre-sales,
sales and developing                activities.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Discontinued
operations of the Cellular Mobile Unit (CMU):
| | -- | ------------------------------------------------------------

| | On
November 21, 2006, the Company signed an agreement to sell substantially all of the
assets and certain liabilities related to its CMU, representing the majority of former
interWAVE Communications International Ltd (interWAVE) business, to LGC
Wireless Inc (LGC), a privately held U.S. company, pursuant to the terms of
which LGC issued to Alvarion Promissory Notes (the Promissory Notes) in the
amount of $ 7,920 and a Convertible Note (the Convertible Note, and
together with the Promissory Note, the Notes) in the amount of $ 6,930.
The CMU was a separate reporting unit of the Company which focused on development and
production of compact cellular GSM and CDMA networks.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Promissory Notes bore simple interest at the rate of 8% per annum, payable annually. 50%
of the principal amounts and any accrued but unpaid interest thereon was due and payable
on December 31, 2007 and the remaining principal and any and all accrued but unpaid
interest was due and payable on December 31, 2008. The Promissory Notes were secured by
the assets that were sold in the transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
parties had the right to convert the outstanding principal on the Convertible Note, at
any date beginning six months following the closing and ending on the date of maturity,
into LGCs Common shares; the outstanding principal on the Convertible Note were
automatically converted into LGCs common shares upon a change of control in LGC.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2007, the Company converted the Convertible Notes into LGC Common shares. On
November 30, 2007, ADC Telecommunication Inc. (ADC), a U.S. publicly traded
company, completed its acquisition of LGC. As of December 31, 2008, the Company received
approximately $ 16.1 million, out of which approximately $ 8.9 million was received
during 2008, in respect of the Common shares of LGC and the Promissory Notes while an
additional $ 1 million is secured in escrow. As a result of these transactions, the
Company recorded in 2007 approximately $ 8.3 million as other income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
results of the CMU operations were presented as discontinued operations for all periods
presented. The cash flow of the CMU was also disclosed separately in the statement of
cash flows for all periods presented.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

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

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

| | Results
of operations of the discontinued segment:
| | --------------------------------------------------

| |                                              | Year ended December 31,
| | -------------------------------------------- | -----------------------
|
|
|
|
| | Revenues (*)                                 |                        
| | Operating expenses (*)                       |                        
| | Impairment of goodwill (Note 2j)             |                        
| | Loss from disposal of discontinued operation |                        
| |                                              |                        
| |                                              |                        
| | Net results                                  |                        
| |                                              |                        

| | (*) | In
2007, the Company collected amounts in reference to the former sale of CMU
          equipment and services which occurred before the sale of the CMU.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | The
preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates, judgments and assumptions that affect
the amounts reported in the financial statements and accompanying notes. The Companys
management believes that the estimates, judgment and assumptions used are reasonable
based upon information available at the time they are made. Actual results could differ
from those estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Financial
statements in U.S. dollars (dollars):
| | -- | -------------------------------------------------

| | A
majority of the Companys revenues is generated in dollars. In addition, most of the
Companys costs are denominated and determined in dollars. The Companys
management believes that the dollar is the currency in the primary economic environment
in which the Company operates. Thus, the functional and reporting currency of the Company
is the dollar.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with Statement of the Financial Accounting Standard No. 52, Foreign
Currency Translation (SFAS No. 52). All transaction gains and losses
from the remeasurement of monetary balance sheet items are reflected in the statement of
operations as appropriate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
consolidated financial statements include the accounts of Alvarion Ltd. and its
wholly-owned subsidiaries. Intercompany transactions and balances, including profits from
intercompany sales not yet realized outside the Company, have been eliminated in
consolidation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

|ALVARION 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.)
|------- | - | ---------------------------------------

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

| | Cash
equivalents are short-term highly liquid investments that are readily convertible to
cash, with maturities of three months or less at the date acquired.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Short-term
bank deposits:
| | -- | -------------------------

| | Bank
deposits with maturities of more than three months and up to one year were included in
short-term bank deposits. As of December 31, 2008, most of the bank deposits were in U.S.
dollars and bore interest at a weighted average interest rate of 3.63%. The deposits are
presented at their cost, including accrued interest. As of December 31, 2007, the Company
did not have short-term bank deposits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Marketable
securities:
| | -- | ----------------------

| | The
Company accounts for its investments in marketable securities using 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 securities at the
time of purchase and reevaluates such determinations at each balance sheet date.
Marketable debt securities are classified as held-to-maturity since the Company has the
positive intent and ability to hold the securities to maturity and are stated at
amortized cost.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the years ended December 31, 2006, 2007 and 2008, all securities covered by SFAS No. 115
were designated by the Companys management as held-to-maturity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amortized cost of held-to-maturity securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and interest are included in
the statements of operations as financial income or expenses, as appropriate. Realized
gains and losses on sales of investments, as determined on a specific identification
basis, if any, are included in the statements of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FASB
Staff Position (FSP) No. 115-1 and 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments (FSP 115-1) and
SEC Staff Accounting Bulletin Topic 5M, Other-Than-Temporary Impairment of Certain
Investments in Debt and Equity Securities provide guidance for determining when an
investment is considered impaired, whether impairment is other-than-temporary, and
measurement of an impairment loss. An investment is considered impaired if the fair value
of the investment is less than its cost. If, after consideration of all available
evidence to evaluate the realizable value of its investment, impairment is determined to
be other-than-temporary, then an impairment loss should be recognized equal to the
difference between the investments cost and its fair value. For the years ended
December 31, 2006, 2007 and 2008, no other-than-temporary impairment losses have
been identified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Inventories:
| | -- | ------------

| | The
Company manages its inventory according to the FIFO method.
| | ---------------------------------------------------------------

| | Inventories
are stated at the lower of cost or market value. Cost is determined as follows:
| | -------------------------------------------------------------------------------------------

| | Raw
materials and components  using the weighted moving average cost method.
| | -------------------------------------------------------------------------------

F - 11

---

---

|ALVARION 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.)
|------- | - | ---------------------------------------

| | Work
in progress and finished products are based on the cost of raw materials and components
used and the cost of production as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | Labor
and overhead calculated on a periodic average basis.
| | ----------------------------------------------------------

| | Inventory
write-offs have been provided to cover risks arising from dead and slow moving items,
technological obsolescence and excess inventories according to revenue forecasts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006, 2007 and 2008, the Company recorded inventory write-offs for inventory no longer
required and provision for inventory purchase commitments in a total amount of $ 9,472,
$ 4,762 and $ 3,457, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006, 2007 and 2008, approximately $ 3,594, $ 2,923 and $ 2,536, respectively, of
inventory previously written-off was used as product components in the Companys
ordinary production course and was sold as finished goods to end users. The sales of
these related manufactured products were reflected in the Companys revenues without
an additional charge to the cost of sales in the period in which the inventory was
utilized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | 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, at
the following annual rates:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                    | %                                                                    
| | ---------------------------------- | ---------------------------------------------------------------------
|
|
|
|
| | Office furniture and equipment     | 7 - 20                                                               
| | Computers and electronic equipment | 15 - 33                                                              
| | Motor vehicles                     | 15                                                                   
| | Leasehold improvements             | Over the shorter of the related lease period or the life of the asset

| | i. | Long-lived
assets:
| | -- | ------------------

| | The
Companys property and equipment and certain identifiable intangible assets are
reviewed for impairment in accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets(SFAS
No. 144), whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Intangible assets that are not considered to
have an indefinite useful life are amortized using the straight-line basis over their
estimated useful lives, which is 3.75-7.75 years. During 2008, the Company completely
amortized its intangible assets with useful lives of 3.75 years. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. During
2006, 2007 and 2008, no impairment losses were recorded.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|ALVARION 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.)
|------- | - | ---------------------------------------

| | j. | Goodwill
and other intangible assets:
| | -- | -------------------------------------

| | Goodwill
represents the excess of the purchase price in a business combination over the fair value
of net tangible and intangible assets acquired. Goodwill is not amortized, but rather is
subject to an annual impairment test. The Company performs an annual impairment test
during the third quarter of each fiscal year, or more frequently if impairment indicators
are present. As of December 31, 2008, the Company operates in one operating segment, and
this segment is the Companys sole reporting unit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the second quarter of 2006, the Company identified circumstances that required the
reassessment of the recoverability of the various assets associated with its CMU unit, as
required in SFAS 142. Management conducted an impairment analysis of goodwill and other
intangibles. Based on a fair value valuation, an impairment charge of goodwill in the
amount of $ 23,378 was recorded. In addition, as a result of the CMU sale (refer to
Note 1c), the Company wrote off additional amount of $ 4,766 related to the CMU goodwill.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the years ended December 31, 2007 and 2008, no additional impairment losses were
recorded.
| | ----------------------------------------------------------------------------------------------

| | k. | Income
taxes:
| | -- | -------------

| | The
Company accounts for income taxes in accordance with Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes (SFAS No. 109).
This Statement prescribes the use of the liability method whereby deferred tax asset and
liability account balances are determined based on differences between the financial
reporting and tax bases of assets and liabilities and for carryforward losses. Deferred
taxes are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value if it is
more likely than not that some portion or all of the deferred tax asset will not be
realized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized under SFAS No. 109.
FIN 48 prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be taken in
a tax return and also provides guidance on various related matters such as derecognition,
interest and penalties, and disclosure. On January 1, 2007, the Company adopted FIN
48. The adoption of FIN 48 had no effect on the Companys Shareholders Equity.
The Company recognizes interest and penalties, if any, related to unrecognized tax
benefits in financial expenses and general and administrative expenses, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised
2004), Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R)
requires companies to estimate the fair value of equity-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite service
periods in the Companys consolidated income statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|ALVARION 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
Company recognizes compensation expenses for the value of its awards granted based on the
straight line method over the requisite service period of each of the awards, net of
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Estimated forfeitures are based on actual historical pre-vesting
forfeitures.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates the fair value of stock options granted under SFAS No. 123(R) using the
Black-Scholes option-pricing model that uses the weighted-average assumptions noted in
the following table. The Company values restricted stock units and options granted at par
value based on the market value of the underlying shares at the date of grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expected
volatility is based on historical volatility that is representative of future volatility
over the expected term of the options. In 2008, the expected term of options granted is
estimated based on historical experience and represents the period time that options
granted are expected to be outstanding. In 2006 and 2007, the expected term was
determined based on the simplified method in accordance with SAB 107. The risk free
interest rate is based on the yield of U.S. treasury bonds with equivalent terms. The
dividend yield is based on the Companys historical and future expectation of
dividends payouts. Historically, the Company has not paid cash dividends and has no
foreseeable plans to pay cash dividends in the future.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | Year ended December 31,
| | ----------------------- | -----------------------
|
|
|
|
| | Volatility              |                        
| | Risk-free interest rate |                        
| | Dividend yield          |                        
| | Forfeiture rate         |                        
| | Expected term           |                        

| | The
Companys annual compensation cost for the years ended December 31, 2006, 2007 and
2008 totaled $ 6,898 ($ 6,450 related to continued operations) $ 7,424 and
$ 7,560, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total equity-based compensation expense related to all of the Companys equity-based
awards, recognized for the years ended December 31, 2006, 2007 and 2008, was comprised as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                    | Year ended December 31,
| | ---------------------------------- | -----------------------
|
|
|
|
| | Cost of goods sold                 |                        
| | Research and development           |                        
| | Sales and marketing                |                        
| | General and administrative         |                        
| |                                    |                        
| |                                    |                        
| | Equity-based compensation expenses |                        
| |                                    |                        

F - 14

---

---

|ALVARION 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.)
|------- | - | ---------------------------------------

| | m. | Revenue
recognition:
| | -- | --------------------

| | The
Company generates revenues by selling its products indirectly through distributors and
OEMs and directly to end-users.
| | --------------------------------------------------------------------------------------------------------------------------

| | Revenues
from products are recognized in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements (SAB No. 104) and
with the Emerging Issues Task Force No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21), when the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the sellers
price to the buyer is fixed or determinable, no further obligation exists and collection
is reasonably assured.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company generally does not grant a right of return. However, the Company has granted to
certain distributors limited rights of return on unsold products. Product revenues on
shipments to these distributors are recognized based on their history of actual returns
provided that all other revenue recognition criteria are met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
cases under which the Company is obligated to perform post delivery installation
services, revenues generated from such arrangements are recognized upon completion of the
installation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
transactions where a customers contractual terms include a provision for customer
acceptance, revenues are recognized either when such acceptance has been obtained or the
acceptance provision has lapsed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Warranty
costs:
| | -- | ---------------

| | The
Company provides a 12 to 21 months warranty period for all of its products. The specific
terms and conditions of a warranty vary depending upon the product sold and customer it
is sold to. The Company estimates the costs that may be incurred under its warranty and
records a liability in the amount of such costs at the time a product is delivered.
Factors that affect the Companys warranty liability include the number of units,
historical rates of warranty claims and cost per claim. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the Companys warranty allowance during the period are as follows:
| | -----------------------------------------------------------------------------

| |                                              | Year ended December 31,
| | -------------------------------------------- | -----------------------
|
|
|
|
| | Balance at the beginning of the year         |                        
| | Warranties issued during the year            |                        
| | Settlements/adjustments made during the year |                        
| |                                              |                        
| |                                              |                        
| | Balance at the end of the year               |                        
| |                                              |                        

| | o. | Research
and development:
| | -- | -------------------------

| | Research
and development costs, net of participation funding received and grants, are charged to
the statement of operations as incurred. See also Note 14a.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|ALVARION 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.)
|------- | - | ---------------------------------------

| | p. | Participations
and grants:
| | -- | --------------------------

| | Grants
and participation received for funding approved research and development projects are
recognized at the time the Company is entitled to such grants, on the basis of the costs
incurred and included as a deduction from research and development costs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Severance
pay:
| | -- | --------------

| | The
liability for severance pay for the Israeli companies is calculated pursuant to Israels
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 for all employees in Israel.
Employees 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 fully
provided by monthly deposits with severance pay funds, insurance policies and by an
accrual. The value of these deposits is recorded as an asset in the Companys
balance sheet.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
deposited funds include profits accumulated up to the balance sheet date. The deposited
funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israels
Severance Pay Law or labor agreements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expenses for the years ended December 31, 2006, 2007 and 2008 were $ 3,162,
$ 4,647 and $ 5,992, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------

| | r. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are carried to the statement of operations as incurred. Advertising expenses for
the years ended December 31, 2006, 2007 and 2008 were $ 1,188, $ 1,427 and $ 2,102,
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | s. | Basic
and diluted net earnings (loss) per share:
| | -- | ------------------------------------------------

| | Basic
net earnings (loss) per share are computed based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net earnings (loss) per share are
computed based on the weighted average number of Ordinary shares outstanding during each
year, plus dilutive potential of Ordinary shares considered outstanding during the year,
in accordance with Statement of Financial Accounting Standards No. 128, Earnings
Per Share (SFAS No. 128).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total weighted average number of shares related to the outstanding options excluded from
the calculations of diluted net earning (loss) per share due to their anti-dilutive
effect was 11,244,000, 6,293,918 and 10,667,727 for the years ended December 31, 2006,
2007 and 2008, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Concentration
of credit risk:
| | -- | -----------------------------

| | Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, short-term bank deposits, marketable
securities, trade receivables and foreign currency derivative contracts.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|ALVARION 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
majority of the Companys cash and cash equivalents and short-term bank deposits are
invested in U.S. dollar deposits with major U.S., European and Israeli banks. Deposits in
the U.S. may be in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Companys
investments are financially sound and, accordingly, minimal credit risk exists with
respect to these investments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investments in debentures of U.S.
corporations, U.S. government agencies and treasury bills. Management believes that the
portfolio is well diversified and, accordingly, minimal credit risk exists with respect
to these marketable securities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the recent turmoil in capital markets the Company tightened its control and
monitoring over its marketable securities portfolio in order to minimize potential risks
stemming from current capital markets environment. Such measures included among the
others: the Companys investment policy approved by the Investment Committee, limits
the amount the Company may invest in any one type of investment or issuer and the grade
of the security, thereby reducing credit risk concentrations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
trade receivables of the Company and its subsidiaries are derived from sales to customers
located primarily in North and South America, Asia Pacific, Africa and Europe. However,
under certain circumstances, the Company and its subsidiaries may require letters of
credit, other collateral, additional guarantees or advance payments. Regarding certain
credit balances, the Company is covered by foreign trade risk insurance. The Company and
its subsidiaries perform ongoing credit evaluations of their customers and establish an
allowance for doubtful accounts based upon a specific review.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Allowance
for doubtful accounts amounted to $ 567 and $ 234 as of December 31, 2007 and 2008,
respectively. The Company charges off receivables when they are deemed uncollectible.
Actual collection experience may not meet expectations and may result in increased bad
debt expense.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
bad debt expenses during 2006, 2007 and 2008 amounted to $ 186, $ 112 and $ 660,
respectively. Total write offs amounted to $ 206, $ 781 and $ 993 in 2006, 2007 and 2008,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
estimated fair value of financial instruments has been determined by the Company using
available market information and valuation methodologies. Considerable judgment is
required in estimating fair values. Accordingly, the estimates may not be indicative of
the amounts the Company could realize in a current market exchange.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of cash and cash equivalents, short-term bank deposits, trade
receivables and trade payables approximate their fair values, due to the short-term
maturities of these instruments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|ALVARION 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.)
|------- | - | ---------------------------------------

| | Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
No. 157) and, effective October 10, 2008, adopted FASB Staff Position (FSP)
No. 157-3, Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active (FSP 157-3), except as it applies to the
nonfinancial assets and liabilities subject to FSP No. 157-2, Effective Date
of FASB Statement No. 157 (FSP 157-2). SFAS No. 157 clarifies
that fair value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or a
liability. As a basis for considering such assumptions, SFAS No. 157 establishes a
three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
1- Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
| | -------------------------------------------------------------------------------------------------------------------------

| | Level
2- Include other inputs that are directly or indirectly observable in the marketplace.
| | --------------------------------------------------------------------------------------------

| | Level
3- Unobservable inputs which are supported by little or no market activity.
| | ---------------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value (see also Note 3 and
Note 10).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Derivative
instruments:
| | -- | -----------------------

| | Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133), requires companies to recognize
all of its derivative instruments as either assets or liabilities in the statement of
financial position at fair value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
those derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being hedged, as a
fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
derivative instruments that are designated and qualify as a cash flow hedge (i.e.,
hedging the exposure to variability in expected future cash flows that is attributable to
a particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument in excess of the
cumulative change in the present value of future cash flows of the hedged item, if any,
is recognized in current earnings during the period of change. For derivative instruments
not designated as hedging instruments, the gain or loss is recognized in current earnings
during the period of change.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
flow hedging strategy  To hedge against the risk of overall changes in cash flows
resulting from foreign currency trade payables and salary payments during the year, the
Company has instituted a foreign currency cash flow hedging program. The Company hedges
portions of its forecasted expenses denominated in NIS with currency forwards and
options. These forward and option contracts are designated as cash flow hedges, as
defined by SFAS No. 133 and Derivative Implementation Group No. G20, Cash Flow
Hedges: Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash
Flow Hedge (DIG 20) and are all effective.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|ALVARION 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.)
|------- | - | ---------------------------------------

| | As
of December 31, 2008, the Company recorded accumulated other comprehensive loss in the
amount of $ 1,183 from its currency forward and option transactions with respect mainly
to trade payables and payroll expenses expected to be incurred during 2009. Such amount
will be recorded in earnings during 2009.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | w. | Comprehensive
income:
| | -- | ---------------------

| | The
Company accounts for comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income. This Statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
shareholders equity during the period except those resulting from investments by,
or distributions to, shareholders.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | x. | Treasury
stock:
| | -- | ---------------

| | The
Company repurchases its Ordinary shares from time to time in the open market and holds
such shares as treasury stock. The Company presents the cost to repurchase treasury stock
as a reduction of shareholders equity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | y. | Investment
in affiliate:
| | -- | ------------------------

| | The
Company accounts for its investment in affiliate using the cost method of accounting
since the Company does not have the ability to exercise significant influence over
operating and financial policies of this company in accordance with the requirements of
Accounting Principle Board (APB) No. 18, The Equity Method of
Accounting for Investments in Common Stock.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys investment is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investment may not be recoverable,
in accordance with APB No. 18. As of December 31, 2007 and 2008, based on managements
analysis, no impairment losses have been identified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | z. | Restructuring
and other related costs:
| | -- | --------------------------------------

| | During
2008, the Company announced that it was implementing a cost reduction plan including the
layoff of approximately 100 employees. The Company recorded a charge of $ 2,914, out
of which $ 86 was write-off of lease improvements due to abandonment of rental premises
as a result of restructuring process. The Company has accounted for the restructuring
plan in accordance with FAS 146, Accounting for Costs Associated with Exit or
Disposal Activities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the major components of the restructuring plan charges are as
follows:
| | -----------------------------------------------------------------------------------------------

| |                               | Initial
costs | Cash
payments | Accrual balance
as of December
31, 2008
| | ----------------------------- | ------------- | ------------- | ---------------------------------------
|
|
|
|
| | Employee termination benefits |               |               | $                                      
| | Repayments of grants          |               |               |                                        
| | Lease abandonment             |               |               |                                        
| | Other                         |               |               |                                        
| |                               |               |               |                                        
| |                               |               |              
| |                               |               |               | $                                      
| |                               |               |               |                                        

| | Expected
completion date of the restructuring plan is by the end of 2009.
| | -------------------------------------------------------------------------

F - 19

---

---

|ALVARION 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.)
|------- | - | ---------------------------------------

| | aa. | Transfers
of financial assets:
| | --- | ------------------------------

| | SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS No. 140), establishes a standard for determining when a
transfer of financial assets should be accounted for as a sale. The Company structures
the arrangements such that the underlying conditions are met for the transfer of
financial assets to qualify for accounting as a sale, excluding transactions presented
below as a secured borrowing. The transfers of financial assets are typically performed
by the factoring of receivables to three Israeli financial institutions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2008, the Company sold trade receivables to Israeli
financial institutions in a total amount of $ 27,404. Control and risk of those trade
receivables were fully transferred in accordance with SFAS No. 140. As of
December 31, 2008, the Company had a transaction that did not meet the guidance of SFAS
140 and is presented as a secured borrowing as part of other accounts payable and accrued
expenses in the amount of $ 4,375.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreements, pursuant to which the Company sells its trade receivables, are structured
such that the Company (i) transfers the proprietary rights in the receivable from
the Company to the financial institution; (ii) legally isolates the receivable from
the Companys other assets, and presumptively puts the receivable beyond the lawful
reach of the Company and its creditors, even in bankruptcy or other receivership; (iii) confers
on the financial institution the right to pledge or exchange the receivable; and (iv) eliminates
the Companys effective control over the receivable, in the sense that the Company
is not entitled and shall not be obligated to repurchase the receivable other than in
case of failure by the Company to fulfill its commercial obligation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ab. | Reclassification:
| | --- | -----------------

| | Certain
amounts in prior years financial statements have been reclassified to conform with
the current years presentation.
| | ----------------------------------------------------------------------------------------------------------------------------

| | ac. | Impact
of recently issued Accounting Standards:
| | --- | -----------------------------------------------

| | In
February 2008, the FASB issued FSP No. FAS 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13", and FSP No. FAS 157-2, Effective Date of FASB
Statement No. 157". Collectively, the Staff Positions defer the effective date
of Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities except for items that are recognized or disclosed at
fair value on a recurring basis at least annually, and amend the scope of Statement 157.
As described in Note 10, the Company adopted Statement 157 and the related FASB
staff positions except for those items specifically deferred under FSP No. FAS 157-2.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any non controlling interest
in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after December 15,
2008. Earlier adoption is prohibited. The impact of SFAS 141R on the Companys
consolidated results of operations and financial condition will depend on the nature and
size of acquisitions, if any, subsequent to the effective date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

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

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

| | In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No.
160). SFAS No. 160 establishes accounting and reporting standards that require
that the ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parents equity; the amount of
consolidated net income attributable to the parent and to the non controlling interest be
clearly identified and presented on the face of the consolidated statement of income; and
changes in a parents ownership interest while the parent retains its controlling
financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not expect that the adoption of SFAS No. 160 will have significant impact on
its consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, Accounting
for Defensive Intangible Assets (EITF 08-7). EITF 08-7
clarifies the accounting for certain separately identifiable intangible assets which an
acquirer does not intend to actively use but intends to hold to prevent its competitors
from obtaining access to them. EITF 08-7 requires an acquirer in a business
combination to account for a defensive intangible asset as a separate unit of accounting
which should be amortized to expense over the period the asset diminishes in value. EITF 08-7
is effective for fiscal years beginning after December 15, 2008, with early adoption
prohibited.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not expect that the adoption of EITF 08-7 will have significant impact
on its consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | In
April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination
of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3
is effective for fiscal years beginning after December 15, 2008 and early adoption
is prohibited. The guidance is applicable to intangible assets acquired after the
effective date. The impact of FSP FAS 142-3 on the Companys consolidated
results of operations and financial condition will depend on the amount of intangibles
acquired, if any, subsequent to the effective date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

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

|NOTE 3: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| | The
following is a summary of held-to-maturity marketable securities:
| | ---------------------------------------------------------------------

| |                           | Amortizedcost | Grossunrealizedgains | Grossunrealizedlosses | Estimatedfair marketvalue
| | ------------------------- | ------------- | -------------------- | --------------------- | -------------------------
|
|
|
|
| | December 31, 2008:        |               |                      |                       |                          
| |                           |               |                     
| | Maturing within one year: |               |                     
| | U.S. Government agencies  |               |                      | $                     | 7,222                    
| | Corporate bonds           |               |                      |                       | 22,353                   
| |                           |               |                      |                       |                          
| |                           |               |                     
| |                           |               |                      |                       | 29,575                   
| |                           |               |                      |                       |                          
| | Maturing over one year:   |               |                     
| | U.S. Government agencies  |               |                      |                       | 2,407                    
| | Corporate bonds           |               |                      |                       | 29,861                   
| |                           |               |                      |                       |                          
| |                           |               |                     
| |                           |               |                      |                       | 32,268                   
| |                           |               |                      |                       |                          
| |                           |               |                     
| |                           |               |                      | $                     | 61,843                   
| |                           |               |                      |                       |                          
| |                           |               |                     
| | December 31, 2007:        |               |                     
| |                           |               |                     
| | Maturing within one year: |               |                     
| | U.S. Government agencies  |               |                      | $                     | 7,887                    
| | Corporate bonds           |               |                      |                       | 37,243                   
| |                           |               |                      |                       |                          
| |                           |               |                     
| |                           |               |                      |                       | 45,130                   
| |                           |               |                      |                       |                          
| | Maturing over one year:   |               |                     
| | U.S. Government agencies  |               |                      |                       | 4,145                    
| | Corporate bonds           |               |                      |                       | 37,512                   
| |                           |               |                      |                       |                          
| |                           |               |                     
| |                           |               |                      |                       | 41,657                   
| |                           |               |                      |                       |                          
| |                           |               |                     
| |                           |               |                      | $                     | 86,787                   
| |                           |               |                      |                       |                          

| | As
of December 31, 2008, the unrealized losses of the Companys investments in
held-to-maturity marketable securities were mainly caused by the credit crunch crisis in
the capital markets. The contractual cash flows of these investments are issued by highly
rated corporations. Accordingly, it is expected that the securities would not be settled
at a price less than the amortized cost of the Companys investment. Based on the
limited severity of the impairments and the ability and intent of the Company to hold
these investments until maturity, the bonds were not considered to be other than
temporarily impaired at December 31, 2007 and 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

|NOTE 4: |  | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------- | - | ----------------------------------------------

| |                          | December 31,
| | ------------------------ | ------------
|
|
|
|
| | Government authorities   |             
| | Deposits and derivatives |             
| | Prepaid expenses         |             
| | Employees and others     |             
| | Notes (see also Note 1c) |             
| |                          |             
| |                          |             
| |                          |             
| |                          |             

|NOTE 5: |  | INVENTORIES
|------- | - | -----------

| |                              |  | 
| | ---------------------------- |  | 
|
|
|
|
| | Raw materials and components |  | 
| | Work in progress             |  | 
| | Finished products            |  | 
| |                              |  | 
| |                              |  | 
| |                              |  | 
| |                              |  | 

| | See also Note 2g.
| | -----------------

|NOTE 6: |  | PROPERTY AND EQUIPMENT
|------- | - | ----------------------

| |                                       |  | 
| | ------------------------------------- |  | 
|
|
|
|
| | Cost:                                 |  | 
| | Office furniture and equipment        |  | 
| | Computers and electronic equipment    |  | 
| | Motor vehicles                        |  | 
| | Leasehold improvements                |  | 
| |                                       |  | 
| |                                       |  | 
| |                                       |  | 
| |                                       |  | 
| | Accumulated depreciation:             |  | 
| | Office furniture and equipment        |  | 
| | Computers and manufacturing equipment |  | 
| | Motor vehicles                        |  | 
| | Leasehold improvements                |  | 
| |                                       |  | 
| |                                       |  | 
| |                                       |  | 
| |                                       |  | 
| |                                       |  | 
| | Depreciated cost                      |  | 
| |                                       |  | 

| | Depreciation
expenses for the years ended December 31, 2006, 2007 and 2008 amounted to $ 4,926, $ 4,232
and $ 6,193, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

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

|NOTE 7: |  | INTANGIBLE ASSETS, NET
|------- | - | ----------------------

| |                           | December 31,
| | ------------------------- | ------------
|
|
|
|
| | Cost:                     |             
| | Current technology        |             
| | Customer relations        |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| | Accumulated amortization: |             
| | Current technology        |             
| | Customer relations        |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| | Amortized cost            |             
| |                           |             

| | Current
technology amortization expenses for the years ended December 31, 2006, 2007 and
2008 amounted to $ 2,676, $ 2,544 and $ 1,327, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | Estimated
amortization expenses for the years ended:
| | ----------------------------------------------------

| | Year ended December 31, | Amortization
expenses
| | ----------------------- | ---------------------
|
|
|
|
| | 2009                    |                      
| | 2010                    |                      

|NOTE 8: |  | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|------- | - | -------------------------------------------

| |                                                     | December 31,
| | --------------------------------------------------- | ------------
|
|
|
|
| | Employees and payroll accruals                      |             
| | Service providers, consultants and accrued expenses |             
| | Restructuring costs (*)                             |             
| | Royalties                                           |             
| | Warranty provision                                  |             
| | Advances from customers                             |             
| | Secured borrowings (**)                             |             
| | Provision for agent commissions                     |             
| | Derivatives                                         |             
| | Others                                              |             
| |                                                     |             
| |                                                     |             
| |                                                     |             
| |                                                     |             

| | (*) | See
also Note 2z.
| | --- | -----------------

| | (**) | See
Note 2aa.
| | ---- | -------------

F - 24

---

---

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

|NOTE 9: |  | COMMITMENTS AND CONTINGENT LIABILITIES
|------- | - | --------------------------------------

| | a. | Premises
occupied by the Company are leased under various lease agreements. The
               lease agreements for these premises will expire in 2013.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has leased various motor vehicles under operating lease agreements. These leases
expire in fiscal year 2011.
| | ------------------------------------------------------------------------------------------------------------------------

| | The
Company has leased computers under operating lease agreements. These leases expire in
fiscal year 2011.
| | -----------------------------------------------------------------------------------------------------------

| | Future
minimum rental payments under such leases as of December 31, 2008 are as follows:
| | ----------------------------------------------------------------------------------------

| |      | Rental of
premises | Lease of
computers | Lease of motor
vehicles
| | ---- | ------------------ | ------------------ | -----------------------
|
|
|
|
| | 2009 |                    |                    | $                      
| | 2010 |                    |                    |                        
| | 2011 |                    |                    |                        
| | 2012 |                    |                    |                        
| | 2013 |                    |                    |                        
| |      |                    |                    |                        
| |      |                    |                   
| |      |                    |                    | $                      
| |      |                    |                    |                        

| | Rental
of premises expenses for the years ended December 31, 2006, 2007 and 2008, were $ 5,129,
$ 5,408 and $ 7,254, respectively. Motor vehicle leasing expenses for the years
ended December 31, 2006, 2007 and 2008, were $ 2,295, $ 2,766 and $ 3,398,
respectively, computer leasing expenses for the years ended December 31, 2006, 2007
and 2008, were $ 208, $ 330 and $ 554, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Litigation:
| | -- | -----------

| | On
November 21, 2001, a purported Class Action lawsuit (the Action) was filed
against interWAVE, certain of its former officers and directors, and certain of the
underwriters for interWAVEs initial public offering (the IPO). On April
19, 2002, the plaintiffs filed an amended complaint. The amended complaint alleged that
the prospectus from interWAVEs IPO failed to disclose certain alleged improper
actions by various underwriters for the offering, in violation of the Securities Act of
1933, as amended and the Securities Exchange Act of 1934, as amended (the Exchange
Act). Similar complaints have been filed concerning more than 300 other IPOs; all
of these cases have been coordinated as In re Initial Public Offering Securities
Litigation, 21 MC 92. On October 8, 2002, the Court entered an Order of Dismissal as
to all of the individual defendants in the IPO litigation, without prejudice. In 2007, a
settlement that had been pending with the Court since 2004, was terminated by
stipulation, after a ruling by the Second Circuit Court of Appeals in six focus cases
in the coordinated proceedings (interWAVE is not one of the six test cases) a stipulation
of Settlement (the Settlement) was submitted to the Second Circuit, and in
2005, the Second Circuit granted preliminary approval. Under the Settlement, interWAVE
would have been dismissed of all claims in exchange for a contingent payment guarantee by
the insurance companies made it unlikely that the settlement would receive final Court
approval. Plaintiffs filed amended master allegations and amended complaints in the six
test cases. In 2008, the Court largely denied the defendants motion to dismiss the
amended complaints.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

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

|NOTE 9: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|------- | - | ----------------------------------------------

| | The
parties have reached a global settlement of the litigation. Under the settlement, which
remains subject to the Court approval, the insurers would pay the full amount of the
settlement share allocated to the Company, and the Company would bear no financial
liability. interWAVE, as well as the officer and director defendants who were previously
dismissed from the Action pursuant to tolling agreements, would receive complete
dismissals from the case. It is uncertain whether the settlement will receive final Court
approval. If the settlement does not receive final Court approval, and litigation against
the Company continues, the Company believes that it has meritorious defenses and intends
to defend the Action vigorously. However, the litigation results cannot be predicted at
this point.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 19, 2007 and February 2, 2007, purported securities class action lawsuits were
filed in the United States District Court for the Northern District of California, and on
February 13, 2007 and March 9, 2007, purported securities class action lawsuits were filed
in the United States District Court for the Southern District of New York (one of which
was subsequently dismissed voluntarily by the plaintiff). The four complaints were
substantially identical. Each complaint named as defendants the Company and certain of
its current and former officers and directors. Each complaint generally alleged
violations of certain U.S. federal securities laws and sought unspecified damages on
behalf of a class of purchasers of Alvarion common stock between November 3, 2004 and May
12, 2006. The plaintiffs alleged, among other things, that the defendants made false and
misleading statements concerning Alvarions business prospects, purportedly
violating Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder.  On May 4, 2007, in response to motions filed by Alvarion, the two New
York lawsuits were transferred to California. On April 9, 2007, three separate groups of
plaintiffs filed motions with the California court, requesting appointment as lead
plaintiff. On September 20, 2007, the Court consolidated the lawsuits into one matter,
and on October 30, 2007, the Court appointed two lead plaintiffs to represent the alleged
class. The Court ordered the appointed lead plaintiffs to file a consolidated amended
complaint on or before January 14, 2008. On or about January 9, 2008, counsel for the
court-appointed lead plaintiffs informed that the lead plaintiffs may dismiss the lawsuit
rather than file an amended complaint. On January 23, 2008, the parties filed a
stipulated request for dismissal of the lawsuit, which the Second Circuit approved on
January 24, 2008. The court-approved dismissal terminated this consolidated securities
class action lawsuit.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | As
of December 31, 2008, the Company obtained bank guarantees in the total
               amount of approximately $ 4,200, in favor of vendors, customers, leasers
and                Government authorities.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | The
Company provided a guarantee to a bank financing of one of the                Companys
customers in the amount of $ 3,900 which expires on April 30,                2010.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Royalties:
| | -- | ----------

| | The
Companys research and development efforts have been partially financed through
grants from the Office of the Chief Scientist (OCS) of the Israeli
Government. In return for the OCSs participation for some of the grants
applications, the company is committed to pay royalties to the Israeli Government at the
rate of 3%-5% of sales of products in which the Israeli Government has participated in
financing the research and development, up to the amounts granted. The grants received
bear annual interest at LIBOR as of the date of approval. The grants are presented in the
consolidated statements of operations as an offset to related research and development
expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

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

|NOTE 9: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|------- | - | ----------------------------------------------

| | Repayment
of the grants is not required in the event that there are no sales of products developed
within the framework of such funded programs. Royalties payable to the OCS are recorded
as they become due and are classified as cost of revenues. Royalty expenses relating to
OCS grants included in cost of revenues for the years ended December 31, 2006, 2007,
and 2008, amounted to $ 693, $ 434 and $ 294, respectively. The maximum amount of the
contingent liability related to royalties payable to the Israeli Government was
approximately $ 4,147 as of December 31, 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 10: |  | FAIR VALUE MEASUREMENTS
|-------- | - | -----------------------

| | In
accordance with SFAS No. 157, the Company measures its foreign currency derivative
contracts at fair value using market approach valuation technique. Foreign currency
derivative contracts are classified within Level 2 value hierarchy, as the valuation
inputs are based on quoted prices and market observable data of similar instruments. As
of December 31, 2008, the fair value of foreign currency derivative, liability,
measured on a recurring basis was $ 1,183.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 11: |  | SHARE CAPITAL
|-------- | - | -------------

| | a. | The
Companys shares are listed for trading on the NASDAQ National Market           and
on the Tel-Aviv Stock Exchange.
| | -- | -----------------------------------------------------------------------------------------------------------------------

| | b. | Shareholders rights:
| | -- | ---------------------

| | The
Ordinary shares confer upon the holders rights to receive notice to participate and vote
in general meetings of the Company, to receive dividends, if and when declared and to
receive, upon liquidation, a pro rata share of any remaining assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Treasury
stock:
| | -- | ---------------

| | In
July 2008, the Company was authorized to use up to $ 30 million of its available cash to
repurchase shares of the Company. By the end of 2008, the Company purchased 1,449,999
shares at a weighted average price of approximately $ 3.44 per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Share
options:
| | -- | --------------

| | The
Company has six stock option plans under which 30,916,260 Ordinary shares were reserved
for issuance.
| | ---------------------------------------------------------------------------------------------------------

| | In
2006, the Company adopted the 2006 shares options plan (the 2006 Plan). Under
the 2006 Plan, the Company may grant restricted share units, restricted shares (RSU),
options and other equity awards to employees, directors, consultants, advisers and
service providers of the Company and its subsidiaries.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

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

|NOTE 11: |  | SHARE CAPITAL (Cont.)
|-------- | - | ---------------------

| | Pursuant
to the 2006 Plan, 1,500,000 Ordinary shares were initially reserved for issuance upon the
exercise of awards granted under the 2006 Plan. The number of Ordinary shares available
for issuance under the 2006 Plan shall be reset annually on April 1 of each year to equal
4% of the total outstanding shares as of such reset date. The Company also grants its
options under 2002 Plan. RSUs vest over a three year period of employment and may be
subject to performance criteria. RSUs that are cancelled or forfeited become available
for future grants.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2008, the Company granted 963,000 performance based options. The Company did not record
compensation  expenses for these options since as of December 31, 2008, it was not
probable that the performance condition  would be satisfied.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the Companys plans, options generally vest ratably over a period of up
to four years, commencing on the date of grant. The options expire no later than 6 years
from the date of grant (under the old plans the options are expired after 10 years), and
are non-transferable, except under the laws of succession. Each option may be exercised
to purchase one Ordinary share for an exercise price that is generally equal to the fair
market value of the underlying share on the date of grant. Part of the options under the
2006 plan were granted at par value. Options that are cancelled or forfeited before
expiration become available for future grants.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, 4,094,082 Ordinary shares of the Company are still available for
future grants under the various option plans.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of option activity under the Companys stock option plans as of December 31,
2008 and changes during year than ended are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| |                                          | Year ended December 31, 2008
| | ---------------------------------------- | ----------------------------
|
|
|
|
| | Options outstanding at beginning of year |                             
| | Changes during the year:                 |                             
| | Granted                                  |                             
| | Exercised                                |                             
| | Forfeited or cancelled                   |                             
| |                                          |                             
| |                                          |                             
| | Options outstanding at end of year       |                             
| |                                          |                             
| |                                          |                             
| | Options exercisable at end of year       |                             
| |                                          |                             

F - 28

---

---

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

|NOTE 11: |  | SHARE CAPITAL (Cont.)
|-------- | - | ---------------------

| | The
weighted-average grant-date fair value of options granted during the years ended December
31, 2006, 2007 and 2008 was $ 3.93, $ 4.55 and $ 4.82, respectively. The weighted-average
fair value of the options vested during the year ended December 31, 2008 was $ 4.20. The
total intrinsic value for the options exercised for the years ended December 31, 2006,
2007 and 2008 was $ 13,827, $ 10,923 and $ 510, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, there was approximately $ 12,000 of total unrecognized compensation
cost 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 1.73 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding as of December 31, 2008, have been separated into ranges of exercise
prices, as follows:
| | ----------------------------------------------------------------------------------------------------------------

| | Exercise price(range) | Optionsoutstandingas ofDecember31, 2008 | Weightedaverageremainingcontractuallife(years) | Weightedaverageexerciseprice | Optionsexercisableas ofDecember31, 2008 | Remaining
contractual
life
(years for
exercisable
options | Weighted
average
exercise
price
| | --------------------- | --------------------------------------- | ---------------------------------------------- | ---------------------------- | --------------------------------------- | --------------------------------------------------------- | -------------------------------
|
|
|
|
| | $    0.0003-0.003     |                                         |                                                |                              | 1,240,161                               |                                                           |                                
| | $    1.06-1.27        |                                         |                                                |                              | 92,011                                  |                                                           |                                
| | $    1.90-2.74        |                                         |                                                |                              | 1,353,975                               |                                                           |                                
| | $    3.56-5.01        |                                         |                                                |                              | 332,833                                 |                                                           |                                
| | $    5.37-8.05        |                                         |                                                |                              | 1,873,127                               |                                                           |                                
| | $    8.06-11.46       |                                         |                                                |                              | 4,357,329                               |                                                           |                                
| | $    12.63-16.95      |                                         |                                                |                              | 1,652,702                               |                                                           |                                
| | $    24.18-268.64     |                                         |                                                |                              | 8,617                                   |                                                           |                                
| |                       |                                         |                                                |                              |                                         |                                                           |                                
| |                       |                                         |                                               
| |                       |                                         |                                                |                              | 10,910,755                              |                                                           |                                
| |                       |                                         |                                                |                              |                                         |                                                           |                                

| | A
summary of the status of the Companys restricted shares units and options granted
at par-value as of December 31, 2008, and changes during the year ended December 31,
2008, is presented below:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unvested restricted share units and options at par value | Number of
restricted
share units and
options at par
value | Weighted
average grant
date fair value
| | -------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------
|
|
|
|
| | Non vested at January 1, 2008                            |                                                           |                                       
| |                                                          |                                                           |                                       
| | Granted                                                  |                                                           |                                       
| | Vested                                                   |                                                           |                                       
| | Forfeited                                                |                                                           |                                       
| |                                                          |                                                           |                                       
| |                                                          |                                                           |                                       
| | Non vested at December 31, 2008                          |                                                           |                                       
| |                                                          |                                                           |                                       

| | e. | Dividends:
| | -- | ----------

| | In
the event that cash dividends are declared in the future, such dividends will be paid in
NIS. The Companys Board of Directors has determined that tax exempt income if any,
will not be distributed as dividends.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

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

|NOTE 12: |  | TAXES ON INCOME
|-------- | - | ---------------

| | Commencing
taxable year 2003, the Company has elected to measure its taxable income and file its tax
return under the Israeli Income Tax Regulations (Principles Regarding the Management of
Books of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income), 1986. Accordingly, results for tax purposes are
measured in terms of earnings in U.S. dollars.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
derived by Alvarion Ltd. is generally subject to the regular Israeli corporate tax rate
of 27%. However, as detailed below, income derived in Israel attributable to certain
Approved Enterprises may enjoy certain tax benefits for a specific definitive
period. The allocation of income derived from Approved Enterprises is
dependent upon compliance with certain requirements of the Investment Law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959:
| | -- | ------------------------------------------------------------------------------

| | Alvarion
Ltd. has been granted status as an Approved Enterprise under the Law for the
Encouragement of Capital Investments, 1959 (the investment law). According to
the provisions of the law, Alvarion Ltd. has elected the alternative benefitstrack
provisions of the investment law, pursuant to which Alvarion Ltd. has waived its right to
grants and instead receives a tax benefit on undistributed income derived from the Approved
Enterprise program. The entitlement to tax benefits depends upon compliance with
the investment law regulations. In 1997, Alvarion Ltd.s production facility in
Nazareth was granted status as an Approved Enterprise. Accordingly, Alvarion
Ltd.s income from that Approved Enterprise will be tax-exempt for a
period of 10 years. The 10-year period of benefits will commence with the first year in
which Alvarion Ltd. earns taxable income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2000, Alvarion Ltd.s expansion request for its third Approved Enterpriseregarding
its production facilities in Migdal Haemek was approved. The income derived from this
Approved Enterprise will be tax-exempt for 10 years period commencing in
first year Alvarion Ltd. earns taxable income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
duration of tax benefits is subject to limits of the earlier of 12 years from the
commencement of production, or 14 years from receiving the approval. The period of
benefits for the plans has not yet commenced, and will expire in 2009 and 2012,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with its merger with Floware in 2001, Alvarion Ltd. assumed the following
Floware Ltd. Approved Enterprise agreement:
| | -------------------------------------------------------------------------------------------------------------------------------------

| | Floware
Ltd. was granted Approved Enterprise status for its 1997 plan regarding the
production facility in Or-Yehuda. After the merger, the operations were relocated to
Alvarions facilities in Tel-Aviv. The income derived from this Approved
Enterprise will be tax-exempt for a period of two years and will enjoy a reduced
tax rate thereafter of 10%  25% for an additional period of five to eight years
(depending on the percentage of foreign investment in the Company). The period of
benefits will commence with the first year in which Alvarion Ltd. earns taxable income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
period of benefits for this plan has not yet commenced, and will expire in 2011.
| | ------------------------------------------------------------------------------------

F - 30

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | Alvarion
Ltd.s entitlement to the above benefits is conditional upon its fulfilling the
conditions stipulated by the investment law, regulations published thereunder and the
letters of approval for the specific investments in Approved Enterprises. In
the event of failure to comply with these conditions, any benefits which were previously
granted may be canceled and Alvarion Ltd. may be required to refund the amount of the
benefits, in whole or in part, including interest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
these retained tax-exempt profits are distributed in a manner other than in the complete
liquidation of the Company they would be taxed at the corporate tax rate applicable to
such profits as if the Company had not elected the alternative system of benefits,
currently between 10%-25% for an Approved Enterprise. As of December 31,
2008, the accumulated deficit of the Company does not include tax-exempt profits earned
by the Companys Approved Enterprise.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the investment law came into effect (the Amendment)
and, has significantly changed the provisions of the Investment Law. The Amendment limits
the scope of enterprises, which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Privileged Enterprise such as provision
generally requiring that at least 25% of the Privileged Enterprises income will be
derived from export. 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 Amendment provides that terms and benefits included in any letter of approval already
granted will remain subject to the provisions of the law as they were on the date of such
approval.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Amendment, in 2005 and 2007, Alvarion Ltd. submitted an expansion requests for
additional Approved Enterprise approval regarding its production facilities.
A portion of the income derived from this Approved Enterprise will be
tax-exempt for a period of 10 years and the rest will be taxed at a reduced rate of 10%
to 25% (depending on the percentage of foreign investment in the Company). The 10-year
period of benefits will commence with the first year in which Alvarion Ltd. earns taxable
income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Alvarion
 Ltd.  has had no  taxable  income  since  inception  and does not have any  profits
 under the  Approved                      Enterprise.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Tax
benefits under the Law for the Encouragement of Industry (Taxation), 1969:
| | -- | ------------------------------------------------------------------------------

| | Alvarion
Ltd. is an industrial company under the above law and, as such, is entitled
to certain tax benefits, mainly accelerated depreciation of machinery and equipment. For
tax purposes only, the Company may also be entitled to deduct over a three-year period
expenses incurred in connection with a public share offering and to amortize know-how
acquired from third parties.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Income
(loss) from continuing operations:
| | -- | -----------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

F - 31

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
loss and income from discontinued operations for the years ended 2006 and 2007 are
substantially attributable to foreign sources.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | d. | Carryforward
losses:
| | -- | --------------------

| | As
of December 31, 2008, Alvarion Ltd. had an available tax loss carryforward amounting to
approximately $ 129,000, which may be carried forward, in order to offset taxable income
in the future, for an indefinite period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the state and the federal tax losses carryforward of the U.S.
subsidiaries amounted to approximately $ 8,700 and $ 33,000, respectively. Such losses
are available to be offset against any future U.S. taxable income of the U.S. subsidiary
and will expire in 2011 and 2028, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
state and federal loss carryforwards per the income tax returns filed included uncertain
tax positions taken in prior years.  Due to application of FIN 48, they are
larger than the net operating loss deferred tax asset recognized for financial statement
purposes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Utilization
of U.S. net operating losses may be subject to substantial annual limitations due to the
change in ownership provisions (annual limitations) of the
Internal Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before utilization.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Reduction
in corporate tax rate:
| | -- | --------------------------------

| | On
July 25, 2005, the Israeli parliament passed the Law for the Amendment of the Income Tax
Ordinance (No.147 and Temporary Order) 2005 (the Income Tax Amendment).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inter
alia, the Income Tax Amendment provides for a gradual reduction in the statutory
corporate tax rate in the following manner: in 2008 the tax rate is 27%, in 2009 the tax
rate will be 26% and from 2010 onward the tax rate will be 25%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Deferred
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 Companys deferred tax
liabilities and assets are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                      | December 31,
| | ---------------------------------------------------- | ------------
|
|
|
|
| | Tax assets in respect of:                            |             
| | Allowance for doubtful accounts                      |             
| | Accrued severance pay and accrued vacation pay       |             
| | Other deductions for tax purposes                    |             
| | Net loss carry forward                               |             
| |                                                      |             
| |                                                      |             
| | Total deferred tax assets before valuation allowance |             
| | Valuation allowance                                  |             
| |                                                      |             
| |                                                      |             
| | Net deferred tax assets                              |             
| |                                                      |             

F - 32

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
main reconciling item between the statutory tax rate of the Company and the effective tax
rate are the non-recognition of tax benefits resulted from the Companys accumulated
net operating losses carryforward due to the uncertainty of the realization of such tax
benefits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | The
Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of
               FIN 48 did not result in a change to the Companys accumulated
deficit. A                reconciliation of the beginning and ending amount of
unrecognized tax benefits                is as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         | December 31,
| | --------------------------------------- | ------------
|
|
|
|
| | Opening balance                         |             
| | Additions for prior year tax positions  |             
| | Additions for current year tax position |             
| | Reductions for prior year tax positions |             
| |                                         |             
| |                                         |             
| | Closing balance                         |             
| |                                         |             

| | The
Company recognizes interest and penalties related to unrecognized tax benefits in
financial expenses and general and administrative expenses, respectively. During the
years ended December 31, 2007 and 2008, the Company recorded $ 285 and $ 200,
respectively for interest and penalties expenses related to uncertain tax positions. The
liability for unrecognized tax benefits included accrued interest and penalties of $ 492
and $ 692 at December 31, 2007 and 2008, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries file income tax returns in Israel, USA and other foreign
jurisdictions. With respect to Alvarion Ltd., the Israeli Tax Authorities had never
examined the Companys tax returns, nevertheless the tax returns until 2003 tax year
(including 2003 tax returns) are deemed to be approved. The last examination conducted
and finalized by U.S. tax authorities was in respect to the Companys U.S. federal
income tax return for 2004. With respect to other Companys subsidiaries, the
Company has not had a tax audit on their behalf.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 13: |  | GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION
|-------- | - | ------------------------------------------

| | a. | The
Company operates in one reportable segment (see Note 1 for a brief
               description of the Companys business) and follows the requirements
of                Statement of Financial Accounting Standards No. 131, Disclosures
about                Segments of an Enterprise and Related Information (SFAS
No.                131).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

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

|NOTE 13: |  | GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION (Cont.)
|-------- | - | --------------------------------------------------

| | b. | Information
on sales by geographic distribution:
| | -- | ------------------------------------------------

| | The
total revenues are attributed to geographic areas based on the location of the Companys
end customers.
| | -----------------------------------------------------------------------------------------------------------

| | The
following table presents total revenues for the years ended December 31, 2006, 2007 and
2008:
| | -------------------------------------------------------------------------------------------------

| |                                                   | Total revenues
| | ------------------------------------------------- | --------------
|
|
|
|
| | Israel                                            |               
| | United States (including Canada)                  |               
| | Europe (without Russia, Romania, Italy ,Spain and |               
| | Denmark)                                          |               
| | Russia                                            |               
| | Romania                                           |               
| | Italy                                             |               
| | Spain                                             |               
| | Denmark                                           |               
| | Latin America                                     |               
| | Africa                                            |               
| | Asia                                              |               
| |                                                   |               
| |                                                   |               
| |                                                   |               
| |                                                   |               

| | The
following table presents total long-lived assets as of December 31, 2007 and 2008:
| | --------------------------------------------------------------------------------------

| |         | Total long-lived assets
| | ------- | -----------------------
|
|
|
|
| | Israel  |                        
| | Romania |                        
| | Other   |                        
| |         |                        
| |         |                        
| |         |                        
| |         |                        

| | The
total long-lived assets are attributed to geographic areas based on the location of the
assets.
| | ---------------------------------------------------------------------------------------------------

|NOTE 14: |  | SELECTED STATEMENTS OF OPERATIONS DATA
|-------- | - | --------------------------------------

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

| |                                 | Year ended December 31,
| | ------------------------------- | -----------------------
|
|
|
|
| | Research and development costs  |                        
| | Less - grants and participation |                        
| |                                 |                        
| |                                 |                        
| |                                 |                        
| |                                 |                        

F - 34

---

---

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

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

| | b. | Financial
income, net:
| | -- | ----------------------

| |                                          | Year ended December 31,
| | ---------------------------------------- | -----------------------
|
|
|
|
| | Financial income:                        |                        
| | Interest and others                      |                        
| | Foreign currency transaction differences |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| | Financial expenses:                      |                        
| | Interest and bank expenses               |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        

| | c. | Net
earnings (loss) per share:
| | -- | ------------------------------

| | The
following table sets forth the computation of basic and diluted net earnings (loss) per
share:
| | --------------------------------------------------------------------------------------------------

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Numerator:                                      |                        
| |                                                 |                        
| | Numerator for basic and diluted net earnings    |                        
| | (loss) per share - income (loss) from           |                        
| | continuing operations available to              |                        
| | shareholders of Ordinary shares                 |                        
| |                                                 |                        
| | Numerator for basic and diluted net income      |                        
| | (loss) per share - (loss) income from           |                        
| | discontinued operations available to            |                        
| | shareholders of Ordinary shares                 |                        
| |                                                 |                        
| |                                                 |                        
| | Numerator for basic and diluted net earnings    |                        
| | (loss) per share - net income (loss) available  |                        
| | to shareholders of Ordinary shares              |                        
| |                                                 |                        
| |                                                 |                        
| | Denominator:                                    |                        
| |                                                 |                        
| | Denominator for basic net earnings (loss) per   |                        
| | share - weighted average number of Ordinary     |                        
| | shares                                          |                        
| |                                                 |                        
| | Effect of dilutive securities:                  |                        
| |                                                 |                        
| |                                                 |                        
| | Employee stock options                          |                        
| |                                                 |                        
| |                                                 |                        
| | Denominator for diluted net earnings (loss) per |                        
| | share - adjusted weighted average number of     |                        
| | shares                                          |                        
| |                                                 |                        

|*) | Antidilutive.
|-- | -------------

F - 35

---

---