**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        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,
                      2005
  **OR**
  o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
                **For
                  the transition period from __________ to
                  __________**
  **OR**
  o
                **SHELL
                      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                      EXCHANGE
                      ACT OF 1934******
                    **Date
                      of event requiring this shell company report
                      _____________**
  **Commission
        file number 0-30628**
 **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)**
  **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****None**
              **None**
  **Securities
        registered or to be registered pursuant to Section 12(g) of the
        Act.**
  **Ordinary
        Shares, NIS 0.01 par value per share**
 **(Title
        of Class)**
  **Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act.**
  **None**
 **(Title
        of Class)**
  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.
  **59,400,992
          Ordinary Shares, NIS 0.01 par value per share**
 
  Indicate
        by check mark if the registrant is a well known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
  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 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 o Non-Accelerated
        Filer x
  Indicate
        by check mark which financial statement item the registrant has elected to
        follow.
  o Item
        17  x 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
  (APPLICABLE
        ONLY TO ISSUERS INVOVLED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
        YEARS)
  Indicate
        by check mark whether the registrant has filed all documents and reports
        required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
        Act
        of 1934, subsequent to the distribution of securities under a plan confirmed
        by
        a court.
  o Yes  o No
  
 **INTRODUCTION**
  We
        are a
        leading provider of wireless broadband systems. We supply carriers, ISPs
        and
        private network operators with WiMAX (Worldwide Interoperability for Microwave
        Access) and other wireless broadband solutions, as well as compact cellular
        networks to developing countries and remote areas. Our products cover the
        full
        range of frequency bands with both fixed and mobile solutions, enabling the
        delivery of business and residential broadband access, corporate VPNs (Virtual
        Private Network), toll quality telephony, mobile base station feeding, hotspot
        coverage extension, community interconnection, public safety communications,
        and
        mobile voice and data. Extending coverage of mobile networks to developing
        countries and other hard-to-serve areas, we offer complete and scalable mobile
        network solutions that feature a low cost of entry, local switching, and
        integrated VAS (Value Added Services) functionality. 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
        (Metropolitan Area Network) standards committees and experience in deploying
        OFDM (Orthogonal Frequency Division Multiplexing)-based systems, we have
        been in
        the forefront of the WiMAX ForumTM 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 vision is to deliver
        solutions for “personal broadband” enabling mobile users to receive
        bandwidth-intensive voice, video, and data services anytime,
        anywhere.
  We
        were
        incorporated in September 1992 under the laws of the State of Israel. In
        August 2001, under the name of BreezeCOM, we merged with Floware Wireless
        Systems Ltd., a company incorporated under the laws of the State of Israel,
        or
        Floware.  Following the merger, we continued as the surviving company and
        we changed our name to Alvarion Ltd.  In April 2003, we completed the
        acquisition of InnoWave ECI Wireless Systems Ltd., a wholly-owned subsidiary
        of
        ECI Telecom Ltd., or InnoWave.  In December 2004, interWAVE Communications
        International Ltd., or interWAVE, was acquired through a merger with and
        into
        Alvarion.
  Except
        for historical information contained herein, the statements contained in
        this
        annual report are forward-looking statements, within the meaning of the Private
        Securities Litigation Reform Act of 1995 with respect to our business, financial
        condition and results of operations. Actual results could differ materially
        from
        those anticipated in these forward-looking statements as a result of various
        factors, including all or any of the risks discussed in “Item 3--Key
        Information--Risk Factors” and elsewhere in this annual report.
  We
        urge
        you to consider that statements which use the terms “believe,” “expect,” “plan,”
“intend,” “estimate,” “anticipate,” “project” and similar expressions in the
        affirmative and the negative are 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. 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.
  i
 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, WE’RE ON YOUR WAVELENGTH, BreezeCOM, BreezeMAX,
        BreezeACCESS, BreezeNET, BreezeLITE, BreezePHONE, WALKair, WALKnet, EASYBRIDGE,
        4Motion, QoR Technology, InnoWave Wireless Systems (Design), INTERWAVE,
        INTERWAVE & Design, INTERWAVE COMMUNICATIONS, INTERWAVE THE , MICROCELLULAR
        NETWORKS COMPANY, GSM NETWORKS IN A BOX, THE MICROCELLULAR NETWORK COMPANY,
        THE
        WIRELESS SOLUTION FOR MAN, WAVEWXCHANGE, WAVEXCHANGE, WAVEXCHANGE, WAVEXPRESS BS PLUS WAVEXTEND, WAVENET,
        WAVENET ACCESS, WAVENET LINK, WAVENET TRANSPORT WAVETRANSIT, WAVEVIEW, WaveGain,
        MICROEXPRESS, MICROXPRESS, TURBOMAX, TURBOWAVE, MINET, MULTIPOINT NETWORKS,
        RAN,
        WIRELESS INC & Device are trademarks or registered trademarks of Alvarion.
        All other trademarks and trade names appearing in this annual report are
        owned
        by their respective holders.
  ii
   **TABLE
        OF CONTENTS**
  **Page**PART
                  I
              1ITEM
                  1.
              
              IDENTITY
                  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
              1ITEM
                  2.
              
              OFFER
                  STATISTICS AND EXPECTED TIMETABLE
              1ITEM
                  3.
              
              KEY
                  INFORMATION
              2A.
              
              SELECTED
                  FINANCIAL DATA
              2B.
              
              CAPITALIZATION
                  AND INDEBTEDNESS
              3C.
              
              REASONS
                  FOR THE OFFER AND USE OF PROCEEDS
              3D.
              
              RISK
                  FACTORS
              3ITEM
                  4.
              
              INFORMATION
                  ON THE COMPANY
              23A.
              
              HISTORY
                  AND DEVELOPMENT OF THE COMPANY
              23B.
              
              BUSINESS
                  OVERVIEW
              23C.
              
              ORGANIZATIONAL
                  STRUCTURE
              45D.
              
              PROPERTY,
                  PLANTS AND EQUIPMENT
              46ITEM
                  4A.
              
              UNRESOLVED
                  STAFF COMMENTS
              46ITEM
                  5.
              
              OPERATING
                  AND FINANCIAL REVIEW AND PROSPECTS
              47A.
              
              OPERATING
                  RESULTS
              47B.
              
              LIQUIDITY
                  AND CAPITAL RESOURCES
              61C.
              
              RESEARCH
                  AND DEVELOPMENT, PATENTS AND LICENSES
              68D.
              
              TREND
                  INFORMATION
              69E.
              
              OFF-BALANCE
                  SHEET ARRANGEMENTS
              69F.
              
              TABULAR
                  DISCLOSURE OF CONTRACTUAL OBLIGATIONS
              69ITEM
                  6.
              
              DIRECTORS,
                  SENIOR MANAGEMENT AND EMPLOYEES
              70A.
              
              DIRECTORS
                  AND SENIOR MANAGEMENT
              70B.
              
              COMPENSATION
              74
  iii
 C.
              
              BOARD
                  PRACTICES
              74D.
              
              EMPLOYEES
              79E.
              
              SHARE
                  OWNERSHIP
              81ITEM
                  7.
              
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              84A.
              
              MAJOR
                  SHAREHOLDERS
              84B.
              
              RELATED
                  PARTY TRANSACTIONS
              84C.
              
              INTERESTS
                  OF EXPERTS AND COUNSEL
              84ITEM
                  8.
              
              FINANCIAL
                  INFORMATION
              85A.
              
              CONSOLIDATED
                  STATEMENTS AND OTHER FINANCIAL INFORMATION
              85B.
              
              SIGNIFICANT
                  CHANGES
              85ITEM
                  9.
              
              THE
                  OFFER AND LISTING
              86A.
              
              OFFER
                  AND LISTING DETAILS
              86B.
              
              PLAN
                  OF DISTRIBUTION
              87C.
              
              MARKETS
              87D.
              
              SELLING
                  SHAREHOLDERS
              87E.
              
              DILUTION
              87F.
              
              EXPENSES
                  OF THE ISSUE
              87ITEM
                  10.
              
              ADDITIONAL
                  INFORMATION
              88A.
              
              SHARE
                  CAPITAL
              88B.
              
              MEMORANDUM
                  AND ARTICLES OF ASSOCIATION
              88C.
              
              MATERIAL
                  CONTRACTS
              90D.
              
              EXCHANGE
                  CONTROLS
              90E.
              
              TAXATION
              90F.
              
              DIVIDENDS
                  AND PAYING AGENTS
              99G.
              
              STATEMENT
                  BY EXPERTS
              99H.
              
              DOCUMENTS
                  ON DISPLAY
              99
  iv
 I.
              
              SUBSIDIARY
                  INFORMATION
              99ITEM
                  11.
              
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUTMARKET
                  RISK
              100ITEM
                  12.
              
              DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY SECURITIES
              100PART
                  II
              101ITEM
                  13.
              
              DEFAULTS,
                  DIVIDEND ARREARAGES AND DELINQUENCIES
              101ITEM
                  14.
              
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                  PROCEEDS
              101ITEM
                  15.
              
              CONTROLS
                  AND PROCEDURES
              101ITEM
                  16A.
              
              AUDIT
                  COMMITTEE FINANCIAL EXPERT
              101ITEM
                  16B.
              
              CODE
                  OF ETHICS AND CODE OF CONDUCT
              102ITEM
                  16C.
              
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              102ITEM
                  16D.
              
              EXEMPTIONS
                  FROM THE LISTING STANDARDS FOR AUDITCOMMITTEES
              103ITEM
                  16E.
              
              PURCHASES
                  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                  PURCHASERS
              103PART
                  III
              103ITEM
                  16.
              
              FINANCIAL
                  STATEMENTS
              103ITEM
                  17.
              
              FINANCIAL
                  STATEMENTS
              103ITEM
                  18.
              
              EXHIBITS
              104
 
 
 v
  **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**  We
        have
        derived the following selected consolidated financial data presented below
        as of
        December 31, 2004 and 2005 and for each of the years ended December 31,
        2003, 2004 and 2005 from our audited consolidated financial statements and
        related notes included in this annual report. The consolidated financial
        data
        for the year ended December 31, 2001 and thereafter include the results of
        operations of the former Floware business from August 1, 2001, the
        effective date of the merger of Floware with and into us. The consolidated
        financial data for the year ended December 31, 2003 include the results of
        operations of the assets and assumed liabilities of InnoWave business from
        April
        1, 2003. The consolidated financial data for the year ended December 31,
        2004
        include the results of operations of the former interWAVE Communications
        International business from December 9, 2004. We have derived the selected
        consolidated financial data as of December 31, 2001, 2002 and 2003 and for
        each
        of the years ended December 31, 2001 and 2002 from our audited consolidated
        financial statements and related notes not included in this annual report.
        We
        prepare our consolidated financial statements in accordance with accounting
        principles generally accepted in the United States, or 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.
  **Year
                    Ended December 31,****2001**
                
                **2002**
                
                **2003**
                
                **2004**
                
                **2005**(in
                    thousands except per share data)**Statement
                    of Operations Data:**Sales
                
                $
                98,968
                
                $
                88,849
                
                $
                127,208
                
                $
                201,507
                
                $
                195,715Cost
                    of sales
                
                
                59,535
                
                
                55,192
                
                
                68,595
                
                
                102,329
                
                
                98,315Write-off
                    of excess inventory and provision for inventory purchase commitments
                
                
                53,881
                
                
                250
                
                
                6,562
                
                
                11,412
                
                
                8,124Gross
                    profit (loss)
                
                
                (14,448
                )
                
                33,407
                
                
                52,051
                
                
                87,766
                
                
                89,276**Operating
                    costs and expenses:**Research
                    and development, gross
                
                
                27,419
                
                
                27,907
                
                
                27,612
                
                
                31,713
                
                
                41,983Less
                    grants
                
                
                5,982
                
                
                3,520
                
                
                3,846
                
                
                3,897
                
                
                3,062Research
                    and development, net
                
                
                21,437
                
                
                24,387
                
                
                23,766
                
                
                27,816
                
                
                38,921Selling
                    and marketing
                
                
                30,425
                
                
                26,684
                
                
                33,000
                
                
                39,038
                
                
                48,794General
                    and administrative
                
                
                6,393
                
                
                6,102
                
                
                6,417
                
                
                9,741
                
                
                11,495Merger
                    and acquisition relatedexpenses
                
                
                2,841
                
                
                —
                
                
                2,201
                
                
                369
                
                
                868Amortization
                    of intangible assets
                
                
                1,200
                
                
                2,400
                
                
                2,606
                
                
                2,779
                
                
                4,367In-process
                    research and development write-off
                
                
                26,300
                
                
                —
                
                
                —
                
                
                10,993Restructuring
                
                
                5,437
                
                
                1,102
                
                
                —
                
                
                —
                
                
                —One-time
                    expense related to a settlement of an OCS program
                
                
                6,535
                
                
                —
                
                
                —
                
                
                —
                
                
                —Total
                    operating costs and expenses
                
                
                100,568
                
                
                60,675
                
                
                67,990
                
                
                90,736
                
                
                104,445Operating
                    loss
                
                
                (115,016
                )
                
                (27,268
                )
                
                (15,939
                )
                
                (2,970
                )
                
                (15,169
                )Financial
                    income, net
                
                
                8,540
                
                
                6,587
                
                
                4,127
                
                
                3,821
                
                
                2,551Other
                    expenses
                
                
                (3,535
                )
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    income (loss)
                
                $
                (110,011
                )
                $
                (20,681
                )
                $
                (11,812
                )
                $
                851
                
                $
                (12,618
                )Basic
                    net earnings (loss) per share
                
                $
                (2.80
                )
                $
                (0.38
                )
                $
                (0.23
                )
                $
                0.02
                
                $
                (
                    0.22
                )Weighted
                    average number of sharesused in computing basic net earnings(loss)
                    per share.
                
                
                39,298
                
                
                53,941
                
                
                52,127
                
                
                56,549
                
                
                58,688Diluted
                    net earnings (loss) per share
                
                $
                (2.80
                )
                $
                (0.38
                )
                $
                (0.23
                )
                $
                0.01
                
                $
                (0.22
                )Weighted
                    average number of sharesused
                    in computing diluted net earnings(loss)
                    per share
                
                
                39,298
                
                
                53,941
                
                
                52,127
                
                
                63,754
                
                
                58,688
   1
  **Year
                      Ended December 31,****2001**
                  
                  **2002**
                  
                  **2003**
                  
                  **2004**
                  
                  **2005**Working
                      capital
                  
                  $
                  167,371
                  
                  $
                  74,237
                  
                  $
                  90,359
                  
                  $
                  53,341
                  
                  $
                  101,713Total
                      assets
                  
                  $
                  307,595
                  
                  $
                  272,075
                  
                  $
                  284,957
                  
                  $
                  328,535
                  
                  $
                  318,002Shareholders’
                      equity
                  
                  $
                  254,251
                  
                  $
                  227,830
                  
                  $
                  220,202
                  
                  $
                  232,812
                  
                  $
                  224,333Capital
                      Stock
                  
                  $
                  370,994
                  
                  $
                  371,120
                  
                  $
                  376,309
                  
                  $
                  388,418
                  
                  $
                  391,957
  **B.**
                **CAPITALIZATION
                    AND INDEBTEDNESS**  Not
            applicable.
  **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, we expect to incur** **loses** **in
            the near term and** **ma** **y
            continue to incur losses in the future.**
  We
            incurred operating loss and net loss in 2005 and in 2003, and had a net
            profit
            in 2004. In 2005, our operating loss and net loss were approximately
            $(15.2)
            million and $(12.6) million, respectively. In 2004, our operating loss
            and net
            income were approximately $(3.0) million and $0.9 million, respectively.
            In
            2003, our operating loss and net loss were approximately $(15.9) million
            and
            $(11.8) million, respectively. We expect
            to incur
            operating and net losses in the near term and we may continue to incur
            losses in
            the future. Continuing losses could have a material adverse effect on
            our
            business, financial condition and results of operations and the value
            and market
            price of our ordinary shares.
  2
 **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 operatio** **ns** **.**
  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. In 2005, adverse market conditions caused our customers
            and
            potential customers to be conservative in their spending, and this could
            continue in the future.  The
            markets that we participate in may not grow as we expect or at all. 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 succeed in doing so.
            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 continue to decline, which would increase our
            losses.
  **If** **we
            do not maintain or increase our share of the wireless broadband equipment
            and
            specialized cellular network markets, our business will suffer. In addition
            new
            markets we attempt to penetrate may not become substantial commercial
            markets.**
  In
            order
            to maintain or increase our share of the markets we participate in, we
            must:
  ·
                  sustain
                      our attained technology position in designing, developing,
                      and
                      manufacturing wireless broadband and specialized cellular network
                      products;
  ·
                  develop
                      and cultivate additional sales channels, including original
                      equipment
                      manufacturer, or OEM, agreements 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
                      and local
                      telephone companies; and
  ·
                  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
                      sometimes offered on special commercial
                      terms.
  Our
            efforts in these markets may not succeed. In addition the mobile market
            and any
            future markets that we may 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.
  **We
            face a number of risks relating to our acquisition of interWAVE which
            may have
            an adverse impact on our results of operation** **s** **.**
  In
            December 2004, we completed the acquisition of interWAVE (referred to
            as our
            cellular mobile unit - CMU). During the second quarter of 2006, we identified
            circumstances that will require the reassessment of the recoverability
            of the
            various assets associated with the CMU. We are currently beginning the
            process
            of evaluating the recoverability of these assets. At this point we cannot
            have a
            reasonable estimate as to the potential impairment of some of the intangible
            assets related to this business, if any. If such impairment will be required
            this may have a significant effect on our result of operations.
  3
 **Under
            the terms of our merger transaction with interWAVE we are liable for
            interWAVE’s
            pre merger liabilitie** **s** **.**
  The
            merger of interWAVE with and into us in December 2004, resulted in our
            assuming
            all of the liabilities of interWAVE existing at the time of the merger.
            These
            liabilities might result in us having to make cash payments. For example,
            in
            2006, we paid approximately $3 million as part of a settlement agreement
            with a
            former interWAVE customer that filed a lawsuit against interWAVE. In
            addition,
            if such liabilities exceed the liabilities we are aware of and have provided
            for
            in our financial statements or if there are liabilities that we were
            not aware
            of at the time of the merger, this could have an adverse affect on
            us.
  **If
            customers refrain from buying our current proprietary products in order
            to wait
            for our standards-compliant, WiMAX certified products, our business will
            suffer** **.**
  In 2005, we
            experienced delays in
            orders
            for, and decreasing revenues
            from our
            non-WiMAX products due to the market transition to WiMAX certified products. We
            may
            continue to suffer from
            the
            market transition to WiMAX certified products as customers continue
            to slow or
            cease their purchases of our non-WiMAX
            products technology in order to wait for WiMAX certified products. In addition,
            the
            introduction of WiMAX certified products may not increase the demand
            for
            wireless broadband solutions and this may adversely affect our results
            of
            operations. We
            cannot currently anticipate when or if WiMAX products will reach full
            market
            acceptance. If these products do not reach full market acceptances our
            results
            of operations would be materially adversely affected.
  **If
            customers refrain from buying our products based on the IEEE 802.16d
            standa** **r** **d** **,** **which supports fixed and nomadic WiMAX solutions,  in order to wait
            for our products based on the IEEE 802.16e stand** **ard,
            which supports portable and mobile WiMAX solutions, our business will
            suffer** **.**
  In 2005, we
            experienced delays in
            orders
            for, and decreasing revenues
            from , our customers as
            they slowed
            their purchases of our fixed and nomadic solutions in order to wait
            for portable and mobile solutions which can also provide fixed and nomadic
            capabilities. We may continue to suffer from
            this market transition. In addition, the introduction of mobile solutions
            may
            not increase the demand for wireless broadband solutions and this may
            adversely
            affect our results of operations.
  **Our
            standards-compliant, WiMAX ready 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.
  **If
            we are unable to attain and/or retain large customers our
            revenues** **** **may** **be adversely** **affected.**
  In
            2003,
            2004 and 2005, 13.9%, 30.6% and 5.2% of our sales were to a Latin American
            operator respectively. For
            2005,
            sales to our Latin American customer decreased significantly due to the
            nearing
            completion of a large deployment. Partially as a result, our revenue
            decreased
            in 2005. Our reliance on this large customer adversely affected our results
            of
            operations in 2005, and if we are
            unable to attain and/or retain other large customers our revenues may
            be
            adversely affected.
  4
 **If
            our DSOs** **(** **Days
            Sales Outstanding)** **continue
            to increase and our revenues continue to decrease we may suffer from
            a cash
            shortfall.**
  If
            our
            DSOs continue
            to increase and our revenues continue to decrease, we may suffer from
            cash
            shortfall. In 2003, 2004 and 2005 our DSOs were 61, 51 and 73 respectively. The
            increase in DSOs during 2005 was caused in large part by the reduction
            in sales
            to our large Latin American customer. Excluding
            the Latin American large customer the DSOs in 2003, 2004 and 2005 were
            71, 73
            and 77 respectively. If our DSOs continue to increase and our revenues
            continue
            to decrease our cash reserves will decrease.
  **Our
            products have long and unpredictable sales cycles. This could adversely
            impact
            our revenues and net income.**
  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 as long as 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 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 could affect the market price of
            our
            ordinary shares.
  **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. The three largest distributors of
            our
            products accounted for a total of approximately 13.1% of our sales in
            2003, and
            less than 10% of our sales in 2004 and in 2005 respectively. If we terminate
            or
            lose any of these distributors, we may not be successful in replacing
            them on a
            timely basis, or at all. Any changes in the distribution and sales channels
            of
            our products, particularly the loss of a major distributor or our inability
            to
            establish effective distribution and sales channels for new products
            will 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 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 and systems
            integrators.**
  The
            success of the sales of our wireless broadband products currently depends
            in
            part on existing 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 wireless broadband
            products.
  5
 We
            face
            the risks of termination of these relationships, or consolidation of
            some of
            these OEMs and system integrators or financial problems they might face,
            as well
            as the promotion of competing products or emphasis on alternative technologies
            by these OEMs and systems integrators turning them into competitors rather
            than
            our partners, all that may result in 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. If any of these risks materializes,
            we
            will need to develop alternative methods of marketing these products.
            Until we
            do so, sales of our wireless broadband products may decline.
  **We
            are also dependent upon the success of our direct sales
            efforts** **.**
  Direct
            sales accounted for a t otal
            of
            approximately 28.4% of our sales in 2003, 52% of our sales in 2004 and
            49% of
            our sales in 200 5. This increase over
            the
            last couple of years in direct sales as a percentage of our sales is,
            among
            other factors, due to market trends that introduced new types of customers,
            that
            purchase directl y from
            us. Direct
            sales customers are not under any obligation to purchase our products.
            Some of
            these customers do not have long business histories and have encountered,
            and
            may continue to encounter ,
            financial difficulty, including difficulty in obtaining credit to purchase
            our
            products. These customers typically purchase our products on a
            project-by-project basis, so that continuity of purchases by these customers
            is
            not assured. We do not necessarily retain sales personnel with carrier
            sales
            expertise, and may face difficulty locating and retaining carrier customers
            who
            purchase directly. If we are unable to effectively continue our direct
            sales
            efforts of our products, our results of operations could be materially
            adversely
            affected. Any such change could occur suddenly and rapidly.
  **We
            may not successfully operate under the new organizational
            structure** **.**
  In
            January 2006 we reorganized
            the Company into a divisional structure. We
            formed
            several units :
            corporate ,
            customer ,
            operations, cellular mobile, broadband wireless access and broadband
            mobile
            units. The rationale behind the reorganization was to improve Company’s
            performance. However there is no assurance we will be able to operate
            well under
            the new structure. If we fail to leverage from the new structure or if
            it takes
            longer than expected to assimilate and implement the new structure, our
            business
            results may significantly suffer. In addition, as part of the organizational
            changes, we have new employees in some of the Company’s key positions. There is
            no assurance that the new employees will be successful in their
            positions.
  **We
            engaged and may continue to engage in mergers and acquisitions that could
            harm
            our business, results of operations and financial condition, and dilute
            our
            stockholders’ equity** **.**
  We
            have
            pursued, and will 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 other 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.
  6
 Past
            and
            future acquisitions by us could result in the following, any of which
            could
            seriously harm our results of operations or the price of our stock:
  ·
                  issuance
                      of equity securities that would dilute our current stockholders’
                      percentages of ownership;
  ·
                  large
                      one-time write-offs;
  ·
                  the
                      incurrence of debt and contingent
                      liabilities;
  ·
                  difficulties
                      in the assimilation and integration of operations, personnel,
                      technologies, products and information systems of the acquired
                      companies;
  ·
                  diversion
                      of management’s attention from other business
                      concerns;
  ·
                  contractual
                      disputes;
  ·
                  risks
                      of entering geographic and business markets in which we have
                      no or only
                      limited prior experience;
  ·
                  potential
                      loss of key employees of acquired organizations;
                      and
  ·
                  potential
                      effect on our cash reserve.
  **Our
            failure to manage growth effectively could impair our business, financial
            condition and results of operations** **.**
  Our
            rapid
            growth, including our amalgamation with interWAVE, our acquisition of
            most of
            the assets and assumed liabilities of InnoWave, and our merger with Floware,
            has
            significantly strained our management, operational and financial resources.
            Any
            future growth including mergers and acquisitions may increase the strain
            on our
            management, operational and financial resources. If we do not succeed
            in
            managing recent and future growth effectively, we may not be able to
            meet the
            demand, if any, for our products and we may lose sales or customers,
            harming our
            business, financial condition and results of operations.
  **Rapid** **technological change may have an adverse affect on the market acceptance
            for our
            products.**
  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
            LAN,
            wireless packet data, orthogonal frequency division multiplexing, or
            OFDM, time
            division multiplexing, modem and radio technologies and other technologies,
            which we have been selling for several years, as well as WiMAX technology
            and
            CDMA or other 3G products. These technologies may be replaced with alternative
            technologies or may otherwise not achieve the wide acceptance that we
            are
            seeking. 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.
  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, third generation cellular systems
            or
            otherwise. New or enhanced products developed by other companies may
            be
            technologically superior to our products, and limit our addressable market,
            or
            render our products obsolete.
  7
 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,
                      such as
                      Intel;
  ·
                  capacity
                      to handle growing demands for faster transmission of increasing
                      amounts of
                      data and voice;
  ·
                  its
                      cost-effectiveness and performance compared to other fixes
                      and other
                      broadband wireless technologies;
  ·
                  its
                      reliability and security;
  ·
                  its
                      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 in the introduction of new or enhanced products,
            which could result in reduced sales, unexpected expenses or delays in
            the launch
            of new or enhanced products** **.**
  The
            development of new or enhanced products is a complex and uncertain process.
            We
            are engaged in the development of very advanced technologies. We may
            experience
            design, manufacturing, marketing and other difficulties that could delay
            or
            prevent our development, introduction or marketing of new products or
            product
            enhancements. 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 which may
            adversely
            affect 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 like the cellular mobile products for example. 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,
            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.
  8
  In
            addition, our products often are integrated with other network components.
            There
            may be incompatibilities between these components and our products that
            could
            significantly harm the service provider or its 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.
  **Existing
            and potential industry standards may have a negative impact on our
            business** **.**
  We
            have
            developed and continue to develop our products with a view to compliance
            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 a view to compliance with existing standards
            and
            anticipated compliance with future standards, we may not be able to introduce
            on
            a timely basis products that comply with industry standards.
  Certain
            standards on which we base our products and technology (such as IEEE
            802.16e-2005, GSM and CDM2000) ** may
            not
            continue to be or will not be broadly adopted which could significantly
            limit
            our market opportunity and harm our business. In addition, our focus
            on
            anticipated future standards, including the IEEE 802.16e-2005 standard,
            may lead
            to delays in introducing products designed for current standards.
  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;
                      and
  ·
                  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. We may
                      have greater
                      disadvantages in competing on the basis of these criteria than
                      on the
                      basis of product differentiation.
  These
            risks, among others, may harm our sales and, consequently, our results
            of
            operations.
  **Standardization
            and increased competition may have an adverse effect on our gross
            margins** **.**
  Standardization
            of product features may increase the number of competitive product offerings.
            Furthermore, our competitors may also attempt to influence the adoption
            of
            standards that are not compatible with our products. Standardization
            also
            results in lower average selling prices. 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, reduced gross margins,
            longer sales cycles and loss of market share and, consequently, could
            adversely
            affect our sales and profitability.
  9
 **Regulation,
            by governments or other public bodies, 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 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 addition,
            there are
            regulatory bodies that act to harmonize spectrum among countries, a factor
            that
            may influence our products that operate in a particular frequency.
  In
            the
            United States, our products are subject to the Federal Communications
            Commission, or 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. In other countries the situation
            varies as
            to the spectrum, if any, that may be used without a license and as to
            the
            permitted purposes of such use. **** Some
            of
            our products operate in license-free 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.
  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. However,
            this frequency licensing regulation process may suffer from delays that
            may
            postpone the commercial deployment of products that operate in licensed
            bands in
            any country that experiences this delay.
  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. Since WiMAX technologies
            evolve
            and enable new applications, such as mobile services, in countries that
            have
            already allocated spectrum , governments may delay the granting of other
            spectrum for mobile WiMAX or the usage of the spectrum for new application
            such
            as mobile WiMAX. Some
            countries still lag in the allocation of broadband wireless licenses,
            and this
            situation may continue in the allocation for spectrum for use by WiMAX
            mobile
            services. 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 of marketing or devices that emit radio frequency energy. These
            requirements were **** established,
            among other things, to avoid interference among users of radio frequencies
            and
            permit interconnection of equipment.
  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, licenses to
                      use certain
                      frequencies and other regulations may include terms, which
                      affect the
                      desirability of using our products and the ability of our customers
                      to
                      grow.
  10
 ·
                  If
                      our products operate in the license-free bands, 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 available frequency
                      spectrum, may significantly impact our operations by rendering
                      our current
                      products obsolete or non-compliant, or by restricting the applications
                      and
                      markets served by our products.
  ·
                  Regulatory
                      changes and restrictions imposed due to environmental concerns,
                      such as
                      restrictions imposed on the location of outdoor
                      antennas.
  ·
                  We
                      may not be able to comply with all applicable regulations in
                      each of the
                      countries where our products are sold and we may need to modify
                      our
                      products to meet local regulations.
  In
            addition, we are subject to export control laws and regulations with
            respect to
            all of our products and technology. We are subject to the risk that more
            stringent export control requirements could be imposed in the future
            on product
            classes that include products exported by us.
  In
            addition we may be subject to certain European directives like the WEEE
            (Waste
            Electrical and Electronical Equipment) and the
            ROHS (Restriction of Hazardous Substances in Electrical and Electronic
            Equipment .
  **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 would require us to write off inventory, which adversely
            affects our
            results of operations. For example, we wrote - off
            inventory in 2003, 2004 and 2005
            in
            the amounts of $5.3 million, $10.9 million and $7.6 million,
            respectively .
  **We
            depend on a number of manufacturing subcontractors with limited manufacturing
            capacity, and these manufacturers may be unable to fill our orders on
            a timely
            basis and at the quality specifications that we require. As a result,
            we may not
            meet our customers’ demands, harming 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.
  11
 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.
  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 greater or lesser amount
            of
            these products than required. Because we outsource the manufacture of
            several of
            our products, we are required to place manufacturing orders well in advance
            of
            the time when we expect to sell these products. In the event that we
            order the
            manufacture of a greater or lesser amount of these products than 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. Any of
            these risks
            could result in manufacturing delays or increases in manufacturing costs
            and
            expenses. For example, in 2004 and 2005 we recorded in our balance sheet,
            an
            allowance for irrevocable inventory purchase commitments in an aggregate
            amount
            of approximately $4.9 million and $2.4 million, respectively, as a result
            of
            over-estimation of our sales. If we experience manufacturing delays,
            we could
            lose orders for our products and, as a result, lose customers. There
            may be an
            adverse affect on our profitability and consequently on our results of
            operations, if we incur increased costs.
  **Our
            dependence on limited sources for key components of our products may
            lead to
            disruptions in the delivery and 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.
                      Although we believe that we can replace any single supplier
                      and obtain key
                      components of comparable quality and price from alternative
                      suppliers, we
                      cannot assure you that we will not experience disruptions in
                      the delivery
                      and cost of our products. We do not have long-term supply contracts
                      with
                      most of these suppliers. In addition, there is global demand
                      for some
                      electrical components that are used in our systems and that
                      are supplied
                      by relatively few suppliers. This presents the following
                      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;
 ·
                  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. This may require us to modify our products, 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.
  12
 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.
  **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, within a period ranging from 12 to 36
            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. 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.
  **Intense
            competition in the markets for our products may have an adverse affect
            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 will increase in the future
            including from current large as well as new market vendors, both with
            respect to
            products that we currently offer and products that we intend to introduce
            in the
            future. 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 independently. We expect our competitors to continue to improve
            independently 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. We
            are also
            facing additional and new competition from large telecommunications equipment
            vendors, such as Samsung, Motorola and Alcatel and we expect this competition
            to
            grow especially in the broadband mobility market .
            We expect these
            competitors to
            continue and improve their technologies and products which might prevent
            us from
            lowering our products’ prices, cause us to loose some of our customers or
            prevent us from penetrating to new markets .
  The
            telecommunications equipment market is also facing continued consolidation.
            This
            consolidation results in large competitors with enhanced resources, financial
            and otherwise, with which to compete with us. We expect this to intensify
            the
            competitive nature of the markets in which we operate .
  13
 As
            the
            market grows, we expect to face competition from aggressive start- ups
            in
            different markets. We expect that we will also face competition from
            alternative
            wireline and wireless technologies including copper wires, fiber-optic
            cable,
            digital subscriber lines, or DSL, cable modems, satellite and other broadband
            access systems.
  Many
            companies compete with us in the specialized cellular network market,
            and we
            expect that competition will increase in the future, including competition
            from
            new market vendors (such as vendors operating in China) entering the
            cellular
            niche of rural cellular networks, in addition to the trend of IP based
            cellular
            base stations and softswitches as an alternative technology to this rural
            cellular niche.
  Some
            of
            our existing and potential competitors have substantially greater resources
            including financial, technological, manufacturing and marketing and distribution
            capabilities, and enjoy greater market recognition than we do. We may
            not be
            able to differentiate our products from those of our competitors, successfully
            develop or introduce new products that are less costly or 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 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
            operation.
  Some
            of
            our existing and potential products may be destined for markets different
            to
            those to
            which we
            traditionally sell . For
            example the customer premise equipment (CPEs) market is forecasted to
            become a
            consumer market with commodity behavior ,
            which
            may negatively affect our gross margins and revenues.
  **We
            have experienced in the past, and may experience in the future, quarterly
            and
            annual fluctuations in our results of operations. This 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. Any fluctuations may cause
            our
            results of operations to fall 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:
  ·
                  our
                      success in integrating the interWAVE
                      business;
  ·
                  the
                      uneven pace of spectrum licensing to carriers and service
                      providers;
  ·
                  adoption
                      of new standards in our industry;
  ·
                  the
                      size and timing of orders and the timing of large scale
                      projects;
  ·
                  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;
  ·
                  the
                      purchasing patterns of our customers and end-users, as well
                      as the budget
                      cycles of customers for our
                      products;
  14
 ·
                  seasonality,
                      including the relatively low level of general business activity
                      at the
                      beginning of each fiscal year and during the summer months
                      in Europe and
                      the winter months in South America and in the United
                      States;
  ·
                  disruption
                      in, or changes in the quality of, our sources of
                      supply;
  ·
                  changes
                      in the mix of products sold by us;
  ·
                  the
                      extensive marketing and organizational efforts that carriers
                      are required
                      to make to develop their subscriber base following the deployment
                      of the
                      network infrastructure, creating a gap between the time carriers
                      purchase
                      base stations for network infrastructure deployment and the
                      time they
                      purchase terminal stations for connection of subscribers to
                      the
                      network;
  ·
                  mergers
                      or acquisitions, by us, our competitors and exiting and potential
                      customers, if any;
  ·
                  fluctuations
                      in the exchange rate of the NIS against the
                      dollar;
  ·
                  adoption
                      of new financial accounting standards;
                      and
  ·
                  general
                      economic conditions, including the changing economic conditions
                      in the
                      United States and worldwide.
  Our
            customers ordinarily require the delivery of products promptly after
            their
            orders are accepted. Our business usually does not have a significant
            backlog of
            accepted orders. Consequently, revenues in any quarter depend 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 adversely affect
            our
            results of operations for the previous 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 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.
  **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 management personnel terminates
            his
            or her employment, our business and results of operations could be harmed.
            Our
            employees are employed “at will”. This means that our employees are not
            obligated to remain employed by us for any specific period.
  **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, or PFIC, for United States federal income
            tax
            purposes. Based upon our market capitalization during 2004, 2005 and
            each 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 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 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 2006 or in subsequent
            years. If
            we were classified as a PFIC, U.S. taxpayers that own our ordinary shares
            at any
            time during a taxable year for which we were a PFIC 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 a "mark to market election" under the
            U.S. Internal Revenue Code. This could also adversely affect the market
            price of
            our ordinary shares. See the
            discussion at "Taxation - United States Federal Income Tax Considerations
            With
            Respect to the Ownership and Disposition of our Ordinary Shares - Passive
            Foreign Investment Company status".
  15
  **We
            are exposed to additional costs and risks associated with complying with
            increasing and new regulation of corporate governance and disclosure
            standards.**
  As
            a
            public company, we will be spending an increased amount of management
            time and
            resources to comply with changing laws, regulations and standards relating
            to
            corporate governance and public disclosure, including the Sarbanes-Oxley
            Act of
            2002, new Securities and Exchange Commission regulations and Nasdaq National
            Market rules. Particularly, as a foreign private issuer, we will need
            to comply
            with the provisions of Section 404 of the Sarbanes-Oxley Act no later
            than the
            filing of our annual report on Form 20-F for the fiscal year ending December
            31,
            2006. Section 404 requires management’s annual review and evaluation of our
            internal controls over financial reporting, and possibly attestation
            of the
            effectiveness of our internal controls over financial reporting by management
            and our independent registered public accounting firm in connection with
            the
            filing of our annual report on Form 20-F for the fiscal year ending December
            31,
            2006, and with each subsequently filed annual report on Form 20-F. As
            part of
            this process, we will need to document and test our internal control
            systems and
            procedures and make improvements in order for us to comply with the requirements
            of Section 404. This process will result in additional accounting and
            legal
            expenses.
  **The
            Implementation of SFAS No. 123(R) will negatively affect the Company’s
            profitability** **.**
  The
            accounting standard (“SFAS No. 123(R)”) adopted by the Financial Accounting
            Standards Board (“FASB”) that requires the fair value of all equity-based awards
            granted to employees to be recognized in the statement of operations
            as
            compensation expense, has become effective as of the beginning of 2006.
            The
            various methods for determining the fair value of stock options are based
            on,
            among other things, the volatility of the underlying stock. Our stock
            price has
            historically been volatile. The adoption of this new accounting regulation
            will
            have a significant impact on our results of operations, as our reported
            earnings
            will decrease significantly. Had we adopted Statement 123(R) in 2003,
            2004 and
            2005, the impact of that standard would have been approximately $7.6
            million,
            $6.5 million and $15.2 million, respectively, as described in the disclosure
            of
            pro forma net income and earnings per share in Note 2m to our consolidated
            financial statements. Our stock price could decline in response to the
            decline
            in our reported earnings.
  The
            new
            rule has and may continue to cause the Company’s management to decrease the
            amount of equity based compensation used as incentive and retention tools.
            This
            could, in turn, hurt our ability to recruit employees and retain existing
            employees.
  **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 National Market have ranged from a high of $53.125 to a low of
            $1.55. On
            May 5, 2006, the last sales price of our ordinary shares on the Nasdaq
            National
            Market was $8.38. We may continue to experience significant volatility
            in the
            future, based on the following factors, among others:
  16
 ·
                  our
                      prospects;
  ·
                  actual
                      or anticipated fluctuations in our sales and results of
                      operations;
  ·
                  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;
  ·
                  general
                      economic and political conditions, particularly in the United
                      States and
                      in South America on our operations and results;
                      and
  ·
                  departures
                      of key personnel.
  **Our
            proprietary technology is difficult to protect and unauthorized use of
            it by
            third parties may impair our ability to compete effectively** **.**
  Our
            success and ability to compete will 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,
            trademark, trade secret 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 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** **.**
  Third
            parties have in the past asserted against us, and may in the future assert
            against us, infringement claims or claims that we have violated a patent
            or
            infringed a copyright, trademark or other proprietary right belonging
            to them.
            In addition, based on the size and sophistication of our competitors
            and the
            history of rapid technological change in our industry, we anticipate
            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 a third party’s 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.
  17
 **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.
  **Operating
            in international markets exposes us to risks which could cause our sales
            to
            decline and our operations to suffer** **.**
  While
            we
            are headquartered in Israel, at least 99% of our sales in 2003, 2004
            and 2005
            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:
  ·
                  trade
                      restrictions, tariffs and export license requirements, which
                      may restrict
                      our ability to export our products or make them less
                      price-competitive;
 ·
                  currency
                      fluctuations;
 ·
                  greater
                      difficulty in safeguarding intellectual property;
                      and
 ·
                  difficulties
                      in managing overseas subsidiaries and international
                      operations.
  We
            may
            encounter significant difficulties with the sale of our products in
            international markets as a result of one or more of these factors.
  **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.
  18
 **Terrorist
            attacks, or the threat of such attacks, may negatively impact the global
            economy
            which may materially adversely affect our business, financial condition
            and
            results of operation and may cause our share price to
            decline** **.**
  The
            financial, political, economic and other uncertainties following terrorist
            attacks throughout the world have led to a worsening of the global economy.
            As a
            result, many of our customers and potential customers have become much
            more
            cautious in setting their capital expenditure budgets, thereby restricting
            their
            telecommunications procurement. Uncertainties related to the threat of
            terrorism
            have had a negative effect on global economy, causing businesses to continue
            slowing spending on telecommunications products and services and further
            lengthen already long sales cycles. Any escalation of these threats or
            similar
            future events may disrupt our operations or those of our customers, distributors
            and suppliers, which could adversely affect our business, financial condition
            and results of operations.
  **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.
            Due
            to the volatile security situation in Israel, our insurance carrier no
            longer
            insures our facilities and assets for damage or loss resulting from terrorist
            incidents. Additionally, several countries still restrict business with
            Israel
            and with Israeli companies. We could be adversely affected by the continuation
            or deterioration of Israel’s conflict with the Palestinians or from restrictive
            laws or policies directed towards Israel or Israeli businesses.
  **We
            currently benefit from government programs and tax benefits that may
            be
            discontinued or reduced.**
  We
            currently receive grants and potential tax benefits under Government
            of Israel
            programs. Pursuant to our current arrangement with the Office of the
            Chief
            Scientist, or 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 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 Law
            for the Encouragement of Industrial Research and Development, 1984, and
            related
            regulation permits the Office of the Chief Scientist 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 royalties
            bearing
            programs. Under the 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. The Government of Israel has reduced the benefits available
            under these programs in recent years 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 adversely affected.
  19
 In
            addition, we have been granted status of an "Approved Enterprise" under
            the Law
            for the Encouragement of Capital Investments, 1959 ("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. A recent amendment to the Investment Law, which we refer
            to as the
            Amendment and has been officially published and effected since April
            1, 2005,
            has significantly changed the provisions of the Investment Law. 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. 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 portion of our products will be manufactured
            outside of Israel. This could materially reduce the tax benefits to which
            we
            would otherwise be entitled. In addition, because the Israeli tax authorities
            customarily review and reassess existing tax benefits granted to merging
            companies and because we have yet to finalize the status of our tax benefits
            with the Israeli tax authorities following our merger with Floware and
            our
            acquisition of most of the assets and assumption of related liabilities
            of
            InnoWave. 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
            could be adversely affected if the rate of inflation in Israel exceeds
            the rate
            of devaluation of the New Israeli Shekel against the dollar** **.**
  Substantially
            all of our revenues are generated in U.S. dollars. A significant portion
            of our
            expenses, primarily labor and subcontractor expenses, is incurred in
            New Israeli
            Shekels, or NIS. As a result, we are exposed to the risk that the rate
            of
            inflation in Israel will exceed the rate of devaluation of the NIS in
            relation
            to the dollar, that the timing of this devaluation lags behind inflation
            in
            Israel, or the NIS may increase in value relative to the dollar. If the
            dollar
            costs of our operations in Israel increase, our dollar-measured results
            of
            operations will be adversely affected. In 2005, the value of the dollar
            increased in relation to the NIS by 6.84%, and the inflation rate in
            Israel was
            2.4%.
   **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** **.**
  Provisions
            of Israeli corporate and tax law and our articles of association may
            have the
            effect of delaying, preventing or making more difficult a merger or other
            acquisition of us. For example, the Israeli Companies Law, 5759-1999,
            referred
            to as the Israeli Companies Law, generally requires that a merger be
            approved by
            the board of directors and by a shareholder vote at a shareholders’ meeting that
            has been called on at least 21 days’ advance notice. Any creditor of a merger
            party may seek a court order to delay or enjoin the merger, if there
            is a
            reasonable concern that the surviving corporation will not be able to
            satisfy
            all of the obligations of any party to the merger. Moreover, a merger
            may not be
            completed until at least 50 days have passed from the time that the merger
            proposal has been filed with the Israeli Registrar of Companies. Other
            potential
            means of acquiring a public Israeli company such as us might involve
            significant
            obstacles, including a requirement for court approval for the acquisition.
            In
            addition, a body of case law has not yet developed with respect to the
            new
            Companies Law. Until this happens, uncertainties will exist regarding
            its
            interpretation. These uncertainties could have the effect of inhibiting
            attempts
            to acquire us and other transactions and decisions by or involving
            us.
  20
 **It
            may be difficult to effect service of process and enforce U. S. judgments
            against our directors, officers and experts in Israel** **.**
   We
            are
            incorporated in Israel. Our executive officers and directors and some
            of the
            directors and experts named in this annual report are not residents of
            the
            United States, and a substantial portion of our assets and the assets
            of these
            persons may be located outside the United States. Therefore, it may be
            difficult
            to collect or get an Israeli court to enforce a judgment obtained in
            the United
            States against us or any of those persons.
  21
  **ITEM
                    4.**
                  **INFORMATION
                      ON THE COMPA****N****Y**
  **A.**
                  **HISTORY
                      AND DEVELOPMENT OF THE COMPA****N****Y**
  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 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 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.
  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.
  We
            also
            have several wholly owned subsidiaries worldwide handling local support,
            promotion, manufacturing and developing activities. For a discussion
            of our
            capital expenditures and divestitures, see “Item 5B--Operating and Financial
            Review and Prospects--Liquidity and Capital Resources”.
  **B.**
                  **BUSINESS
                      OVERVI****E****W**
  **Genera** **l**
  With
            more
            than 2 million units deployed in 150 countries, our company is the worldwide
            leader in providing wireless broadband systems. We believe we lead the
            WiMAX
            market with the greatest number of WiMAX deployments worldwide. We supply
            carriers, ISPs and private network operators with WiMAX standard and
            other
            wireless broadband solutions , as well
            as compact cellular networks to developing countries and remote
            areas.
  Our
            products cover the full range of frequency bands with both fixed and
            mobile
            solutions, enabling the delivery of business and residential broadband
            access,
            corporate VPNs, toll quality telephony, mobile base station feeding,
            hotspot
            coverage extension, community interconnection, public safety communications,
            and
            mobile voice and data. Extending coverage of mobile networks to developing
            countries and other hard to serve areas, we offer mobile network solutions
            that
            feature a low cost of entry, local switching, and integrated value-added
            service
            (VAS) functionality.
  As
            a
            wireless broadband pioneer, we have been driving and delivering innovations
            for
            more than 10 years from core technology developments 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 ForumTM 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.
  We
            provide solutions in a wide range of licensed and unlicensed frequency
            bands and
            our solutions address every end user profile, from the growing residential
            and
            SOHO (small office, home office) markets through SMEs (small and medium
            enterprises) and MTU/MDUs (multi-tenant units/multi dwelling units).
            In all of
            these markets, we have integrated and engineered industry-leading technologies
            such as our WiMAX product, BreezeMAX, to create carrier class and standards
            based solutions, combined with excellent deployment and field
            experience.
  22
 In
            January 2006 we reorganized the company into a divisional structure,
            in order to
            support the type of multi-dimensional growth strategy that we are pursuing.
            We
            formed several units: corporate, customer, operations, cellular mobile,
            broadband wireless and broadband mobile units. We believe this structure
            will
            give us the flexibility to react quickly to changing market
            dynamics.
  **OUR
            BUSINES** **S**
  **We
            have two separate business activities, the WiMAX and Wireless Broadband
            Access
            activity and the Cellular Mobile activity** **.**
  **WiMAX
            and Wireless Broadband Acces** **s**
  ***The
            Early Demand for Fixed Wireless Broadban*** ***d***
  In
            the
            late nineties, both consumers and businesses began to demand broadband
            - or
            high-speed Internet data services, accelerating the establishment of
            DSL and
            cable-based broadband networks (wired infrastructure). These networks
            involved
            high investment costs, so the infrastructure was not established as fast
            as the
            demand for broadband required. Meeting this need for broadband services
            is the
‘hole’ that wireless broadband networks stepped in to fill, and has been the
            primary application of wireless broadband networks until now.
  For
            more
            than ten years, our primary business activity has been fulfilling the
            growing
            demand for broadband connectivity by providing equipment and services
            to build
            fixed wireless broadband networks. The wireless broadband market has
            grown over
            the last decade due the acceptance of wireless equipment as a high performance,
            cost-efficient alternative to wireline infrastructure. Just bridging
            the
“digital divide”, or providing both broadband and basic telephony services in
            areas where telecommunications infrastructure is poor or did not yet
            exist, led
            wireless broadband to comprise more than 5% of the world’s broadband
            networks.
  In
            developed countries, government financial support has encouraged operators
            to
            complete broadband coverage in rural and suburban areas with low-density
            populations where the business model for wired infrastructure is poor.
            In
            developing countries, government financial support is offered, for operators
            to
            offer basic telephony services based on wireless broadband to meet the
            demand in
            urban areas.
  In
            addition, we have deployed fixed wireless broadband systems for additional
            applications, such as toll quality telephony, mobile base station feeding,
            hotspot coverage extension, municipal and community interconnection,
            and public
            safety communications.
  ***Additional
            Factors in the Widespread Adoption of Wireless
            Broadban*** ***d***
  Over
            the
            last few years fixed wireless broadband networks have grown in popularity
            due to
            factors other than increasing demand that cannot be met by wired infrastructure.
            These include:
  ·
                  Emerging
                      operators that see opportunities to provide innovative broadband
                      services,
  23
 ·
                  Demand
                      for fundamental data and voice services in underserved areas
                      in both
                      developing and developed countries,
  ·
                  Increased
                      demand for primary voice services with options for data access
                      in
                      developing countries,
  ·
                  A
                      move towards deregulation in many countries, including international
                      regulatory changes enabling increased competition and resulting
                      in
                      increased allocation of spectrum to existing and new
                      operators,
  ·
                  Competition
                      among various types of telecommunications players to offer
                      multiple
                      services using a single network,
  ·
                  Rapid
                      progression of standardization by international bodies, for
                      example, The
                      WiMAX Forum, combined with the wide participation of equipment
                      vendors and
                      carriers to adopt these standards,
  ·
                  The
                      attractive business model that is offered to operators by using
                      standardized and interoperable products,
                      and
  ·
                  Growing
                      demand of public access providers to build municipalities’ own
                      infrastructures.
  ***Our
            Wireless Broadband Experience Enabled Us to Identify the Potential of
            WiMA*** ***X***
   We
            have
            over ten years of experience in producing equipment, and currently hold
            30% of
            the market in fixed wireless broadband deployments. This position enabled
            us to
            identify the potential in early 2002, in what then was an emerging wireless
            technology based on the WiMAX technology. As a result of this experience
            and
            early strategic decisions, by 2005 we led the market in the number of
            deployed
            WiMAX networks. We have been at the forefront of developments with WiMAX
            technology since its beginning, at a company and industry level, including
            major
            roles in the standardization process through our work in The WiMAX ForumTM as a
            charter board member and chairing key working committees. In addition,
            our
            employees are active in other related technology organizations (e.g.,
            Wireless
            Communications Association, IEEE 802.16, ETSI BRAN-HiperMAN
            standards).
  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 will operate (the IEEE 802.16-2004 standard). This
            standard
            fully supports all 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, enabling the user
                      to relocate
                      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
                      network
                      coverage area, with hard handoffs between cells, enabling non-real
                      time
                      applications
  ·
                  Full
                      mobility, at multiple locations at high vehicular speed, within
                      network
                      coverage area, with guaranteed handoffs between cells, enabling
                      service
                      continuity for all applications
  24
 ***Demand
            for “Personal Broadband*** ***”***
  Following
            the trends of both consumers and business users enjoying the benefits
            of mobile
            voice and fixed broadband services- at home and at work - and in-between
            (via
            hotspots), brings the industry to demand the next level of service. The
            next
            service level will be for operators to provide personal broadband, meaning
            broadband data and voice services arriving to a user’s handheld device or
            handset such as a mobile phone, PDA, or laptop. We believe that this
            service of
            personal broadband holds great potential as it offers users greater productivity
            and efficiency.
  However,
            for this next service level of personal broadband services to be achieved
            technologically and adopted by consumers and businesses, the technology
            must
            offer tight security, diverse innovative applications, reliability, high
            quality
            of service and broadband data speeds. With our experience and knowledge
            of
            wireless technologies, we strongly believe that WiMAX technology is the
            solution
            that best satisfies these needs. In addition to its high technical capacities,
            the interoperability and standardization of WiMAX-based products and
            networks
            are expected to offer lower-cost and volume-produced standard chips and
            systems.
            In turn, these low costs will be passed on to users, encouraging service
            adoption for personal broadband services.
  ***WiMAX
            Technology and Advantage*** ***s***
  WiMAX
            stands for Worldwide Interoperability for Microwave Access, a technology
            based
            on the IEEE 802.16 air interface standard and the ETSI HiperMAN wireless
            metropolitan area network (MAN) standard. WiMAX technology has the capacity
            to
            deliver sufficient bandwidth to enable added-value applications, including
            live video broadcasting, high-speed data, toll-quality voice and multimedia
            content. Most importantly, the WiMAX (IEEE-802.16) standard was 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
            QoS
            (Quality of Service), and minimizes investment and operating costs for
            operators
            with its distributed architecture and efficient, packet-based air
            interface.
  The
            technical advantages of WiMAX over other mobile technologies, especially
            in
            spectral efficiency that increases the capacity and reduces the cost
            per
            subscriber and advanced QoS, non line-of-sight capabilities and smart
            antennas,
            are being proven now in the lab and in the field. No other technology
            offers a
            full set of chargeable, differential, premium multimedia, data and voice
            services in various wireless fashions: fixed, portable and mobile to
            increase
            revenue and reduce subscriber churn rates.
  ***Our
            Experience with Mobilit*** ***y***
  In
            addition to the fixed wireless broadband and WiMAX experience and expertise,
            we
            gained expertise in mobility by acquiring interWAVE Communications International
            at the close of 2004. We have the know-how and technology to build end-to-end
            cellular mobile solutions, which also assists us in gaining the essential
            experience in the realization of mobile WiMAX solutions. These turn-key
            cellular
            solutions are scalable and all IP distributed based networks. They generate
            revenue by addressing a particular cellular niche market, and serve as
            a
            building-block in mobile broadband data, voice and multimedia service
            provision.
  ***Our
            Strategy for Serving the Demand for Personal Broadban*** ***d***
  The
            new
            demand for the next level of service, namely personal broadband, has
            caused us
            to expand our focus to include a new set of users, both in terms of
            socio-economic groups and geographic markets. It also leads us to target
            a
            different segment of telecom operators. To differentiate themselves and
            target
            customers with the highest ARPU (average revenue per user) operators
            are
            interested in providing what may be termed “DSL on the move”, services that are
            characterized as a means to significantly improve the lifestyle of individuals
            and the efficiency of businesses. Until today, no technology has been
            able to
            technically nor economically support these type of services targeted
            initially
            to the very highly developed, metropolitan areas.
  25
 We
            hold a
            distinct advantage in this nascent market for personal broadband services.
            Our
            WiMAX platform was designed from the ground up according to the IEEE
            802.16
            standard to provide operators with a continuous path from fixed to portable
            and
            mobile networks, while preserving their investment and optimizing their
            business
            models with innovative service offerings.
  ***Government
            Deregulation Creates Deman*** ***d***
  Global
            telecom deregulation is opening up the telecommunications/Internet access
            industries to competition by new players and these emerging players have
            shown
            interest in our WiMAX and fixed BWA systems. Unlike the built-in delivery
            systems of wireline infrastructure, wireless technology requires the
            use of
            frequencies contained within a given spectrum to transfer voice and data.
            Usually, governments allocate a specific range of that spectrum, either
            licensed
            or unlicensed bands, to incumbent and innovative challengers, competitive
            carriers, as well as to cellular operators, internet service providers,
            or ISPs,
            and other service providers, enabling them to launch a variety of broadband
            initiatives based exclusively on wireless networking solutions. During
            2005,
            additional licensed and unlicensed spectrums were added in many regions
            around
            the world. Increased availability of licensed and unlicensed spectrums
            may
            increase the demand for wireless broadband.
  ***Our
            Geographic Market*** ***s***
  Until
            now
            our network installations have been typically found in the following
            geographic
            markets:
  Within
            developed countries (including 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. Wireless broadband has made inroads in these areas due
            to its
            excellent business case, robust equipment, extensive coverage and non
            line-of-sight capabilities. In addition, government assistance in ‘closing the
            digital divide’ in these countries, also serves as an incentive for alternative
            operators to consider wireless systems to provide broadband services.
            Good
            examples of these locations have been identified in the U.S., Western
            and
            Eastern Europe, Asia Pacific and South America.
  Both
            urban and suburban areas within developing countries (where lack of
            telecommunication coverage is due to poor infrastructures) have found
            that
            deploying fixed wireless broadband and now WiMAX systems have enabled
            them to
            afford major networks to provide broadband and telephony  services.
            Within this group are the countries where basic voice services remain
            scarce,
            that look to our toll quality voice networks to fill the gap and provide
            telephony service. Good examples of these locations have been identified
            in
            Africa, CIS (Commonwealth of Independent States, former USSR) Latin America
            and
            Asia Pacific.
  In
            the
            future, given the shift to personal broadband, we expect to increase
            our efforts
            in the geographic areas of developed countries. Now with the upcoming
            availability of our nomadic ,
            portable and mobile applications, we plan to strengthen our marketing
            efforts
            during 2006 in metropolitan and high-density areas within developed countries.
            We hope that this expected shift in the product roadmap during 2007 from
            nomadic, to portable, to mobile services will enable us to penetrate
            the high end, metropolitan consumer and business user groups. Innovative
            operators have informed
            us that they
            intend to turn to these markets as well. We believe that these services
            of
            secure personal broadband offer attractive benefits of productivity enhancements
            to lifestyle and work style routines to the very population that has
            the means
            of affording them - at the price that can be offered only by WiMAX
            technology.
  26
 *Geographic
            breakdown of revenue*
  2003
                  
                  2004
                  
                  2005In
                      thousandsNorth
                      America
                  
                  $
                  31,710
                  
                  
                  24.9
                  %
                  $
                  34,772
                  
                  
                  17.3
                  %
                  $
                  41,315
                  
                  
                  21.1
                  %Latin
                      America
                  
                  
                  30,928
                  
                  
                  24.3
                  %
                  
                  77,747
                  
                  
                  38.6
                  %
                  
                  33,363
                  
                  
                  17.1
                  %EMEA
                  
                  
                  51,155
                  
                  
                  40.2
                  %
                  
                  79,838
                  
                  
                  39.6
                  %
                  
                  106,508
                  
                  
                  54.4
                  %Asia
                      Pacific
                  
                  
                  13,415
                  
                  
                  10.6
                  %
                  
                  9,150
                  
                  
                  4.5
                  %
                  
                  14,529
                  
                  
                  7.4
                  %$
                  127,208
                  
                  
                  100.0
                  %
                  $
                  201,507
                  
                  
                  100.0
                  %
                  $
                  195,715
                  
                  
                  100.0
                  %
 
 ***Our
            Target Customer*** ***s***
  *Tier
            One and Two Operators*
  Tier
            one
            and two carriers - (both Fixed Network Operators (FNOs) and Mobile Network
            Operators (MNOs) form the largest and most established telecom operators,
            with
            nationwide or global presence, serving tens of million of users purchasing
            more
            than $2 billion per year of infrastructure equipment. This
            target group is a primary focus for our WiMAX equipment since they have
            a strong
            interest to use WiMAX in their network. Tier two operators are looking
            for the
            technology to keep them at the front line of their own country and to
            expand
            quickly into neighboring countries as well. Some examples of this group
            include
            AT&T, Axtel , British Telecom, France Telecom, Telkom South Africa and
            Telmex. Traditionally,
            these operators take a relatively long time to shift to new technologies,
            although many of them are involved in trials with our WiMAX
            equipment.
  *CLECs,
            Service Providers, & Regional Carriers*
  As
            competitive local exchange carriers (CLECs) seek to compete effectively
            with the
            incumbent local exchange carriers (ILECs), wireless broadband has emerged
            as an
            attractive, 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.
  CLECs
            have constituted the primary focus for our fixed wireless access product
            line
            and are becoming more interested in WiMAX. The
            reduced installation costs, rapid roll-out potential and modular architecture,
            coupled with their high network capacity and coverage and enhanced service
            options, present an attractive alternative to service providers and regional
            carriers seeking to supply their customers with reliable comprehensive
            data and
            voice solutions. Examples
            of these operators include Czech on line, and Peterstar.
  *Innovative
            Challengers*
  Similar
            to the group of CLECs, service providers and regional carriers , is a
            group of broadband providers who are building their business model primarily
            on
            WiMAX solutions. This group ,
            innovative challengers, as we call them, is
            expected to constitute a greater portion of our core market for our future
            WiMAX
            products. Some examples of carriers falling in this category include
            Free
            (France), Iberbanda (Spain), Irish Broadband, and Ertach (Argentina).
            This group
            is expected to become the early adopters of WiMAX portable and mobile
            services.
  27
 *Cellular
            Operators*
  Cellular
            operators are able to leverage their infrastructure, radio base-station
            sites
            and customer base, together with their marketing, billing systems and
            customer
            support investments, to offer competitive broadband Internet access services
            to
            their customer base or to attract new customers for broadband who can
            eventually
            become cellular customers. Some examples for such customers would be Entel
            (Chile) and Mobifon (Romania).
  *Government,
            Municipalities and Communities, & Private Network
            Operators*
  Private
            and government sectors that operate private, closed loop networks 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; and
            cost-effective access within communities, municipalities and educational
            institutions. Another area, which has leveraged broadband wireless very
            effectively, has been public safety and municipal applications. Government
            authorities and private bodies 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. Good examples may be
            found in
            various US communities like Lexena, Kansas and Corpus Christi,
            Texas.
  *2005
            Partial Customer List for WiMAX and other fixed wireless broadband
            systems*
  Telecom
            carriers and service providers using our products include, among
            others:
  ·
                  Altitude
                      Telecom, France
  ·
                  AMA
                      Wireless, US
  ·
                  Axtel,
                      Mexico
  ·
                  Arobase,
                      Ivory Coast
  ·
                  British
                      Telecom, UK
  ·
                  China
                      Mobile, China
  ·
                  China
                      Netcom, China
  ·
                  China
                      Telecom, China
  ·
                  China
                      Unicom, China
  ·
                  EDN
                      Sovintel, Russia
  ·
                  Entel
                      PCS, Chile
  ·
                  Ertach
                      (formerly Millicom), Argentina
  ·
                  Finnet
                      Group, Finland
  ·
                  Ghana
                      Telecom, Ghana
  ·
                  Gulfsat,
                      Madagascar
  ·
                  Iberbanda,
                      Spain
  ·
                  Ikatel,
                      Mali
  ·
                  Irish
                      Broadband, Ireland
  ·
                  Microtelecom,
                      Congo
  28
 ·
                  Mobifon
                      Titan Broadband, Romania
  ·
                  MobileCity,
                      Sweden
  ·
                  NeoSky,
                      Canada
  ·
                  Onatel
                      Telecom, Burkina Faso
  ·
                  Rioplex,
                      US
  ·
                  TDS
                      Metrocom, US
  ·
                  Telmex,
                      Mexico
  ·
                  TPSA,
                      Poland
  ·
                  Verizon
                      Avenue, US
  ·
                  Vivendi
                      Telecom, Hungary
   ***WiMAX
            and Wireless Broadband Solution*** ***s***
  ***WiMAX
            Solution*** ***s***
  *BreezeMAX
            for fixed and nomadic applications*
  Our
            WiMAX
            system is the BreezeMAX platform, designed from the ground up according
            to the
            IEEE 802.16 standard. BreezeMAX features advanced OFDM technology to
            support
            non-line-of-sight (NLOS) operation, adaptive modulation up to QAM64,
            and the
            highest spectral efficiency available. Currently operating in the 3.3,
            3.5 and
            3.6 GHz licensed frequency bands, BreezeMAX addresses 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 ForumTM. Its carrier-class design supports broadband
            speeds and quality of service (QoS) to enable carriers to offer triple
            play
            broadband services to thousands of subscribers in a single base
            station.
  BreezeMAX
            has quickly become a popular solution for operators offering fixed
            high-bandwidth, IP-based voice and data services to evolve their networks
            to
            industry standard solutions with improved CPE (Customer Premise Equipment)
            economics. Recently, the platform was enhanced with an offering of primary
            voice
            services, while allowing the operator to leverage legacy voice infrastructure.
            The system’s rich feature set and cost-effective and versatile CPEs make
            BreezeMAX a preferred broadband wireless solution for service providers
            who are
            interested in improving their business model. We intend to have BreezeMAX
            certified according to the evaluation standards and timetable set by
            the WiMAX
            Forum for IEEE 802.16-2004 (d) and 802.16-2005 (e).
  In
            June
            2005, we announced the market introduction of BreezeMAX Si, a self-installable,
            indoor WiMAX customer premises equipment (CPE) based on the IEEE 802.16-2004
            standard and using the Intel® PRO/Wireless 5116 broadband interface (WiMAX
            chip). The BreezeMAX Si opens the door for fixed broadband wireless access
            (BWA)
            WiMAX standard-based solutions to become nomad ic
            and
            quickly deployed with a plug-and-play installation. In addition, it enables
            centrally provisioned, portable connectivity for subscribers to use the
            CPE in
            various points within the network coverage and re-connect to the service
            after
            moving from one location to another.
  In
            July
            2003, Intel Corporation announced its intention to develop an IEEE
            802.16d-compliant silicon chip and by September 2005, we developed the
            subscriber unit that uses that chip. The commercially available BreezeMAX
            PRO
            CPE was the world’s first subscriber unit that integrated the Intel®
PRO/Wireless 5116 broadband interface and marked an important step for
            the
            industry moving toward the widespread adoption of WiMAX standard
            products.
  29
 ***BreezeMAX
            for Portable and Mobile Applications - Future product*** ***s***
  First
            generation BreezeMAX was designed according to the IEEE 802.16-2004 standard
            for
            fixed and nomadic networks. The future application BreezeMAX platform
            to provide
            mobile WiMAX is now in design 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 PCMCIA (Personal Computer
            Memory
            Card International Association) or mini cards at multiple locations,
            at least at
            walking speed and enables a hard handoff of devices. Mobile access ranges
            in
            scope from low to high vehicular speeds, but adds PDAs and smartphone
            devices,
            multiple locations and enables a soft handoff. 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.
  Our
            mobile WiMAX solution, called 4Motion is expected to be introduced to
            the market
            by the end of 2006 and commercially available in 2007. This target is
            planned to
            coincide with the availability of mobile WiMAX-enabled devices such as
            laptops
            and PDAs that utilize chips currently under development. 4MotionTM is a complete
            WiMAX 802.16e-2005 solution portfolio being developed in conjunction
            with
            leading providers of core network and IP technology, devices and integration
            services. 4Motion is expected to offer open, scalable and cost-effective
            mobile
            data solutions that deliver true broadband services of several Mbps per
            subscriber or more with full quality of service (QoS) capabilities that
            enable
            applications such as VoIP. Compliance with 802.16e-2005 standards and
            a fully
            distributed, all-IP architecture means that 4Motion gives operators the
            flexibility to choose the multi-vendor partners to add third party IP
            services,
            while controlling costs.
  ***Fixed
            Wireless Broadband Access Product*** ***s***
  We
            provide a broad range of integrated fixed wireless broadband solutions,
            addressing different markets and frequency bands, designed to address
            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
            2.3 GHz 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, compact mobile networks,
            networking protocols and very large systems integration, or VLSI.
  Fixed
            wireless broadband solutions are based on OFDM (Orthogonal Frequency
            Division
            Multiplexing) technology with non-line-of-sight (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.
  30
 *BreezeACCESS
            Products (BreezeACCESS II, XL, VL, OFDM)*
  BreezeACCESS
            enables fixed high-speed data and voice, point-to-multipoint wireless
            broadband
            applications. BreezeACCESS access 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
            and controllers, and subscriber units, which operate 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 for future growth.
  BreezeACCESS
            OFDM (orthogonal frequency division multiplexing-based) products support
            fixed
            higher 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 4.9, 5.2, 5.3, 5.4, 5.7GHz
            bands,
            which are mostly unlicensed, and provide gross data rates of up to 54
            Mbps.
  OFDM
            technology, on which BreezeACCESS OFDM and BreezeACCESS VL are based,
            enable
            higher data rates, up to 12 Mbps in the case of BreezeACCESS OFDM, and
            up to 54
            Mbps in the case of BreezeACCESS VL, 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. It is intended
            to
            become our service provider solution in all the 5 GHz bands.
  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
            Products - BreezeNET (BreezeNET DS.11, PRO.11, BreezeNET B)*
  Our
            BreezeNET 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 products
            consist
            of three product families: BreezeNET DS.11, BreezeNET PRO.11, and BreezeNET
            B.
  BreezeNET
            DS.11 products utilize direct sequence spread spectrum (DSSS), radio
            technology
            and are compliant with the IEEE 802.11b wireless LAN standard. DSSS products
            provide data rates of up to 11 Mbps and are most suitable for low user
            density
            applications where high data rates are of prime importance. BreezeNET
            DS.11
            outdoor bridging products, operating in the unlicensed 2.4 GHz band,
            feature
            indoor/outdoor architecture with an indoor interface unit and an outdoor
            radio
            unit. The indoor/outdoor architecture enables lower cost installations,
            while
            supporting reliable building-to-building high data rate bridging over
            long
            distances.
  31
 BreezeNET
            PRO.11 products utilize frequency hopping spread spectrum, or FHSS, radio
            technology and are compliant with the IEEE 802.11 Wireless LAN standard.
            FHSS
            products provide data rates of up to 3 Mbps and allow point-to-multipoint
            installations with a large number of wireless users. BreezeNET PRO.11
            products,
            operating in the unlicensed 2.4 GHz band, include indoor solutions and
            outdoor
            wireless connectivity solutions most suitable for building-to-building
            bridging
            and applications characterized by high user density, and high-speed mobility
            in
            harsh radio environments.
  BreezeNET
            B products function as a wireless bridge system that provides high-capacity,
            high-speed point-to-point connectivity. The BreezeNET B system operates
            in the
            unlicensed 5GHz band and enables operation in near and non-line-of-sight
            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/or
            data
            encryption. The system supports VLANs, enabling secure operation, and
            VPN
            services, allowing tele-workers or remote offices to conveniently access
            their
            enterprise network.
  *MGW
            and eMGW Products*
  The
            MultiGain Wireless (MGW) and 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 MGW and 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
            is a
            point-to-multipoint fixed wireless access system that 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. It 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; upgrade
            existing
            networks with advanced data services; and 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 CDMA (Code Division Multiple Access) 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.
  32
 MGW
            is a
            point-to-multipoint fixed wireless access system that supports a variety
            of
            services, including toll quality voice, high-speed voice band data and
            ISDN-BRI,
            primarily for urban, suburban and rural environments. MGW’s scalable
            architecture enables low initial investment, with incremental growth
            based on
            subscriber demand. It is well suited for both new operators entering
            the market
            and incumbent operators in areas where copper infrastructure is already
            saturated or is difficult to install, such as new housing areas, historical
            sites or temporary installations. Based on our frequency hopping CDMA
            technology, MGW supports a broad range of frequency bands, from 800MHz
            to 3.8
            GHz, and provides coverage of over 25 kilometers in line of sight, or
            LOS,
            conditions. Hundreds of thousands of MGW lines have already been successfully
            installed in over 60 countries.
  MGW
            is
            comprised of a radio port control unit, a radio port coupler, a fixed
            access
            unit, a power supply and charger unit and a coverage extender used to
            extend the
            geographical coverage of the network. It also includes a network planning
            tool
            and a network management system featuring fault, configuration, traffic
            and
            performance management.
  *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 *WALKair* products
            consist of *WALKair* 1000
            that
            operates in the 3.5, 10.5 and 26 GHz licensed bands, and *WALKair* 3000
            that
            operates in the 26 and 28 GHz band.
  *WALKair* products
            are based on time division multiplexing, or TDM, technology. *WALKair* systems
            support a complement of value-added classes of services including VPN,
            Virtual
            LAN, or 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. *WALKair* 3000
            integrates smoothly with *WALKair* 1000.  This 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.
  Integrating
            our *WALKair
            1000* and *WALKair
            3000* technologies
            in the same base station, *Alvarix* allows
            operators to benefit from low deployment costs without limiting the ability
            to
            upgrade each customer when appropriate. For a low-cost entry solution,
            operators
            can deploy *WALKair
            1000* along
            with differentiated data service. When higher speed and capacity is required, *WALKair
            3000* can be
            deployed on the same base station to deliver high-end data services with
            premium
            QoS capabilities. This pay-as-you-grow approach allows operators to improve
            their infrastructure price-performance.
  ***Network
            Management Products for both WiMAX and Other Wireless
            Broadban*** ***d***
  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, 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
            products, including BreezeMAX, BreezeACCESS VL, BreezeNET B and WALKair
            networks.
  33
 Our
            full
            portfolio of network management products include:
  ·
                  *AlvariSTAR,*which
                      configures, monitors and manages our*BreezeMAX,
                      BreezeACCESS*and*WALKair*products;
  ·
                  *BreezeMANAGE*,
                      which configures, monitors and manages our*BreezeACCESS*products;
  ·
                  *WALKnet*,
                      which configures, monitors and manages our*WALKair*products;
  ·
                  *BreezeVIEW*,
                      which configures, monitors and manages our*BreezeNET*products;
  ·
                  *UltraWAVE
                      OMC*which configures, monitors and manages our mobile products
                      (UltraWAVE and
                      Breeze2000); and
  ·
                  *IMS*,
                      which configures, monitors and manages our eMGW
                      product.
  BreezeMANAGE,
            WALKnet, BreezeVIEW, AlvariSTAR, UltraVIEW and IMS are multi-platform
            simple
            network management protocol, or 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.
  ***Compact
            Cellular Network*** ***s***
  *Demand
            for Compact, Scalable Networks*
  The
            world’s cellular market is huge at approximately one billion mobile phone users.
            However, the giant global companies in this market have left an under-served
            segment; that of small or extension networks, servicing up to 100,000
            subscribers. The business model for these small or specialized types
            of networks
            is not profitable for the large players. In addition, with the recent
            occurrences of natural disasters, there is a clear need for a rapid response
            to
            bring back telecommunications services to distraught areas. Another area
            of
            growing demand is compact reliable communications systems. Given the
            world’s
            interest in investing more heavily in security and defense, compact reliable
            communications systems serve a valuable role. Finally, users today are
            unwilling
            to give up their mobile phone service even when in flight or while vacationing
            on a cruise ship or roaming around remote areas of the world. This is
            another
            area in which a scalable, immediately deployable small network has much
            to
            offer.
  *Our
            Geographic Markets*
  Our
            target markets for these compact cellular networks include emerging markets
            in
            developing or under-developed countries, due to our networks ’ low
            entry cost and reduced maintenance expenses. In addition, our products
            are
            particularly cost-effective for island landscapes or a series of islands
            due to
            their simple, easy to support and maintain network that is software configurable
            to various network architectures. In addition, geographic areas with
            few
            subscribers are ideal markets, an excellent example being a recent deployment
            in
            the Falkland Islands, a territory that had not yet received cellular
            service
            until our network was deployed due to the poor business case for the
            larger
            network suppliers. Finally, we have designed our small to mid-size stand-alone
            cellular networks to serve the following applications that are relevant
            for any
            location in the world including developed areas within developed
            countries:
  34
  ·
                  Applications
                      that require rapid deployments such as emergency responses,
                      disaster
                      recovery, military uses, and special
                      events,
  ·
                  Rural
                      extensions to already established cellular infrastructure:
                      e.g., to add
                      capacity and coverage in remote or rural areas and to provide
                      telephone
                      service in previously under-served
                      communities,
  ·
                  Contained
                      applications, such as cruise ships and
                      airplanes,
  ·
                  WLL
                      (Wireless Local Loop) connecting subscribers to the PSTN switch
                      using
                      radio signals as a substitute for
                      copper.
  ***Our
            Customers***
  Our
            cellular networks have been installed in over 20 countries to offer solutions
            for public operators and specialized cellular applications that provide
            reduced
            overall and backhaul costs, rapid deployment, scalable configurations,
            and
            value-added services such as pre-paid, SMS and voice mail.
  *Cellular
            Operators*
  Our
            solutions are targeted to telecom carriers offering cellular services and
            wireless service providers looking to expand their existing user base
            and gain
            market share, with the objective of extending capacity, coverage, and
            providing
            value-added services in areas previously under or unserved. Cellular
            operators
            are able to leverage their infrastructure, radio base-station sites and
            customer
            base, together with their marketing, billing systems and customer support
            investments, to offer competitive broadband Internet access services
            to their
            customer base or to attract new customers for broadband who can eventually
            become cellular customers.
  In
            the
            past, wireless networks have been deployed primarily in urban centers
            and other
            heavy usage areas. Increasing demand for improved service over wider
            geographic
            areas has prompted cellular service providers to accelerate the expansion
            of
            their networks and ours enable operators to achieve this very cost effectively.
            We offer various remote-cell packages with local switching capabilities,
            which
            reduce both operating and capital expenditures. These packages can serve
            as an
            extension to a larger infrastructure deployed in an urban location so
            that
            operators maintain all network service and management transparency.
  *Government
            and Public Sector*
  Disaster
            recovery is a major issue and governments are forced to invest in the
            resources
            to combat future natural disasters. Our complete compact GSM networks
            are
            excellent tools for providing cellular phone service until the wired
            infrastructure is repaired. Temporary sites for defense or tactical training
            or
            maneuvers also require a full, end-to-end network solution for the complete
            range of mobile voice services. This is another major vertical market
            that only
            a compact, complete cellular system can service.
  *Partial
            Customer List*
  ·
                  Cable
                      & Wireless
  ·
                  Hubei
                      Mobile Communications
  ·
                  Integrated
                      Services Limited
  35
 ·
                  FSM
                      Telecom
  ·
                  National
                      Telecommunications Authority of the Marshall
                      Islands
  ***Our
            Compact, Cellular Solution*** ***s***
  Our
            line
            of compact cellular solutions that are easy to deploy and tailored for
            the ‘hard
            to reach’, remote environments provide an end-to-end GSM and CDMA solutions for
            these various niche markets. In fact, we believe our GSM system is the
            only
            commercially available system that provides all of the infrastructure
            equipment
            and software necessary to support an entire wireless network within a
            single,
            compact enclosure. Our networks may be deployed in communities with a
            few
            thousand subscribers and may be scaled to grow to over a hundred thousand
            subscribers.
  ***Our
            Cellular Product*** ***s***
  Our
            Cellular Mobile Unit (CMU) has network installations in over 20 countries.
            The
            Cellular Mobile Unit has developed customizable solutions for public
            operators,
            equipment manufacturers, and specialized GSM applications. Our scalable
            products
            and low startup costs enable customers to purchase a complete network
            solutions
            with scalable Mobile Switching Center (MSC), Base Station Controller
            (BSC), and
            Base Transceiver Station (BTS) that meets their current needs and allows
            for
            future expansion. We use industry-standard interfaces to facilitate integration
            with existing infrastructure and third-party vendors. Our customers benefit
            from
            our innovative techniques that provide local switching and reduce backhaul
            costs. In mobile applications, customers also gain from our ability to
            rapidly
            deploy a network using compact designs and easy-to-configure databases.
  ***GSM
            solutions - WAVEXpress and UltraWAVE***
  The
            WAVEXpress and UltraWAVE product families provide a comprehensive set
            of GSM
            network capabilities that supports an entire GSM network within a single
            enclosure. WAVEXpress and UltraWAVE systems can serve as a base station,
            base
            station controller, switch or any combination of these functions depending
            on
            the system’s hardware and software configuration. The WAVEXpress and UltraWAVE
            products are modular, which enable the system to be updated and enhanced
            by
            exchanging specific hardware modules and upgrading software. The compact
            and
            modular system enables wireless service providers to fill in coverage
            blind
            spots, to increase capacity in heavy usage areas and to provide service
            to
            previously unserved areas.
  WAVExchange
            switching family is a cost effective Mobile Switching System scalable
            from 100
            to 20,000 subscribers. WAVExchange offers full mobility functions and
            allows
            operators to expand their switching capacity and service offerings to
            remote or
            isolated areas. WAVExchange also provides international roaming for visiting
            subscribers. WAVExchange can be deployed as a stand-alone solution or
            integrated
            with WAVEXpress and UltraWAVE as part of an end-to-end cellular
            deployment.
  Our
            compact specialty cellular networks serve a variety of end-users and
            applications including residential cellular users, governmental, homeland
            security, and disaster relief agencies, as well as travel/leisure companies.
            This year witnessed the launch of several products and components in
            these
            products that enhanced the product form size and improved on the network’s cost
            effectiveness, including UltraWAVE network-in-a-box (NIB), Micro BTS/BS
            Plus and
            X40 Switch.
  *CDMA
            2000-1x solution - Breeze2000*
  CDMA
            2000-1x technology enables last mile wireless telephony and always-on
            data
            access over wide coverage for residential users who are fixed or mobile.
            CDMA
            2000’s design minimizes the initial network cost for servicing the last mile.
            Using CDMA 2000 operators can profitably address the challenge of servicing
            the
            low ARPU (Average Revenue Per User) markets; leveraging the low price
            CDMA
            2000-1x CPEs (Customer Premise Equipment) and economic benefits. CDMA
            2000 is a
            point-to-multipoint solution, which offers operators a cost efficient
            alternative to traditional wireless local loop technologies. Carriers
            are able
            to provide voice and always-on data services for both fixed and limited
            mobility
            connections. CDMA 2000 1xRTT offers always-on 153 Kbps peak. CDMA 2000
            operates
            in the 450MHz, 850MHz, 1900MHz, and 2100 MHz frequencies.
  36
 Breeze2000
            is designed to provide last mile wireless telephony and always-on data
            access
            over wide coverage for residential users with fixed or limited mobility.
            Breeze2000 is a point to multipoint, next generation network, IP-based
            CDMA
            2000. The IP based architecture combined with distributed structural
            design
            minimizes the initial network cost for servicing the last mile. For use
            in small
            to medium scale networks in urban to rural, the distributed IP architecture
            minimizes operator’s initial investment and expedites its time to market.
            Breeze2000 enables operators to profitably address the challenge of servicing
            the low ARPU markets.
  Breeze2000
            provides transparent telephony services over V5.2 interface including
            supplementary services, fax G3, payphone and data services of circuit
            switched
            and always-on 153 Kbps peak. In addition, it offers a self-contained
            network
            connected to PSTN over SS7, thereby reducing the costs of satellite backhaul
            in
            rural networks. The system operates in the 450MHz, 850MHz, 1900MHz, and
            2100MHz
            frequencies.
  ***Accessories
            Offered by Alvario*** ***n***
  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,
            BreezeACCESS, WALKair and BreezeNET solutions. These accessories include
            antennas, cables, surge arrestors, amplifiers and other components. We
            also
            offer various configuration and monitoring tools in addition to the
            BreezeMANAGE, WALKnet and BreezeVIEW network management applications
            for our
            BreezeACCESS, WALKair and BreezeACCESS products.
  **TECHNOLOGIES
            UNDERLYING OUR PRODUCT** **S**
  We
            use
            internally developed core technologies and continue to invest heavily
            in
            augmenting our expertise in networking, radio and digital signal processing,
            or
            DSP, modem technologies. We also participate as active members in international
            standards committees.
  ***Networking
            Technolog*** ***y***
  To
            support the BreezeMAX products, we have developed or otherwise acquired,
            and
            continue to invest in, networking expertise in the areas of IP Access,
            PPPoE
            (Point-to-Point Protocol Over Ethernet) tunneling, Virtual Private Networks
            (VPN) and Voice over IP (VoIP), based on industry standards such as H.323,
            SIP
            and MGCP, and other Internet standards and protocols. 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
            802.16-2005
            (16e) standards for further improved support of these needs. We have
            also
            developed a network management system that provides network surveillance,
            monitoring and configuration capabilities for all the family
            products.
  37
 To
            support our BreezeACCESS products, we have developed or otherwise acquired,
            and
            continue to invest in, networking expertise in the areas of VoIP, based
            on
            industry standards such as H.323 and media gateway control protocol,
            or MGCP,
            and other Internet standards and protocols. 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 interfacing with billing
            systems
            for data and voice. We are developing medium access technology based
            on the IEEE
            802.16a standard for further improved support of these needs.
  To
            support our WALKair products, we have developed time division multiple
            access,
            or TDMA, based air protocol whereby all terminal stations are synchronized
            with
            the base station. Each terminal station transmits a burst according to
            the base
            station upon demand.
  The
            PSTN
            FWA MGW system was extended to provide additional data services to wireless
            subscribers. The eMGW system was especially designed to support the modern
            wholesale network model for carriers. PPPoE, remote and local DHCP network
            tools
            give to the network access provider the ability for fast and inexpensive
            IP
            network configuration and interfacing to the billing systems.
  ***Radio
            Technolog*** ***y***
  We
            have
            in-house radio development capabilities to address the diversified 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, 3.4-3.6 GHz, 5.7
            GHz, 10.5
            GHz and 26 and 28 GHz. The modulation methods include Frequency Hopping
            Spread
            Spectrum, or FHSS, Gaussian Frequency Shift Keying, or GFSK, Direct Sequence
            Spread Spectrum, or DSSS, Single Carrier QAM and OFDM, OFDMA, GSM and
            CDMA. Our
            products include both Time Division Duplex, or TDD, radios and Frequency
            Division Duplex, or 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.
  ***Digital
            Signal Processing (DSP) Modem Technolog*** ***y***
  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 FPGA (Field Programmable
            Gate-Array) and DSP reprogramming, allow us to readily introduce advanced
            features to our products and to follow amendments to emerging standards,
            including capability to upgrade deployed networks by pure s/w download.
            Similarly our CPE designs allow for upgradeability through over the air
            s/w
            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, which is also used as the foundation
            for
            our broadband mobile IEEE 802.16e solution, while enjoying the benefits
            of OFDMA
            and smart-antenna processing. The base station architecture and capabilities
            is
            closely aligned and synchronized with the CPE ASICs and reference design
            developed by Intel resulting from our collaboration, which began in 2003,
            to
            assure optimum performance in future WiMAX deployments.
  38
 We
            have
            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
            a
            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 will serve as a key component of our BreezeACCESS-OFDM
            products. 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.
  The
            FWA
            eMGW system was designed 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.
  We
            have
            expertise in radio modem design for GSM and TDMA, including design of
            DSP,
            equalizer, AGC, and power control for CDMA products. Currently the IWF
            (Inter
            Working Function) is designed for fax and data services.
  ***GSM
            switching and IP-based mobile switc*** ***h***
  Our
            cellular products include two distinctive switching technologies for
            GSM and
            CDMA networks. WAVExchange is a family of low and high capacity MSC platforms
            for GSM and is capable of supporting from 100 up to 100,000 subscribers
            on a
            single platform. WAVExchange enables operators to cost effectively render
            service in areas with no switching capabilities or with poor transmission
            to
            central switching locations.
  Our
            recently developed CDMA switch (MSC) is based on a VoIP paradigm where
            all calls
            are trunked over an IP based network infrastructure. This architectural
            concept
            is often referred to as NGN (Next Generation Network) and enables virtual
            positioning of the IP-based MSC anywhere on the public or private IP
            network.
            Using off-the-shelf IP gear enables a very cost effective and easy to
            maintain
            backbone network.
  ***Participation
            in International Standards Committee*** ***s***
  As
            part
            of our strategy to become a technological 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 Mohammad Shakouri, Vice President of
            Business
            Development 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 "Item 4B - Business Overview - General
            - WiMAX
            Technology and Advantages".
  39
 The
            scope
            of the IEEE 802.16-based standard is the Wireless MAN (Metropolitan Area
            Network), 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. Dr. Vladimir Yanover holds the position of co-chair of WiMAX Forum’s
            Mobile Task Group (MTG), responsible for defining the profiles and 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 to define and improve the
            OFDM/OFDMA mode, for both fixed and mobile broadband applications and
            to improve
            the IEEE 802.16 standard ability to increase its market print in license-exempt
            applications.
  Mariana
            Goldhammer, Director for Strategic Technologies at Alvarion, is Chair
            of IEEE
            802.16h, targeting 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 is currently
            considering
            the OFDMA mode. Ms. Goldhammer 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, being the driving
            force
            behind increasing the data rate of the frequency hopping modem. Naftali
            Chayat,
            our Chief Scientist, chaired a task group of the IEEE 802.11a, a wireless
            LAN
            work group involved with high-data rate standardization.
  We
            are
            very active in the international arena, including ITU-R, to promote the
            WiMAX
            policy in the Regulatory domain and secure the spectrum for broadband
            fixed/mobile deployment.
  **SALES,
            MARKETING AND SUPPORT OF OUR PRODUCT** **S**
  We
            market
            our products through an extensive network of more than 220 active partners.
            These include original equipment manufacturers (OEM), national and local
            distributors, systems integrators and resellers. Our distributor partners
            in
            turn sell to resellers, including value-added resellers and systems integrators,
            and to end-users. We also market our products directly to large-end
            customers.
  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 and other wireless broadband, wireless
            voice,
            and cellular markets. We sell in these markets through OEM agreements
            or other
            strategic arrangements with leading telecommunications suppliers, direct
            sales
            as well as indirectly through our distribution channels, which market
            primarily
            to smaller Internet service providers and operators. Additionally, to
            achieve
            broad and rapid market penetration, we maintain direct relationships
            with
            carriers. By doing so, we believe that we are better able to understand
            the
            needs of new operators, such as innovative challengers, Tier 1 and global
            operators, and are better able to identify and anticipate trends in the
            wireless
            broadband market.
  40
 We
            have
            strategic relationships with major telecommunications equipment manufacturers,
            such as Siemens, Alcatel, Nera and Lucent. 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 and other key companies
            to
            increase our exposure and establish ourselves as a supplier to markets
            and
            end-user segments that are not reached by our present distribution
            channels.
  We
            have
            strong relationships with leading incumbents and leading telecom operators
            to
            whom we sell our solutions directly.
  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.
  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 allocation of our revenues by geographical regions 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
            community, 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-
            and
            post-sales activities conducted by our distribution channels with large
            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. The seminars are held in various countries and in different
            languages according to need.
  **MANUFACTURING
            OPERATIONS AND SUPPLIER** **S**
  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 marketing 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, Japan and the United States. Part
            of
            our production is conducted in our facility in Tel Aviv.
  41
 The
            quality assurance, final assembly and testing operations of our products
            are
            performed by us at our facilities in Tel Aviv, Omer, Mountain View, Schenzen
            and
            in our leased premises at some of our subcontractors’ facilities in Israel. 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.
            Our
            packaging and shipping activities are conducted primarily at our Tel
            Aviv, Omer
            and Mountain View facilities.
  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 that our Israel based contract manufacturers be ISO 9002 certified.
            Our US manufacturing location and contract manufacturers are undergoing
            ISO 9002
            certification, and we expect this during the course of 2006. Our Tel
            Aviv and
            Omer locations are ISO 14000 certified.
  **PROPRIETARY
            RIGHT** **S**
  In
            order
            to protect our proprietary rights in our products and technologies, we
            rely
            primarily upon a combination of patents, trademark, trade secret, and
            copyright
            law as well as confidentiality, non-disclosure and assignment of inventions
            agreements. We have over 90 patents issued by patent offices in several
            countries, with more than 50 pending patent applications.
  We
            have
            trademark registrations in Israel, 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 adequate to prevent misappropriation
            of
            our technology or independent development and/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 do not or will not infringe on existing
            or
            future proprietary rights of others. Although we believe that our technology
            has
            been independently developed and that none of our intellectual property
            infringes on the rights of others, we cannot assure you that third parties
            will
            not assert infringement claims against us or seek an injunction on the
            sale of
            any of our products in the future. If an infringement were found to exist,
            we
            may attempt to acquire the requisite licenses or rights to use such technology
            or intellectual property. However, we cannot assure you that such licenses
            or
            rights could be obtained on terms that would not have a material adverse
            effect
            on us, if at all.
  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.
  42
 **THE
            COMPETITIVE ENVIRONMENT IN WHICH WE OPERAT** **E**
  The
            markets for our products are very competitive and we expect that competition
            will increase in the future, both with respect to products that we are
            currently
            offering, and with respect to products that we are developing. The principle
            competitive factors in these markets include:
  ·
                  price
                      and price/performance ratio;
 ·
                  technology;
 ·
                  regulation
                      and product certifications;
 ·
                  ability
                      to support new industry standards;
 ·
                  product
                      time to market, and
 ·
                  brand
                      strength and sales channels, 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,
            Aperto Networks, Arraycom, Cambridge, Ericsson, Flarion (acquired by
            Qualcomm),
            IP Wireless, Motorola, Navini, Nextnet, Terabean, Inc., Redline, Samsung
            Siemens
            , SR Telecom and ZTE. Other vendor members of the WiMAX Forum may become
            our
            competitors.
  Our
            products also compete with alternative telecommunications transmission
            media,
            including leased lines, copper wire, fiber-optic cable, cable modems,
            television
            modems and satellite.
  Companies
            that are engaged in the manufacture and sale, or the development, of
            products
            that compete with our compact cellular network products are GSM communications
            equipment providers such as Ericsson, Lucent, Motorola, Nokia, Siemens,
            ZTE and
            Huawei.
  We
            also
            compete with the Wi-Fi, TDMA and CDMA product offerings from the same
            communications equipment providers and expect that a number of them will
            develop
            competing data communications products and technologies in the near future.
            We
            also compete with CDMA product offerings of Ericsson, Motorola, ZTE,
            Huawei,
            UT-Starcom, Samsung and LG Electronics. In the past, the products of
            the leading
            GSM equipment communications providers were capable of handling large
            subscriber
            bases. Equipment providers are beginning however to focus on equipment
            similar
            to our products that address smaller subscriber bases and distributed
            architecture based on IP Base Stations (GSM or CDMA). Each of the major
            GSM
            communications equipment providers has at least a partial GSM solution
            that
            addresses this target market.
  Increased
            competition in our market results in price reductions, new 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
            REGULATIO** **N**
  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. In other
            countries the situation varies as to the spectrum, if any, that may be
            used
            without a license and as to the permitted purposes of such use. 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.
  43
 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, 3.5, 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. 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.
  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
            5MHz.
  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.
  **C.**
                  **ORGANIZATIONAL
                      STRUCTU****R****E**
  The
            following is a list of our significant 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.;
  ·
                  interWAVE
                      Communications Inc., incorporated under the laws of Delaware,
                      United
                      States, is a wholly owned subsidiary of Alvarion Mobile,
                      Inc.;
  ·
                  AlvarionUK
                      LTD., incorporated under the laws of
                      England;
  ·
                  Alvarion
                      SARL*, incorporated under the laws of
                      France;
  44
 ·
                  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.Ş.**, incorporated under the laws of
                      Turkey;
  ·
                  Alvarion
                      de Mexico S.A de C.V, incorporated under the laws of
                      Mexico;
  ·
                  interWAVE
                      Communications Ireland Limited, incorporated under the laws
                      of
                      Ireland;
  ·
                  interWAVE
                      Communications International SA, incorporated under the laws
                      of
                      France;
  ·
                  interWAVE
                      Communications (Shenzen) Co., Ltd., incorporated under the
                      laws of
                      China;
  ·
                  International
                      Wave Communications Networks, Inc., incorporated under the
                      laws ofthe
                      Philippines; and
  ·
                  Alvarion
                      Singapore PTE LTD., incorporated under the laws of
                      Singapore.
  *Alvarion
            SARL is a wholly-owned subsidiary of Alvarion  UK
            LTD.
            In addition, we have representative offices in China, Italy, Russia,
            the
            Philippines, Japan, South Africa, Spain, Czech Republic and
            Singapore.
  **
            Alvarion Telsiz Sistemleri Ticaret A. S. and Alvarion - Tadipol - ECI
            Sp.zoo are
            wholly owned subsidiaries of Kermadec Telecom B.V.
 
 **D.**
                  **PROPERTY,
                      PLANTS AND EQUIPME****N****T**
  We
            do not
            own any real estate. On December 31, 2005, we leased an aggregate of
            approximately 244,000 square feet in Israel for annual lease payments
            (including
            management fees) of approximately $3.5 million and incur annual parking
            expenses
            in connection with this lease of approximately $0.6 million. These premises
            consist mainly of our corporate headquarters and two separate warehouses
            located
            in Israel. We have been occupying our main premises since April 2001,
            which
            serves 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 April through
            May 2006. We extended the lease during 2006 until the year 2011. We also
            lease
            approximately 34,500 square feet of office facilities in Mountain View
            California, at an annual rent of approximately $0.4 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. In addition,
            we lease
            office space for the operation of our facilities in Miami, Florida, San
            Diego,
            California, France, Romania, China, Hong Kong, Uruguay, Japan, Brazil,
            Mexico,
            Philippines, Ireland and Poland, Russia, Italy, Spain.
  We
            believe that the facilities we currently lease are adequate for our current
            requirements.
  **ITEM
                      4A.**
                    **UNRESOLV**ED****STAFF****COMMEN****T****S****
 None
  45
  **ITEM
                      5.**
                    **OPERATING
                        AND FINANCIAL REVIEW AND PROSPEC****T****S**
 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
                      RESUL****T****S**
  **Overvie** **w**
  We
            are a
            leading provider of wireless broadband systems. We supply carriers, ISPs
            and
            private network operators with WiMAX (Worldwide Interoperability for
            Microwave
            Access) and other wireless broadband solutions, as well as compact cellular
            networks to developing countries and remote areas. Our products cover
            the full
            range of frequency bands with both fixed and mobile solutions, enabling
            the
            delivery of business and residential broadband access, corporate VPNs
            (Virtual
            Private Network), toll quality telephony, mobile base station feeding,
            hotspot
            coverage extension, community interconnection, public safety communications,
            and
            mobile voice and data. Extending coverage of mobile networks to developing
            countries and other hard-to-serve areas, we offer complete and scalable
            mobile
            network solutions that feature a low cost of entry, local switching,
            and
            integrated VAS (Value Added Services) functionality.
  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
            (Metropolitan Area Network) standards committees and experience in deploying
            OFDM (Orthogonal Frequency Division Multiplexing)-based systems, we have
            been in
            the forefront of the WiMAX ForumTM 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 vision is
            to deliver
            solutions for “personal broadband” enabling mobile users to receive
            bandwidth-intensive voice, video, and data services anytime,
            anywhere.
  Our
            products are usually used in a point-to-multipoint architecture and address
            a
            wide scope of end-user profiles, from the residential and small office,
            home
            office, or SOHO, markets, through small and medium enterprises, or SMEs,
            and
            multi-tenant units/multi-dwelling units. Our compact specialty cellular
            networks
            serve a variety of end-users and applications including residential cellular
            users, governmental, homeland security, disaster relief agencies, as
            well as
            travel/leisure companies.
  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 very
            large systems integration, or 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 has complemented
            our
            existing product set and expanded our served market to include the mobile
            equipment market. We have consolidated the results of operations of interWAVE’s
            business in our financial statements from December 9, 2004.
  46
 On
            April
            1, 2003 we acquired certain assets and assumed liabilities of InnoWave
            Ltd. We
            have consolidated the results of InnoWave’s business in our financial statements
            from April 1, 2003.
  On
            August 1, 2001 we acquired Floware Wireless Communication Ltd. Upon the
            closing of the acquisition, we changed our name from BreezeCOM Ltd. to
            Alvarion
            Ltd. We have consolidated the results of Floware’s business in our financial
            statements from August 1, 2001.
  **2005
            Highlights**
  We
            believe that over the last few years we have laid a foundation for long-term
            growth by developing and introducing our newest WiMAX wireless broadband
            products, and other BWA products. Our focus in fiscal 2006 is building
            on this
            foundation and executing well in key areas, including continuing to innovate
            to
            meet our customer needs, and continuing to focus internally on product
            excellence and business efficiency. In 2005, we experienced increased
            demand for
            our BreezeMAX solutions from various types of operators around the world.
  Key
            challenges include successfully managing the transition from our non-WiMAX
            to
            WiMAX products. We have experienced delays in orders for, and decreasing
            revenues from, our non-WiMAX products due to market transition to WiMAX
            certified products. This trend may continue as customers may continue
            to delay
            orders for our products until the introduction of our new WiMAX products.
            In
            addition, 2005 revenues were adversely impacted by the decrease in revenues
            from
            a Latin American customer due to the nearing completion of a large deployment.
  We
            also
            experienced challenges in our CMU business. During the second quarter
            of 2006,
            we identified circumstances that will require the reassessment of the
            recoverability of the various assets associated with the CMU. We are
            currently
            beginning the process of evaluating the recoverability of these assets.
            At this
            point we cannot have a reasonable estimate as to the potential impairment
            of
            some of the intangible assets related to this business, if any. If such
            impairment will be required this may have a significant effect on our
            result of
            operations.
  **Critical
            Accounting Principle** **s**
  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 which 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 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
            results:
  47
 *Segments.* We
            manage
            our business on the basis of two reportable segments and follow the requirements
            of Statement of Financial Accounting Standard No. 131 "Disclosures About
            Segments of an Enterprise and Related Information". Our
            operating segments are the WiMAX and Wireless Broadband Access activity
            and the
            Cellular Mobile activity.
  *Revenue
            Recognition* .
            We
            generate revenues from selling our products indirectly through distributors
            and
            OEMs as well as 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 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. However, we have granted to
            certain
            distributors limited rights of return on unsold products. Product revenues
            on
            shipments to these distributors are deferred until the distributors resell
            our
            products to their customers, 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.
  *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. For certain accounts receivable
            balances, we are also covered by foreign trade risk insurance. To date,
            we have
            not experienced material losses on the ongoing credit evaluations of
            our
            customers. 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 in the future.
  *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 relatively
            short 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
            unmarketable inventory equal to the difference between the cost of inventory
            and
            the estimated market value based upon 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.
  48
 Note
            2g
            to our financial statements describes the write-offs and provisions which
            we
            made and recorded in 2003, 2004 and 2005 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
            which 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.
  *Intangible
            assets.* As a
            result of the acquisition of interWAVE in 2004, the acquisition of InnoWave
            in
            2003 and our merger with Floware in 2001, our balance sheet as of December
            31,
            2005 and 2004 includes acquired intangible assets, such as goodwill,
            current
            technology, customer relations and tradenames, which totaled approximately
            $96.1
            million and $100.5 million, respectively. In the course of the analysis
            and
            valuation of intangible assets, we use financial and other information,
            including financial projections and valuations provided by third parties.
            Although we evaluate our intangible assets when there is an indication
            of an
            impairment, our projections are based on the information available at
            the
            respective valuation dates, and may differ from actual results.
  *Goodwill.* In
            accordance with Statement of Financial Accounting Standards No. 142,
“Goodwill
            and Other Intangible Assets”, (“SFAS No.142”), goodwill acquired in a business
            combination that closes on or after July 1, 2001 is deemed to have indefinite
            life and will not be amortized. SFAS 142 requires goodwill to be tested
            for ` on
            adoption and at least annually thereafter or between annual tests in
            certain
            circumstances, and impaired, rather than being amortized as previous
            accounting
            standards required. As of December
            31, 2005 we had total goodwill of $85.3 million on our balance sheet.
            Goodwill
            is tested for impairment by comparing the fair value of the reporting
            unit with
            its carrying value. On September
            30, 2005, the
            date
            that the company performed its annual impairment test , the
            Company determined that two reporting units exist - the “BWA” unit and the
            former interWAVE business (“CMU”) .
            The
            fair value was determined based on our management’s future operations
            projections, using discounted cash flows and market approach and
            market multiples valuation methods. No indication of impairment was identified.
            In assessing the recoverability of our goodwill and other intangible
            assets, we
            must make assumptions regarding the estimated future cash flows and other
            factors to determine the fair value of the respective assets. If these
            estimates
            or their related assumptions change in the future, we may be required
            to record
            impairment charges for these assets.
  During
            the second quarter of 2006, we identified circumstances that will require
            the
            reassessment of the recoverability of the various assets associated with
            the
            CMU. We are currently beginning the process of evaluating the recoverability
            of
            these assets. At this point we cannot have a reasonable estimate as to
            the
            potential impairment of some of the intangible assets related to this
            business,
            if any. If such impairment will be required this may have a significant
            effect
            on our result of operations.
  49
 *In-process
            research and development write-off* .
            At the
            time of our acquisition of interWAVE, interWAVE was in the process of
            developing
            new technologies that we valued at approximately $11 million. The technologies
            under development were CDMA and a part of the GSM technology. As of the
            date of
            the acquisition, none of these technologies had demonstrated their technological
            or commercial feasibility. Significant risk existed because we were unsure
            of
            the obstacles we would encounter in the form of time and cost necessary
            to
            produce technologically feasible products. Were these proposed products
            to fail
            to become viable, it was unlikely that interWAVE would be able to realize
            any
            value from the sale of the technology to another party.
  As
            the
            in-process technologies had no alternative since the proposed products
            did not
            prove to be feasible, these development efforts are within the definition
            of
            In-Process Research and Development (IPR&D) contained in Statement of
            Financial Accounting Standards (SFAS) No. 2. “Accounting for research and
            development cost”. Accordingly, this amount was expensed in the consolidated
            statement of operations, upon consummation of the acquisition.
  We
            used
            an income approach in valuing the acquired IPR&D. Under this approach, the
            fair value reflects the present value of the projected free cash flows
            that will
            be generated by the IPR&D projects and that is attributable to the acquired
            technology, if successfully completed. The projected revenues used in
            the income
            approach were based upon our estimate of the revenues to be generated
            upon
            completion of the projects and the beginning of commercial sales. The
            projections assumed that the products would be successful and that the
            product’s
            development and commercialization would meet our management’s current time
            schedule.
  *Current
            Technology* .
            Current
            technology represents proprietary “know how”, patents, or any other relevant
            intellectual property that is technologically feasible as of the valuation
            date.
            Usually, current technology can be easily identified as existing products
            generating revenues on a current basis. As of December 31, 2005, the
            amounts
            allocated to current technology from the interWAVE acquisition, the InnoWave
            acquisition and the Floware merger totaled $2.9 million, $0.7 million
            and $6.0
            million, respectively. In accordance with Statement of Financial Accounting
            Standards No. 144, “Accounting for the Impairment of Long-Lived Assets”, (“SFAS
            No. 144”), the value of the current technology as of December 31, 2005 and 2004,
            has also been reviewed and it was determined that no indicators for impairment
            existed. The acquired current technology is amortized using the straight
            line
            method, over 7 years, 4.75 years and 7.75 depending on the respective
            product’s
            amortization schedules.
  *Customer
            relations.* When
            an
            operating entity is acquired, the target company is often a party to
            ongoing
            relationships with its customers that are of material value to the acquirer.
            To
            the extent that future cash flow of a business would be negatively affected
            in
            the absence of these relationships, they are deemed to have economic
            value. The
            amount allocated to customer relations acquired from the interWAVE and
            Innowave
            acquisitions totaled approximately $1.2 million and $0.5 million, respectively.
            These values are estimated by performing discounted cash flows analysis
            which is
            based upon customer backlog at the date of acquisition and historical
            recurring
            revenues by customer, reflecting customer renewal rates, and entails
            forecasting
            cash flows to be generated by customer relations. ** In
            accordance with SFAS No. 144 we reviewed the value of our customer relations
            as
            of December 31, 2005 and 2004 and determined that there was no indicators
            for
            impairment existed. The amount of intangible assets represented by customer
            relations related to the interWAVE and Innowave acquisitions is amortized
            using
            the straight line method over a period of two years and 3.75 years, respectively
            reflecting the expected attrition of the respective customer
            relationships.
  *Tradename* .
            The
            amount allocated to the acquired tradename related to the interWAVE acquisition
            of $1.1 million was based upon the estimated cost to recreate tradenames.
            This
            estimated cost was based upon the historical advertising and promotion
            spending
            over the last two years for our GSM products. The amount allocated to
            tradename
            is being amortized on a straight-line basis over two years based upon
            the
            expected transition time from the legacy hardware to the next generation
            hardware.
  50
 Should
            any of these above-mentioned intangibles become impaired and therefore
            need to
            be written-down or written-off, the charge would result in a corresponding
            reduction in our shareholders’ equity and a corresponding charge to our
            statement of operations. Should the estimates and tests that we conducted
            in
            making these assessments be incorrect, we will have to record impairment
            on
            these intangibles.
  *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 three 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.
  *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. Likewise, should we
            determine
            that we would not be able to realize all or part of our net deferred
            tax asset
            in the future, an adjustment to the deferred tax asset would be charged
            to
            income in the period such determination was made. Our estimates for estimated
            future tax rates could be adversely affected by earnings being lower
            than
            anticipated in countries where we have different statutory rates, ** changes
            in the valuation of our deferred tax assets or liabilities, or changes
            in tax
            laws or interpretations thereof. 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 deferred taxes.
  **Contingencies
            and Other Accrued Expenses**
  We
            are
            from time to time involved in legal proceedings and other claims. We
            are
            required to assess the likelihood of any adverse judgments or outcomes
            to these
            matters, as well as potential ranges of probable losses. We have not
            made any
            material changes in the accounting methodology used to establish our
            self-insured liabilities during the past three fiscal years. A determination
            of
            the amount of reserves required, if any, for any contingencies and accruals
            is
            made after careful analysis of each individual issue. The required reserves
            may
            change due to future developments, such as a change in the settlement
            strategy
            in dealing with any contingencies, which may result in higher net loss.
            If
            actual results are not consistent with our assumptions and judgments,
            we may be
            exposed to gains or losses that could be material.
  51
 **Results
            of Operation** **s**
  The
            following table presents our total revenues attributed to the geographical
            regions based on the location of our customers for the years ended
            December 31, 2003, 2004 and 2005.
  **2003**
                  
                  **2004**
                  
                  **2005****Total**
                        **revenues**
                  
                  **Percentage**
                  
                  **Total**
                      **revenues**
                  
                  **Percentage**
                  
                  **Total**
                      **revenues**
                  
                  **Percentage**In
                      thousands
                  
                  Of
                      sales
                  
                  In
                      thousands
                  
                  Of
                      sales
                  
                  In
                      thousands
                  
                  Of
                      salesIsrael
                  
                  $
                  1,294
                  
                  
                  1.0
                  %
                  $
                  2,268
                  
                  
                  1.1
                  %
                  $
                  1,271
                  
                  
                  0.6
                  %United
                      States (including Canada)
                  
                  
                  31,710
                  
                  
                  25.0
                  %
                  
                  34,772
                  
                  
                  17.3
                  %
                  
                  41,315
                  
                  
                  21.1
                  %Europe
                      (without Russia and Spain)
                  
                  
                  21,655
                  
                  
                  17.0
                  %
                  
                  29,843
                  
                  
                  14.8
                  %
                  
                  49,498
                  
                  
                  25.3
                  %Russia
                  
                  
                  9,802
                  
                  
                  7.7
                  %
                  
                  13,794
                  
                  
                  6.8
                  %
                  
                  11,790
                  
                  
                  6.0
                  %Mexico
                  
                  
                  18,655
                  
                  
                  14.7
                  %
                  
                  64,005
                  
                  
                  31.8
                  %
                  
                  14,790
                  
                  
                  7.6
                  %Africa
                  
                  
                  13,223
                  
                  
                  10.4
                  %
                  
                  18,285
                  
                  
                  9.1
                  %
                  
                  26,640
                  
                  
                  13.6
                  %Spain
                  
                  
                  1,200
                  
                  
                  0.9
                  %
                  
                  8,678
                  
                  
                  4.3
                  %
                  
                  10,678
                  
                  
                  5.5
                  %Asia
                  
                  
                  13,415
                  
                  
                  10.6
                  %
                  
                  9,150
                  
                  
                  4.5
                  %
                  
                  14,529
                  
                  
                  7.4
                  %Latin
                      America (without Mexico)
                  
                  
                  12,273
                  
                  
                  9.6
                  %
                  
                  13,742
                  
                  
                  6.8
                  %
                  
                  18,573
                  
                  
                  9.5
                  %Romania
                  
                  
                  3,981
                  
                  
                  3.1
                  %
                  
                  6,970
                  
                  
                  3.5
                  %
                  
                  6,631
                  
                  
                  3.4
                  %$
                  127,208
                  
                  
                  100.0
                  %
                  $
                  201,507
                  
                  
                  100.0
                  %
                  
                  195,715
                  
                  
                  100
                  %
 
 52
 
 The
            following table sets 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,****2003**
                  
                  **2004**
                  
                  **2005**(in
                      thousands)Sales
                  
                  $
                  127,208
                  
                  $
                  201,507
                  
                  $
                  195,715Cost
                      of sales
                  
                  
                  68,595
                  
                  
                  102,329
                  
                  
                  98,315Write-off
                      of excess inventory and provision for inventory purchase
                      commitments
                  
                  
                  6,562
                  
                  
                  11,412
                  
                  
                  8,124Gross
                      profit
                  
                  
                  52,051
                  
                  
                  87,766
                  
                  
                  89,276Operating
                      costs and expenses:Research
                      and development, gross
                  
                  
                  27,612
                  
                  
                  31,713
                  
                  
                  41,983Less
                      - grants
                  
                  
                  3,846
                  
                  
                  3,897
                  
                  
                  3,062Research
                      and development, net
                  
                  
                  23,766
                  
                  
                  27,816
                  
                  
                  38,921Selling
                      and marketing
                  
                  
                  33,000
                  
                  
                  39,038
                  
                  
                  48,794General
                      and administrative
                  
                  
                  6,417
                  
                  
                  9,741
                  
                  
                  11,495Merger
                      and acquisition related expenses
                  
                  
                  2,201
                  
                  
                  369
                  
                  
                  868Amortization
                      of intangible assets
                  
                  
                  2,606
                  
                  
                  2,779
                  
                  
                  4,367In-process
                      research and development write-off
                  
                  
                  —
                  
                  
                  10,993Total
                      operating expenses
                  
                  
                  67,990
                  
                  
                  90,736
                  
                  
                  104,445Operating
                      loss
                  
                  
                  (15,939
                  )
                  
                  (2,970
                  )
                  
                  (15,169
                  )Financial
                      income, net
                  
                  
                  4,127
                  
                  
                  3,821
                  
                  
                  2,551Net
                      income (loss)
                  
                  $
                  (11,812
                  )
                  $
                  851
                  
                  $
                  (12,618
                  )
 
 
 **Year
                      Ended December 31,****2003**
                  
                  **2004**
                  
                  **2005**(as
                      a percentage of sales)**Statement
                      of Operations Data:**Sales
                  
                  
                  100.0
                  %
                  
                  100.0
                  %
                  
                  100.0
                  %Cost
                      of sales
                  
                  
                  53.9
                  
                  
                  50.8
                  
                  
                  50.2Write-off
                      of excess inventory and provision for inventory purchase
                      commitments
                  
                  
                  5.1
                  
                  
                  5.7
                  
                  
                  4.2Gross
                      profit
                  
                  
                  41.0
                  
                  
                  43.5
                  
                  
                  45.6**Operating
                      costs and expenses:**Research
                      and development, gross
                  
                  
                  21.7
                  
                  
                  15.8
                  
                  
                  21.5Less
                      - grants
                  
                  
                  3.0
                  
                  
                  2.0
                  
                  
                  1.5Research
                      and development, net
                  
                  
                  18.7
                  
                  
                  13.8
                  
                  
                  20.0Selling
                      and marketing
                  
                  
                  26.0
                  
                  
                  19.4
                  
                  
                  24.9General
                      and administrative
                  
                  
                  5.1
                  
                  
                  4.8
                  
                  
                  5.9Merger
                      and acquisition related expenses
                  
                  
                  1.7
                  
                  
                  0.2
                  
                  
                  0.4Amortization
                      of intangible assets
                  
                  
                  2.0
                  
                  
                  1.4
                  
                  
                  2.2In-process
                      research and development write-off
                  
                  
                  —
                  
                  
                  5.4Total
                      operating expenses
                  
                  
                  53.5
                  
                  
                  45.0
                  
                  
                  53.4Operating
                      loss
                  
                  
                  (12.5
                  )
                  
                  (1.5
                  )
                  
                  (7.8
                  )Financial
                      income, net
                  
                  
                  3.2
                  
                  
                  1.9
                  
                  
                  1.3Net
                      income (loss)
                  
                  
                  (9.3
                  %)
                  
                  0.4
                  %
                  
                  (6.5
                  %)
  53
 **Year
            Ended December 31, 2005 Compared with Year Ended December 31,
            2004**
  *The
            results for the year ended December 31, 2005 include the combined activities
            of
            Alvarion with former interWAVE operations whereas the results of the
            year ended
            December 31, 2004 combine both activities from December 9, 2004 through
            December
            31, 2004. The results of former interWAVE operations during 2004 did
            not have a
            material effect on our consolidated statement of operations.*
  *Sales* .
            Sales
            in 2005 were approximately $195.7 million,
            a decrease of approximately 2.9% compared with sales of approximately
            $201.5
            million in 2004. In 2005, we
            experienced delays in sales of our non-WiMAX products due to the market
            transition to WiMAX certified products.
  Wireless
            broadband sales in 2005 were approximately $176.9 million , a
            decrease of approximately 11.5% compared with sales of approximately
            $199.9
            million in 2004. In 2004
            and 2005, 30.6% and 5.2% of our sales were to a Latin American operator,
            respectively. For 2005, sales to our Latin American customer decreased
            significantly due to the nearing completion of a large project. Partly
            as a
            result, our revenue decreased in 2005. Excluding
            the impact of the large customer, wireless broadband sales increased
            approximately 20% in 2005 compared with 2004, reflecting broad-based
            demand for
            wireless broadband solutions, including the BreezeMAX product, our WiMAX
            based
            platform. Sales in Europe, Middle East and Africa reached 58% of our
            BWA sales
            in 2005 reflecting an increase of 30% over 2004 sales in this region,
            attributed
            mainly to the progress in the spectrum allocation process and the early
            adoption of
            our
            broadband wireless products by
            well-capitalized independent operators. Sales in Central and Latin America
            accounted for 19% of our BWA sales in 2005 a decrease of 58% (in dollar
            value)
            over 2004 in this region, related mainly to the decrease in deployment
            of a
            single large customer. During 2003 we received a large order from a Latin
            American customer. Initial deployment of this order began in 2003 and the majority
            was
            deployed during 2004, with the remainder in 2005. Toward the
            end of 2005
            we received a small additional order from this customer, to be deployed
            in
            2006.
  Cellular
            mobile unit (CMU) sales in 2005 were approximately $18.8 million compared
            with
            $1.6 million in the relative period of 2004 (which represents revenues
            from
            December 9, 2004 the date we acquired interWAVE).
  *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 $98.3 million in 2005, a decrease of approximately
            3.9%
            compared with cost of sales of approximately $102.3 million in 2004. Cost of
            sales as a percentage of sales decreased to approximately 50.2% in 2005
            from
            approximately 50.8%
            in
            2004, primarily attributable to the continued implementation of operational
            efficiency measures and cost reduction programs, including improvement
            in
            manufacturing processes and improvement of the terms with our subcontractors,
            which we implemented during 2005, which was partially offset by lower
            margins in
            the CMU.
  *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 revenues forecasts and technological obsolescence.
            Should inventories on-hand exceed our estimates or become obsolete 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. In 2005,
            we recorded
            charges related to the write-off of excess inventory and accrued a provision
            for
            inventory purchase commitments of new materials and components which
            we had
            purchased or committed to purchase in anticipation of forecasted sales
            which we
            did not consummate in the aggregate amount of approximately $7.6 million
            and
            $0.53 million, respectively compared to approximately $10.9 million and
            $0.5
            million, respectively in 2004.
  *Inventory
            utilization* *.*  In
            2000,
            we built significant inventories to sell equipment to customers, primarily
            in
            the United States, to provide fast Internet access utilizing unlicensed
            bandwidth. During that year we estimated that the historical growth rate
            would
            continue. However, the sudden and unexpected slowdown in the telecommunication
            industry started in 2001 curtailed the ability of existing and prospective
            carriers and service providers to finance purchases of products such
            as ours.
            Many carriers and service providers had stopped deploying new networks
            or had
            ceased operations completely and were no longer potential users of our
            products.
            Accordingly, in response to these market condition changes and after
            evaluating
            industry trends, we performed an inventory evaluation model designed
            to better
            align our inventory levels to the new market conditions and anticipated
            customer
            demand. At that point, we determined, based on the low market visibility,
            that
            it was unlikely that we would be able to utilize or market our entire
            inventory.
            As a result, during the second and third quarter of 2001, we wrote off
            certain
            components of our products that were deemed to be excess inventory, in
            the
            amount of $45.3 million. On April 1, 2003, as part of InnoWave’s acquisition, we
            also acquired its inventory which was recorded at fair value on the date
            of
            acquisition. As a result of the change in trends and the increase in
            2003 of the
            overall worldwide demand for broadband access solutions the demand for
            our
            broadband wireless products increased as well. Consequently, the demand
            for part
            of the related products of our prior years’ written-off components increased
            significantly and we began utilizing part of them. Most of our utilized
            inventory in 2004 and 2005 was related to the write -offs of excess inventory
            made in 2001 and to certain components of InnoWave’s acquired inventory.
  In 2005
            and
            2004, approximately $ 6.0 and $ 5.6
            million, respectively, of inventory previously written-off was used as
            products ’ 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
            profit in
            2005 and 2004 by 3% and 2.7 % of
            sales, respectively.
  If
            there
            was to be a sudden and significant decrease in demand for our products,
            or if
            there was a higher incidence of inventory obsolescence because of rapidly
            changing technology and customer requirements, we could be required to
            increase
            our write-off of excess inventory allowances, 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.
  54
 *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.
            Gross research and development expenses were approximately $42.0 million
            in
            2005, an increase of approximately 32.4% compared with gross research
            and
            development expenses of approximately $31.7 million in 2004. This increase
            is
            primarily attributable to the CMU research and development employee-related
            expenses. Gross research and development, as a percentage of sales increased
            to
            21.5% in 2005 from 15.8% in 2004, primarily as a result of the increase
            in
            R&D expenses as well as the decrease in our revenues. Grants from the OCS
            totaled approximately $3.1 million in 2005 and $3.9 million in 2004.
            Research
            and development expenses, net, were approximately $38.9 million in 2005,
            compared with approximately $27.8 million in 2004.
  *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 $48.8 million
            in
            2005, an increase of approximately 25.0% compared with selling and marketing
            expenses of approximately $39.0 million in 2004. This
            increase is primarily attributable to the CMU selling and marketing expenses
            in
            2005. Selling and marketing expenses as a percentage of sales increased
            to 24.9%
            in 2005 from 19.4% in 2004. This increase is primarily attributable to
            higher
            cost associated with the CMU unit as well as to the decrease in sales
            in
            2005.
  *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 fee costs and other administrative costs.
            General
            and administrative expenses were approximately $11.5 million of 2005,
            an
            increase of approximately 19.0% compared with general and administrative
            expenses of approximately $9.7 million in 2004. This increase is primarily
            attributable to the CMU general and administrative expenses in 2005.
            During 2006
            the company reached a settlement of a lawsuit with a former customer
            of
            interWAVE Communications International Ltd resulting in a decrease of
            approximately $1 million in the general and administrative expenses in
            2005. General
            and administrative expenses as a percentage of sales increased to 5.9%
            in 2005
            from 4.8% in 2004. This increase is primarily attributable to higher
            costs
            associated with the CMU as well as the decrease in sales in 2005. General
            and
            administrative expenses increased in 2005 and 2004 by $563,000 and $60,000
            respectively due to reclassification of deferred stock compensation amortization
            expenses to general and administrative expenses.
  *Acquisition
            related expenses.* ****** Acquisition
            related expenses consist primarily of compensation and related expenses
            to
            synergy of employees from the merger transaction with interWAVE and human
            resources, marketing, administrative and other expenses related to the
            transaction. Acquisition related expenses were $0.9 million in 2005 compared
            with $0.4 million in the relative period in 2004.
  *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 7 years. As a result of the acquisition of InnoWave, we acquired other
            acquisition-related intangibles such as current technology and customer
            relations with an aggregate value of $5.8 million, which is amortized
            over the
            useful life of these assets, which range between 3.75 to 7.75 years.
            In
            addition, as a result of the acquisition of interWAVE, we acquired other
            acquisition-related intangibles such as current technology, customer
            relations
            and trade names with an aggregate value of $5.8 million, which is amortized
            over
            the useful life of these assets, and range between 2 to 7 years. Amortization
            charges of $4.4 million for all of these acquisition-related intangibles
            were
            recorded in 2005 and $2.8 million were recorded in 2004.
  55
 *Financial
            income, net* .
            Financial income, net, was approximately $2.6 million in 2005, a decrease
            of
            approximately 33.2%, compared with financial income, net, of approximately
            $3.8
            million in 2004. The decrease in financial income is attributed mainly
            to a
            decrease in our cash, cash equivalents, short term and long term marketable
            securities and deposits of approximately $50 million used in the interWAVE
            acquisition.
  *Operating
            income* . In
            2005,
            we experienced loss of $ (15.9) million, compared with operating loss of (
            $3.5) million in 2004. Our operating loss in 2005 as a percentage of sales
            increased to (12.5%) in 2005 compared with (1.5%) in 2004. The operating
            income
            of the BWA decreased from $8.9 million in 2004 to $1.8 million in 2005.
            The
            operating loss of the CMU increased from $(11.9) million (including $11
            million
            related to in-process research and development write-off following the
            acquisition of interWAVE ) million in 2004 to $(17) million in
            2005.
  *Net
            income* .
            In
            2005, net loss was approximately $(12.6) million, compared with a net
            income of
            approximately $0.9 million in 2004.
  **Year
            Ended December 31, 2004 Compared with Year Ended December 31,
            200** **3**
  *The
            results for the period December 9, 2004 through December 31, 2004 reflect
            the
            combined activities of Alvarion with former interWAVE operations whereas
            the
            results of 2003 for the period between April 1, 2003 and December 31,
            2003
            reflect the combined activities of Alvarion with former InnoWave operations.
            The
            results of former interWAVE operations during this period did not have
            a
            material effect on our consolidated statement of operations.*
  *Sales* .
            Sales
            in 2004 were approximately $201.5 million, an increase of approximately
            58.4%
            compared with sales of approximately $127.2 million in 2003. The continuous
            worldwide demand for broadband solutions, including broadband wireless
            solutions, is the primary reason for the increase of our sales in 2004
            compared
            to 2003. This increased demand was derived from several
            sources such as, the developing regions in Central and Eastern Europe
            where
            wireline infrastructure is inadequate, Western Europe where well-capitalized
            independent operators who own spectrums deployed our solutions on a national
            basis, and an on-going project which was initiated in 2003 by one of
            our
            customers which accounted for about 30% and 14% of our revenues in 2004
            and
            2003, respectively. These increases are reflected in our sales by countries.
            For
            example, Europe, Middle-East and Africa accounted for 40% of our sales
            in 2004
            reflecting an increase of 55% over 2003 sales in this region. Latin America
            accounted for 39% of our 2004 sales reflecting a year-over-year growth
            of
            approximately 150%.
  *Cost
            of sales.* Cost
            of
            sales was approximately $102.3 million in 2004, an increase of approximately
            49.3% compared with cost of sales of approximately $68.6 million in 2003.
            This
            increase is primarily attributable to the increase in sales compared
            to 2003
            partially offset by cost reduction processes. Cost of sales as a percentage
            of
            sales decreased to approximately 50.8% in 2004 from approximately 53.9%
            in 2003,
            primarily attributable to the continued implementation of operational
            efficiency
            measures and cost reduction programs, which we implemented during 2004,
            and due
            to the utilization of previously written-off inventory, as described
            in
“Inventory utilization” below.
  *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 revenues forecasts and technological obsolescence.
            Should inventories on-hand exceed our estimates or become obsolete 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. In 2004,
            we recorded
            charges related to the write-off of excess inventory following our quarterly
            inventory evaluations and accrued a provision for inventory purchase
            commitments
            of new materials and components which we had purchased or committed to
            purchase
            in anticipation of forecasted sales which we did not consummate in the
            aggregate
            amount of approximately $10.9 million and $504,000, respectively compared
            to
            approximately $5.3 million and $1.3 million, respectively in 2003.
  56
 *Inventory
            utilization.*  Approximately $ 6
            million and $5.6 million of previously written-off inventory was used
            in 2003
            and 2004, respectively, as product 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 that the inventory was utilized in accordance
            with ARB 43, Chapter 4 footnote 2. This inventory utilization increased
            our
            gross profit in 2003 and 2004 by 4.8% and 2.7 % of
            sales, respectively.
  *Research
            and development expenses, net* .
            Gross
            research and development expenses were approximately $31.7 million in
            2004, an
            increase of approximately 14.9% compared with gross research and development
            expenses of approximately $27.6 million in 2003. The increase is primarily
            attributable to the increase in employee-related expenses. Research and
            development, gross, as a percentage of sales decreased to 15.8% in 2004
            from
            21.7% in 2003, primarily as a result of the increase in our revenues.
            Grants
            from the OCS, totaled approximately $3.9 million in 2004 and $3.8 million
            in
            2003. Research and development expenses, net, were approximately $27.8
            million
            in 2004, compared with approximately $23.8 million in 2003. Research
            and
            development expenses increased in 2003 by $261,000 due to reclassification
            of
            deferred stock compensation amortization expenses to Research and development
            expenses.
  *Selling
            and marketing expenses* .
            Selling
            and marketing expenses were approximately $39.0 million in 2004, an increase
            of
            approximately 18.3% compared with selling and marketing expenses of
            approximately $33 million in 2003. The increase is primarily attributable
            to the
            increase in sales reflected in increased employee-related expenses and
            expanded
            sales and marketing efforts. Selling and marketing expenses as a percentage
            of
            sales decreased to 19.4% in 2004 from 25.9% in 2003. This decrease is
            primarily
            attributable to the increase in sales in 2004. Selling and marketing
            expenses
            increased in 2003 by $96,000 due to reclassification of deferred stock
            compensation amortization expenses to selling and marketing
            expenses.
  *General
            and administrative expenses* .
            General
            and administrative expenses were approximately $9.7 million in 2004,
            an increase
            of approximately 51.8% compared with general and administrative expenses
            of
            approximately $6.4 million in 2003. The increase is primarily attributable
            to
            the growth of our activities and to professional fees related to the
            growth of
            our activities. General and administrative expenses as a percentage of
            sales
            decreased to 4.8% in 2004 from 5% in 2003. This decrease is primarily
            attributable to the increase in sales in 2004. General and administrative
            expenses increased in 2004 and 2003 by $60,000 and $94,000 respectively
            due to
            reclassification of deferred stock compensation amortization expenses
            to general
            and administrative expenses.
  *Acquisition
            related expenses.* ****** Acquisition
            related expenses of approximately $369,000 consist primarily of compensation
            and
            related expenses to synergy of employees from the merger transaction
            with
            interWAVE and human resources, marketing, administrative and other expenses
            related to the transaction.
  57
 *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 7 years. As a result of the acquisition of InnoWave, we acquired other
            acquisition-related intangibles such as current technology and customer
            relations with an aggregate value of $5.8 million, which is amortized
            over the
            useful life of these assets, which range between 3.75 to 7.75 years.
            In
            addition, as a result of the acquisition of interWAVE, we acquired other
            acquisition-related intangibles such as current technology, customer
            relations
            and tradenames with an aggregate value of $5.8 million, which is amortized
            over
            the useful life of these assets, and range between 2 to 7 years. Amortization
            charges of $2.8 million for all of these acquisition-related intangibles
            were
            recorded in 2004 and $2.6 million were recorded in 2003.
  *In-Process
            research and development write-off.* As a
            result of the acquisition of interWAVE, we acquired an identifiable intangible
            asset of $11.0 million allocated to the CDMA and a certain GSM technology.
            The
            in-process research and development was determined by an independent
            appraisal
            using the Income approach. These technologies were considered to have
            no
            alternative future use other than the technological indications for which
            they
            were in development and thus, no technological feasibility had been established.
            Accordingly, this amount, was expensed in the consolidated statement
            of
            operations, upon consummation of the acquisition in accordance with FASB
            Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business
            Combinations Accounted for by the Purchase Method” (“FIN 4”).
  *Financial
            income, net* .
            Financial income, net, was approximately $3.8 million in 2004, a decrease
            of
            approximately 7.3%, compared with financial income, net, of approximately
            $4.1
            million in 2003. The decrease in financial income is primarily attributable
            to
            the worldwide decrease in interest rates on investments and the decrease
            in our
            cash reserves due to the acquisition of interWAVE.
  *Net
            income* .
            In
            2004, net income was approximately $0.9 million, compared with a net
            loss of
            approximately $(11.8) million in 2003.
  **Impact
            of Inflation and Currency Fluctuation** **s**
  The
            dollar cost of our operations is influenced by the extent to which inflation
            in
            Israel is offset by a devaluation of the NIS in relation to the dollar.
            Substantially all of our sales, and most of our expenses, are denominated
            in
            dollars. However, a portion of our expenses, primarily labor expenses
            is
            denominated in NIS unlinked to the dollar. Inflation in Israel will have
            the
            effect of increasing the cost in dollars of these expenses unless offset
            on a
            timely basis by a devaluation of the NIS in relation to the dollar. Yet
            the
            devaluation of the NIS against the dollar will have the effect of decreased
            dollar cost of our operations in Israel. Because exchange rates between
            the NIS
            and the dollar fluctuate continuously, albeit with a historically declining
            trend in the value of the NIS, exchange rate fluctuations will have an
            impact on
            our profitability and period-to-period comparisons of our results of
            operations.
            In 2005, the valuation of the NIS against the dollar exceeded the rate
            of
            inflation in Israel and we have experienced an increase in the dollar
            cost of
            our operations in Israel.
  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. The cash flow hedges were all effective. These
            activities are all effective as hedges of these expenses. Please see
“Item
            11--Qualitative and Quantitative Market Risks”
  58
 For
            a
            discussion of certain policies or factors relating to our being an Israeli
            company and our location in Israel, please see “Item 3--Key Information--Risk
            Factors--Risks Relating to our Location in Israel.”
  **B.**
                  **LIQUIDITY
                      AND CAPITAL RESOURC****E****S**
  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 Flow** **s**
  Total
            cash, cash equivalents, short term and long term marketable securities
            and
            deposits were $114.3 million as of December 31, 2005, a decrease of
            approximately $18.4 million or 13.8% from $132.7 million at December
            31, 2004.
            Our operating activities used cash of approximately $15.2 million in
            2005,
            provided cash of approximately $23.0 million in 2004 and provided cash
            of
            approximately $1.6 million in 2003 . The negative cash flow in 2005 includes
            our
            net loss in this period together with an increase in trade receivables
            and
            inventories, and a decrease in other account payables partially offset
            by a
            decrease in long term receivables and an increase in trade payables.
            The cash
            flows provided in 2004 include our net income in this period together
            with the
            write-off of In-process research and development relating to the interWAVE
            acquisition and the increase in other accounts payable s , partially offset by the increase of trade receivables and trade payables.
            The
            cash flows provided in 2003 include our net loss in this period together
            with
            increase in trade receivables partially offset by increase in trade payables
            and
            other accounts payables.
  Our
            investing activities provided cash of approximately $36.1 million in
            2005, used
            cash of approximately $34.7 million in 2004 and used cash of approximately
            $3.6
            million in 2003. Capital expenditures were approximately $4.1 million
            in 2005,
            $3.4 million in 2004 and$3.1 million in 2003. These expenditures principally
            financed the purchase of research and development equipment and manufacturing
            equipment.
  Net
            cash
            provided by financing activities totaled approximately $1.8 million in
            2005,
            $8.1 million in 2004 and $2.0 million in 2003. In 2005, the amount of
            cash
            provided was attributable primarily to proceeds from the issuance of
            shares in
            connection with the exercise of employees’ options at the amount of
            approximately $3.5 million partially offset by repayment of maturities
            of long
            term loan of $1.7 million. In 2004, 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 $9.8
            million, partially offset by repayment of maturities of long term loan
            of $1.7
            million. In 2003 the amount of cash provided was attributable primarily
            to
            proceeds from the issuance of shares in the amount of approximately $4.9
            million
            and from the proceeds from long-term debt in the amount of $6.9 million,
            partially offset by the repurchase of shares in the amount of approximately
            $1.3
            million and the settlement of our debt to the OCS in the amount of $8.5
            million.
  We
            expect
            that cash provided or used by 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.
  We
            have
            historically met our financial requirements primarily through the sale
            of equity
            securities, including our initial public offering and follow-on public
            offering,
            and through research and development and marketing grants from the government
            of
            Israel, bank borrowings and cash generated from operations and from the
            exercise
            of warrants and options. We raised approximately $107 million from the
            sale of
            5,750,000 ordinary shares in our initial public offering in March 2000 and
            approximately $73 million from the sale of 2,150,000 ordinary shares
            in our
            July 2000 follow-on offering. We also obtained approximately $55.5 million
            in cash and cash equivalents, marketable securities and deposits as a
            result of
            our merger with Floware in 2001 and approximately $32.7 million was received
            and
            accrued as financial income from 2000 through 2005.
  59
 *Accounts
            Receivable, Net.* Accounts
            receivable, net was $39.3 million and $28.1 million as of December 31,
            2005 and
            December 31, 2004, respectively. Days sales outstanding (“DSO”) in receivables
            as of December 31, 2005 and December 31, 2004 were 73 and 51 days, respectively.
            Increase in DSO’s in 2005 is primarily a result of the change in customer mix.
            The increase in DSOs during 2005 was caused in large part by the reduction
            in
            sales to our large Latin American customer. Excluding th e
            impact
            of this
            Latin American custome r, DSOs
            in 2005 and 2004
            were
            77 and
            73 days, respectively . During
            the year 2005, we sold trade receivables in a total amount of $ 13.5
            million.
  *Inventories.* Inventories
            were $43.4 million as of December 31, 2005, an increase of $2.0 million
            or 5.0%
            from $41.3 million at December 31, 2004. Inventories consist of raw materials,
            work in process and finished goods and inventories at customers which
            are not
            recognized as revenues yet. This increase in inventory level is mainly
            attributed to the decrease
            of our sales and to the increased number of products we offer, including
            interWAVE products. As
            a
            result of the foregoing, inventory
            turns were approximately two times in fiscal 2005 and two and a half
            times in
            2004. 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 to enhance
            our
            responsiveness to future customers’ needs and market changes.
  **WORKING
            CAPITA** **L**
  Our
            working capital was approximately $101.7 million as of December 31, 2005,
            compared to $53.3 million as of December 31, 2004 and to $90.4 million
            as of
            December 31, 2003. The increase in working capital from December 31,
            2004 to
            December 31, 2005 is primarily attributable to an increase in our cash
            and cash
            equivalents and our marketable securities balances, and change in the
            mix of our
            cash and cash equivalents, long-term bank deposits and marketable securities
            that had partially moved from long term to short term, and to an increase in trade receivables. The decrease in working capital from December 31, 2003 to
            December
            31, 2004 is primarily attributable to the cash used for the acquisition
            of
            interWAVE and the increase of other accounts payable and accrued expenses
            partially offset by the increase in trade receivables.
  **Commitment** **s**
  *Long
            term debt.* During
            2003, we entered into a long-term loan agreement for approximately $7.0
            million
            with a bank designated for the settlement of a portion of our OCS royalty
            payment obligations. The loan is linked to the US dollar and is payable
            in four
            equal annual installments carrying variable interest. As of December
            31, 2005
            the balance of the long-term loan was approximately $3.5 million. The
            loan is
            secured by a back-to-back lien of a bank deposit.
  *Leases.* We
            lease
            office space in several worldwide locations. Rent expense totaled $4.9
            million
            in 2005, $4.5 million in 2004 and $4.0 million in 2003, respectively.
            We also
            lease various motor vehicles under operating lease agreements, which
            expire in
            2008. Motor vehicles leasing expenses for the year ended December 31,
            2005 were
            $2.1 million, for the year ended December 31, 2004 were $2.1 million
            and for the
            year ended December 31, 2003 were $2.2 million.
  60
 Future
            annual minimum lease payments under all non-cancelable operating leases
            as of
            December 31, 2005 were as follows (in thousands):
  **Rental
                      of Premises**
                  
                  **Lease
                      of motor vehicles**2006
                  
                  $
                  4,165
                  
                  
                  2,2162007
                  
                  $
                  3,469
                  
                  
                  1,2922008
                  
                  $
                  3,245
                  
                  
                  1732009
                  
                  $
                  2,700
                  
                  
                  -2010
                      and thereafter
                  
                  $
                  3,375
                  
                  
                  -$
                  16,954
                  
                  $
                  3,681
 
 *Royalties.* During
            2005, we recorded royalty-bearing grants from the OCS for the support
            of
            research and development activities aggregating to $52,000 for certain
            of our
            research and development projects. 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 such projects, up to 100% of the grants received, linked
            to the
            U.S. dollar. 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.
  During
            2005, we paid or accrued royalties to the OCS in the amount of $1.1 million.
            As
            of December 31, 2005, the aggregate contingent liability to the OCS amounted
            to
            $6.1 million.
  The
            following table of our material contractual obligations as of December
            31, 2005,
            summarizes the aggregate effect that these obligations are expected to
            have on
            our cash flows in the periods indicated:
  **Payments
                    due by period****Contractual
                      Obligations**
                  
                  **Total**
                  
                  **Less
                      than 1 year**
                  
                  **During
                      the second and third years**Long-Term
                      Debt
                  
                  $
                  3,506
                  
                  $
                  1,757
                  
                  $
                  1,749Rental
                      Lease Obligations
                  
                  $
                  16,954
                  
                  $
                  4,165
                  
                  $
                  6,714Motor
                      vehicle Leases
                  
                  $
                  3,681
                  
                  $
                  2,216
                  
                  $
                  1,465Total
                  
                  $
                  24,141
                  
                  $
                  8,138
                  
                  $
                  9,928
 
 *Treasury
            stock* .
            Through
            December 31, 2002, we resolved to implement a share buyback plan under
            which the
            total amount to be paid for the repurchase of shares, shall not exceed
            $9
            million dollars. As of December 31, 2005, we had purchased 3,796,773
            shares at a
            weighted average price per share of approximately $2.07 per share.
  **FUTURE
            NEEDS**
  Our
            cash
            balances and investments, governmental research and development grants
            will
            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.
  61
 **Effective
            Corporate Tax Rat** **e**
  Income
            derived by Alvarion Ltd. is generally subject to the regular Israeli
            corporate
            tax rate, which is progressively being reduced from 35% to 34% in 2005
            and 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.
  Our
            manufacturing facilities in Tel Aviv and Nazareth 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.
  On
            September 6, 1995, our production facilities in Tel Aviv were granted
            Approved Enterprise status. Subject to compliance with applicable requirements,
            the income derived from the Tel Aviv Approved Enterprise will be tax-exempt
            for
            a period of four years and will enjoy a reduced tax rate of 10% to 25%
            for the
            following six years. The actual number of years and tax rate depends
            upon the
            percentage of the non-Israeli holders of our share capital. 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 ten
            years.
  The
            periods of tax benefits with respect to each of the Tel Aviv and 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. The period of benefits for the Tel Aviv Approved
            Enterprise and for the Nazareth plan has not yet commenced.
  In
            1998,
            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 will be tax-exempt for a period of two
            years and
            will thereafter enjoy 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.
  62
 In
            2000,
            we received approval of our application for an expansion of our Approved
            Enterprise status with respect to our Nazareth facility. This expansion
            will
            include, among other things, our Carmiel facility, which during 2004
            was
            relocated to Migdal Ha-emek. The income derived from this Approved Enterprise
            will be tax-exempt for a period of ten years. The relative portion of
            taxable
            income that should be exempt for a ten year period is subject to final
            covenants
            with the tax authorities. The ten-year period of benefits will commence
            with the
            first year in which we earn taxable income.
  InnoWave
            was granted an “Approved Enterprise” status for its 1997 plan regarding the
            production facility in Omer. During 1999, InnoWave’s request for an expansion
            was approved.
  During
            2003, we applied for the assignment of former InnoWave’s “Approved Enterprise”
status to Alvarion. Such approval was obtained. The income derived from
            this
            Approved Enterprise will be tax-exempt for a period of ten years. The
            relative
            portion of taxable income that should be exempt for a ten year period
            is subject
            to final covenants with the tax authorities. The ten-year period of benefits
            will commence with the first year in which we earn taxable income.
  In
            order
            to maintain eligibility for the above programs and benefits following
            the
            Floware merger and InnoWave acquisition, 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 which
            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, 2005, our accumulated deficit does not include tax-exempt
            profits earned by our “Approved Enterprise” .
  A
            recent
            amendment to the Investment Law (the “Amendment”), which has been officially
            published and effected since of April 1, 2005, has significantly changed
            the
            provisions of the Investment Law. Among other things, the Amendment provides
            tax
            benefits to both local and foreign investors and simplifies the process
            of the
            investment center approval. 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.
  As
            of
            December 31, 2005, in the Israeli company we had available tax loss
            carryforwards amounting to approximately $100 million, which may be carried
            forward, in order to offset taxable income in the future, for an indefinite
            period. In addition, the incurred net tax operating loss carryforwards
            in a
            total amount of $69 million of BreezeCOM and Floware at the effective
            time of
            the merger can be carried forward to subsequent years and may be set
            off against
            our taxable income beginning with the tax year immediately following
            the merger.
            This set off is limited per each calendar year to the lesser of:
  ·
                  20%
                      of the aggregate net tax operating losses of the merging companies
                      prior
                      to the effective time of the merger;
                      and
 ·
                  50%
                      of the combined company’s taxable income in the relevant tax year before
                      the set off of losses from preceding
                      years.
  63
 These
            restrictions, with several modifications, also apply to the set off of
            capital
            losses of the merging companies against capital gains of the combined
            company.
  As
            a
            result, we do not anticipate being subject to income tax in Israel until
            at
            least 2008.
  As
            of
            December 31, 2005, the state and the U.S. federal tax losses carryforward
            of our
            U.S. subsidiary, excluding former interWAVE tax losses carryforward,
            amounted to
            approximately $18 million and $43.3 million, respectively. These losses
            are
            available to offset against any future U.S. taxable
            income of our U.S. subsidiary and will expire in the years 2010 and 2025,
            respectively.
  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.
  Following
            the acquisition of interWAVE, we analyzed the annual limitations on its
            net
            operating losses as of the acquisition date and our alternatives to benefits
            from such losses. As of December 31, 2005, we estimate the annual US
            Federal NOL
            available to offset future income at approximately $1.67 million. Annual
            amount
            that is not offset against taxable income will be accumulated until
            2024.
  **Reduction
            in corporate tax rat** **e**
  On
            July
            25, 2005 the Israeli parliament passed the Law for the Amendment of the
            Income
            Tax Ordinance (No.147 and Temporary Order) - 2005 (hereinafter - the
            Amendment).
  Inter
            alia, the Amendment provides for a gradual reduction in the statutory
            company
            tax rate in the following manner: in 2006 the tax rate will be 31%, in
            2007 the
            tax rate will be 29%, in 2008 the tax rate will be 27%, in 2009 the tax
            rate
            will be 26% and from 2010 onward the tax rate will be 25%. Furthermore,
            as from
            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,” 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 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 the status
            of our tax
            benefits following the Floware merger, the InnoWave acquisition and the
            interWAVE 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
            Brazilian, French, German, Hong Kong, Japanese, Romanian, U.K., Uruguayan,
            Polish, Dutch, Turkish, Mexican, Ireland, China, Philippines and U.S.
            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.
  64
 **Government
            Grant** **s**
  Under
            an
            arrangement previously entered with the Office of the Chief Scientist
            in
            Israel’s Ministry of Industry and Trade (“the OCS”), the company settled its
            liability for the amount due of $8,534. The repayment to the OCS could
            be made
            over
            a period of five years
            from the date of settlement. The liability is linked to Israel’s Consumer Price
            Index (“CPI”) and bears annual interest of 4%. (For additional information
            please refer to Note 10 of our financial statements).
  This
            Arrangement enables the Company to participate in new OCS programs under
            which
            it will be 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 the
            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.
  In
            addition, during 2005, we participated in a consortium in the frame of
            the
            European 6th program. As of December 31, 2005 we accrued grants from
            this
            project totaling $0.6 million. These grants do not bear any royalty repayment
            obligations.
  Following
            our acquisition of interWAVE and its subsidiaries, the Irish subsidiary
            participates in programs sponsored by the Irish Government and the European
            Union, operated by the Industrial Development Agency (IDA) and previously
            by
            Shannon Development. These programs are designed to promote research
            and
            development and overall regional development. No royalties are payable
            on these
            grants but the IDA may at any time within five years from the date of
            payment of
            the last installment from any particular grant stop payment of the grants
            and/or
            revoke and cancel or reduce the grants under certain circumstances.
  **Recently
            issued accounting standard** **s**
  On
            December 16, 2004, the Financial Accounting Standards Board (FASB) issued
            FASB
            Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
            of
            FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
            123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
            Employees,
            and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
            the
            approach in Statement 123(R) is similar to the approach described in
            Statement
            123. However, Statement 123(R) requires all share-based payments to employees,
            including grants of employee stock options, to be recognized in the income
            statement based on their fair values. Pro forma disclosure is no longer
            an
            alternative. The new standard will be effective for the Company in the
            first
            interim period beginning after January 1, 2006.
  As
            permitted by Statement 123, the company currently accounts for share-based
            payments to employees using Opinion 25’s intrinsic value method and, as such,
            generally recognizes no compensation cost for employee stock options.
            In
            addition, non-compensatory plans under APB 25 will be considered compensatory
            for FAS 123(R) purposes. Accordingly, the adoption of Statement 123(R)’s fair
            value method will have a significant impact on the Company result of
            operations,
            although it will have no impact on the Company overall financial position.
            Had
            the Company adopted Statement 123(R) in prior periods, the impact of
            that
            standard would have approximated the impact of Statement 123 as described
            in the
            disclosure of pro forma net income and earnings per share in Note 2m
            to the
            consolidated financial statements.
  65
 The
            company will implement FAS 123(R) using the modified prospective method
            starting
            January 1, 2006. Under this method, the company will begin recognizing
            compensation cost for equity-based compensation for all new and existing
            unvested share-based awards after the date of adoption. The
            Company expects that the adoption of the SFAS No. 123(R) fair value method
            will
            have a significant impact on the consolidated results of operations,
            although it
            will have no impact on the Company's overall consolidated financial position
            or
            consolidated cash flows.
  In
            March
            2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107)
            to give
            guidance on implementation of SFAS 123R, which the Company plans to adopt
            in
            implementing SFAS 123R.
  In
            May
            2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting
            Changes and Errors Corrections” (“SFAS 154). SFAS 154 replaces APB Opinion No.
            20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting
            Changes in Interim Financial Statements”, although it carries forward some of
            their provisions. SFAS 154 requires retrospective application to prior
            periods’
financial statements of changes in accounting principle, unless it is
            impracticable to determine either the period-specific effects or the
            cumulative
            effect of the change. A change in depreciation, amortization, or depletion
            method for long-lived, non-financial assets will be accounted for as
            a change in
            accounting estimate effected by a change in accounting principle. SFAS
            154 is
            effective for changes in accounting principle made in fiscal years beginning
            after December 15, 2005. The company does not expect the adoption of
            SFAS 154 to
            have material impact on its financial position or result of
            operations.
  In
            November 2005, the FASB issued FSP FAS 115-1. The FSP addresses the
            determination as to when an investment is considered impaired, whether
            that
            impairment is other than temporary, and the measurement of an impairment
            loss.
            The FSP also includes accounting considerations subsequent to the recognition
            of
            other than-temporary impairment and requires certain disclosures about
            unrealized losses that have not been recognized as other-than-temporary
            impairments. The guidance in this FSP amends FASB Statements No. 115,
            Accounting
            for Certain Investments in Debt and Equity. The FSP replaces the impairment
            evaluation guidance of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary
            Impairment and Its Application to Certain Investments,” with references to the
            existing other-than-temporary impairment guidance. The FSP clarifies
            that an
            investor should recognize an impairment loss no later than when the impairment
            is deemed other-than-temporary, even if a decision to sell an impaired
            security
            has not been made. The guidance in this FSP is to be applied to reporting
            periods beginning after December 15, 2005. As of December 31, 2005 adoption
            of
            FSP FAS 115-1 will not have a material impact on the Company’s financial
            position or results of operation.
 
 In
            November 2004, the FASB issued Statement of Financial Accounting Standard
            No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SAFS
            151"). SFAS 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter
            4,
            to clarify that abnormal amounts of idle facility expense, freight handling
            costs and wasted materials (spoilage) should be recognized as current-period
            charges. In addition, SFAS 151 requires that allocation of fixed production
            overheads to the costs of conversion be based on normal capacity of the
            production facilities. SAFS 151 is effective for inventory costs incurred
            during
            fiscal years beginning after June 15, 2005. The Company does not expect
            that the
            adoption of SFAS 151 will have a material effect on its financial position
            or
            results of operations.
 
  **C.**
                  **RESEARCH
                      AND DEVELOPMENT, PATENTS AND LICENS****E****S**
  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.
  66
 As
            of
            December 31, 2005, our research and development staff consisted of 398 full
            time employees. Our research and development is conducted at our facilities
            in
            Israel the U.S., Romania, Ireland and China. We occasionally use independent
            subcontractors for portions of our development projects.
  Our
            gross
            research and development expenses were approximately $27.6 million or
            21.7% of
            sales in 2003, $31.7 million or 15.8% of sales in 2004 and $42 million
            or 21.5%
            of sales in 2005. The OCS reimbursed us for approximately $3.8 million
            in 2003,
            $3.9 million in 2004 and $3.0 million in 2005.
  **D.**
                  **TREND
                      INFORMATI****O****N**
  See
            the
            overview section of the Management’s Discussion and Analysis above.
 **E.**
                  **OFF-BALANCE
                      SHEET ARRANGEMEN**T****S****
 Not
            applicable.
  **E.**
                  **TABULAR
                      DISCLOSURE OF CONTRACTUAL OBLIGATIO****N****S**
  Included
            under Section B of this Item 5.
  67
  **ITEM
                        6.**
                      **DIRECTORS,
                          SENIOR MANAGEMENT AND EMPLOYE**E****S****
 **A.**
                  **DIRECTORS
                      AND SENIOR MANAGEME****N****T**
  The
            following table lists the name, age, and position of Alvarion Ltd.’s current
            directors and executive officers:
  **Name**
                  **Age**
                  **Position**Anthony
                      Maher
                  59
                  Chairman
                      of the board of directors (2)Dr. Meir
                      Barel
                  54
                  Vice
                      Chairman of the board of directors (2)Oded
                      Eran
                  49
                  Director
                      (1)Benny
                      Hanigal
                  55
                  Director
                      (2)Professor
                      Raphael Amit
                  58
                  External
                      Director (3)Robin
                      Hacke
                  45
                  External
                      Director (4)Amnon
                      Yacoby
                  56
                  Director
                      (5)Dr.
                      David Kettler
                  63
                  Director
                      (5)Zvi
                      Slonimsky
                  56
                  Director(
                      5)Tzvi
                      Friedman
                  45
                  Chief
                      Executive Officer (1)Amir
                      Rosenzweig
                  45
                  President,
                      Alvarion, Inc.Dafna
                      Gruber
                  41
                  Chief
                      Financial OfficerZvi
                      Harnik
                  47
                  President,
                      Broadband Mobile UnitBenny
                      Glazer
                  56
                  Senior
                      Vice President - Corporate Sales (6)Rudy
                      Leser
                  41
                  Corporate
                      Vice President, Strategy & Marketing (7)Avi
                      Mazaltov
                  44
                  President,
                      Operations and Infrastructure Division(7)Avi
                      Wellingstein
                  45
                  President
                      of the Customers’ Business Division (8)Avinoam
                      Barak
                  43
                  President
                      of the Broadband Wireless Access Division (8)Haim
                      Srur
                  41
                  Corporate
                      Vice President of Human Resources
                      (8)
  (1)
            Term
            expiring at our 2006 Annual General Meeting
 (2)
            Term
            expiring at our 2008 Annual General Meeting
 (3)
            Term
            expiring September 2006
 (4)
            Term
            expiring April 2007
 (5)
            Term
            expiring at our 2007 Annual General Meeting
 (6)
            Held
            this position until December 31, 2005
 (7)
            Appointed executive officer January 1, 2006
 (8)
            Appointed January 1, 2006
  **Mr.
            Anthony Maher** ** has
            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.
            In
            March 2002, Mr. Maher joined Star Venture Management, a venture capital
            company,
            as a partner. 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., Wavecom Communications, Broadlight and Cube Optics
            Inc.
            Mr. Maher holds M.Sc. and B.Sc. degrees in Electrical Engineering and
            Physics
            from the University of Illinois.
  68
 **Dr.
            Meir Barel** served
            as
            the chairman of the board of directors of Floware from its inception
            until its
            merger with us in August 2001, and has, since the merger, served as vice
            chairman of our board of directors. Dr. Barel also served as a director
            of
            BreezeCOM between 1994 and 2000. Dr. Barel is the founder and managing
            partner
            of Star Venture Management, a venture capital company, which was founded
            in
            1992, and SVM Star Venture Capital Management Ltd. From 1988 to 1992,
            Dr. Barel
            was a managing director of TVM Techno Venture Management, Munich. Prior
            to 1986,
            Dr. Barel served in various German and Israeli companies involved in
            factory
            automation, computer design and data communication. Dr. Barel received
            a
            doctorate in Electrical Engineering from the Data Communication Department
            of
            the Technical University of Aachen, Germany.
  **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 Hanigal** has
            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. Mr. Hanigal has a B.Sc. degree in
            Electrical
            Engineering from the Technion.
  **Professor
            Raphael Amit** ****** has
            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 the Alvarion Board, Professor Amit served as Chairman of the
            Board of
            Directors of Creo Products Inc (NASDAQ: CREO until May 2005) and a member
            of the
            Audit committee and the compensation, nominating, and Governance committee.
            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. 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
            January 2003 to July 2003, Ms. Hacke served as Managing Director of Triport
            Advisors Ltd., a company founded by Ms. Hacke that provides advisory
            services to
            investment companies including Portview Communications Partners. 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 several
            privately held companies, including Aternity Inc. Ms. Hacke holds an
            A.B. magna
            cum laude degree from Harvard-Radcliffe College and an MBA degree from
            Harvard
            Business School.
  69
 **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.
  **Dr.
            David Kettler** has
            joined as a member of 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
            Computing Advisory Board of Georgia Tech College 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 a member of the ECE Industrial Advisory
            Board and
            the School of Engineering and Applied Sciences Academic 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. 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 and
            a M.B.A.
            degree from Tel-Aviv University.
  **Mr.
            Tzvi Friedman** was
            appointed Alvarion’s CEO and President in October 2005. 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. summa cum laude in Electrical Engineering , a M.Sc.E.E. cum
            laude in
            Electrical Engineering from Tel Aviv University and a Sloan Program M.Sc.M.
            in
            Management from the London Business School.
  70
 **Mr.
            Amir Rosenzweig** was
            appointed President of Alvarion, Inc. in July 2001. Prior to joining
            Alvarion,
            Mr. Rosenzweig served as President, Chief Executive Officer and a Director
            of
            MTS Ltd. from 1998 to 2001. Between 1996 and 1998, Mr. Rosenzweig served
            as Vice
            President Marketing and Sales of GMA Communications Ltd., prior to which
            Mr.
            Rosenzweig was President and Chief Executive Officer of Sogo Electronics
            Ltd.,
            from 1989 until 1996. Mr. Rosenzweig holds both a B.Sc. degree in Electronics
            Engineering and an M.B.A. degree from Tel Aviv University.
  **Ms.
            Dafna Gruber** has
            been
            our Chief Financial Officer since 1997 and was our controller from 1996
            to 1997.
            From 1993 to 1996, Ms. Gruber was a controller at Lannet, a worldwide
            leading
            data communications company subsequently acquired by Lucent. Ms. Gruber
            has a
            B.A. degree in Accounting and Economics from Tel Aviv University and
            has been a
            certified public accountant since 1991.
  **Mr.
            Zvi Harnik** was
            appointed President, Broadband Mobile Unit in January 2005 and served
            as
            Executive Vice President - Research and Development from April 2000 to
            January
            2005. From September 1999 to April 2000, Mr. Harnik served as Vice President
            of
            Research and Development at Midbartech Ltd. Prior to joining Midbartech,
            Mr.
            Harnik served as our Vice President of Research and Development from
            1997 to
            1999. From 1987 to 1997, Mr. Harnik served as Engineering and Research
            Director
            of Lannet. Mr. Harnik managed the design of an Ethernet switching system
            that
            received the Rothschild prize for innovation in 1995. Mr. Harnik has
            a B.Sc.E.E.
            degree from the Technion.
  **Mr.
            Benny Glazer** serves
            as
            Vice President of Sales of Ectel Ltd. since January 2006. Mr. Glazer
            joined us
            as Vice President of Corporate Sales in August 1999 and served in this
            role
            until 2006. From 1998 to 1999, Mr. Glazer served as Director of Business
            Development for ESC Medical Systems Ltd., a manufacturer of medical lasers.
            From
            1996 to 1997, Mr. Glazer served as President and Chief Executive Officer
            of
            NuLAN Technologies, a manufacturer of videoconferencing systems. In 1995,
            he was
            the President and Chief Executive Officer of ACE North Hills Ltd., a
            data
            communications company, until its acquisition by Nbase Ltd. From 1985
            to 1994,
            he served as Vice President of International Sales of Fibronics, a LAN
            and fiber
            optic networking equipment manufacturer. Mr. Glazer has a B.Sc. degree
            in
            Electronic Engineering from Ben Gurion University and a M.B.A. degree
            from Tel
            Aviv University. Today Mr. Glazer is VP Sales in Ectel Ltd.
  **Mr.
            Rudy Leser** joined
            us in August 2000 upon the merger with Floware. Mr. Leser served as Floware’s VP
            Strategy and Product Management and in January 2002 was appointed as
            our Vice
            President of Marketing. In January 2006, Mr. Leser was appointed Corporate
            VP
            Strategy and Marketing. Mr. Leser joined Floware in August 2000 as Vice
            President of Business Development. Prior to joining Floware, Mr. Leser
            held
            various positions in the fields of marketing including strategic marketing
            director at Metalink. Mr. Leser holds the B.Sc. and M.Sc. degrees in
            Aerospace
            Engineering from the Technion Israel Institute for Technology.
  **Mr.
            Avi Mazaltov** was
            appointed President, 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. Prior thereto Mr. Mazaltov held the position of
            Supply
            Chain Director at TFL, a subsidiary of Tadiran Ltd. Mr. Mazaltov has
            a B.Sc.
            degree in Industrial Engineering and Management from Ben-Gurion
            University.
  71
 **Mr.
            Avi Wellingstein** joined
            Alvarion in January 2006, as President of the Customers’ Business Division.
            Immediately 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 VP and Chief Procurement Officer. Before joining Comverse,
            Mr. Wellingstein filled the role of Vice President of Sales and Marketing
            of
            Orbotech Pacific. Mr. Wellingstein earned 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, and was appointed President of the Broadband
            Wireless Access Division in January 2006. In the 5 years prior to joining
            Alvarion, Mr. Barak served as General Manager of the Networking Business
            Unit in
            Radvision. Prior to 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
            earned
            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 thereto Mr. Srur served as Floware’s VP 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.
  **B.**
                  **COMPENSATI****O****N**
  The
            aggregate direct labor costs associated with all of our directors and
            executive
            officers as a group (14 persons) for the year ended December 31, 2005
            (including
            persons who served as directors or executive officers for only a portion
            of
            2005, and whether or not serving as such as of December 31, 2005) was
            approximately $2,045,238. This amount includes approximately $176,653
            which 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 who are not officers received an aggregate of $275,000
            in
            compensation in 2005. As of December 31, 2005, our directors and executive
            officers held outstanding options to purchase an aggregate of 4,378,342
            ordinary
            shares, at exercise prices ranging from $1.9 to $15.4 , with expiration
            dates
            ranging from January 2009 to December 2014.
   **C.**
                  **BOARD
                      PRACTICE****S******
  **Appointment
            of Directors and Terms of Officer** **s**
  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
            fifteen months after the last preceding annual general shareholders’ meeting.
            Until the next annual general shareholders’ meeting, shareholders may elect new
            directors to fill vacancies in, or increase the number of the members
            of the
            board of directors in a special meeting of the shareholders. Our board
            of
            directors may appoint any person as a director temporarily to fill any
            vacancy
            created in the 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 shareholders. The appointment and terms of office of all our
            executive
            officers are determined by our board of directors, the Compensation Nominating
            and Corporate Governance Committee or our CEO.
  72
 **Service
            Contracts of Director** **s**
  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.
  **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 a minimum of 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". However this requirement will
            not
            take effect until appropriate regulations are adopted. 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, any entity controlling the
            company
            or any entity controlled by the company or by this controlling entity.
            The term
            affiliation includes:
  ·
                  an
                      employment relationship;
  ·
                  a
                      business or professional relationship maintained on a regular
                      basis;
  ·
                  control;
                      and
  ·
                  service
                      as 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 adversely impact such
            person’s
            ability to serve as an external director. 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 one additional
            three
            year term. The external directors must be elected by the majority of
            the
            shareholders in a general meeting, provided that either the shares voting
            in
            favor of the external director’s election includes at least one-third of the
            shares of non-controlling shareholders or 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.
  Currently
            Ms. Robin Hacke and Professor Raphael Amit qualify as our external directors
            under the Israeli Companies Law. Ms. Hacke was elected as an external
            director
            for an initial three year term on August 1, 2001, and was re-elected
            for an
            additional term on April 28, 2004. On September 30, 2003, Professor Amit
            was
            elected as an external director for an initial three year term, effective
            as of
            October 1, 2003. We have appointed the external directors to the committees
            of
            our board of directors as required by law.
  73
 **Audit
            Committe** **e**
  Pursuant
            to the Israeli Companies Law, 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
            law. The audit committee must be comprised of at least three directors,
            including all of the external directors. The audit committee may not
            include the
            chairman of the board, 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. The members of our audit committee
            are
            Professor Amit, Ms. Hacke and Mr. Eran, each of whom are independent
            directors in accordance with the Nasdaq listing requirements. Professor
            Amit
            qualifies as a financial expert for purposes of the rules of the Securities
            and
            Exchange Commission. As stated above, Ms. Hacke and Professor Amit qualify
            as
            external directors under the Israeli Companies Law.
  **Compensation,
            Nominating and Corporate Governance Committe** **e**
  The
            compensation, nominating and corporate governance committee of our board
            of
            directors, which consists of Mr. Maher, Dr. Barel, Professor Amit, and
            Dr.
            Kettler, assists the board of directors in carrying out its responsibilities
            relating to compensation of our top executive officers, including our
            Chief
            Financial Officer and Chief Executive Officer, and the setting of their
            respective goals, and in administering our share option plans and other
            issues
            relating to employee compensation. Our compensation, nominating and corporate
            governance committee is also responsible for recommending to the board
            of
            directors nominees for board membership and for reviewing and advising
            the board
            of directors on corporate governance issues.
  **Internal
            Audito** **r**
  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
            representative. Mr. Eyal Weitzman serves as our internal auditor since
            February
            2006.
  74
 **Fiduciary
            Duties of Office Holders; Approval of Specified Related Party Transactions
            Under
            Israeli La** **w**
  The
            Israeli Companies Law codifies the fiduciary duties that office holders,
            including 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 skill with which
            a
            reasonable office holder in the same position would have acted under
            the same
            circumstances. The office holder’s duty of care includes a duty to use
            reasonable means to obtain information on the advisability of a given
            action
            brought for his approval or performed by him by virtue of his position,
            and all
            other significant information pertaining to those actions. The duty of
            loyalty
            requires an office holder to act in good faith and for the company’s benefit,
            and includes avoiding any conflict of interest between the office holder’s
            position in the company and any other position held by him or his personal
            affairs, avoiding any competition with the company, avoiding exploiting
            any
            business opportunity of the company in order to receive personal advantage
            for
            himself or others, and 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. Each person listed in the
            table
            under “Directors and Senior Management” above is deemed to be an office holder
            under the Israeli Companies Law. Under the Israeli Companies Law, 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 each of the audit committee,
            board of
            directors and shareholder approvals.
  **Disclosure
            of Personal Interes** **t**
  The
            Israeli Companies Law requires that an office holder of a company promptly
            disclose 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. This would include disclosure of a personal
            interest
            of the office holder’s spouse, siblings, parents, grandparents, descendants,
            spouse’s descendants, and their spouses, as well as of any corporation in which
            the office holder or his or her relative is a 5% or greater shareholder,
            director or general manager or in which he or she or his or her relative
            has the
            right to appoint at least one director or the general manager, but does
            not
            include a personal interest arising solely from the holding itself of
            shares of
            the company. Disclosure is not required if the transaction is not an
            extraordinary transaction, that is, a transaction other than in the ordinary
            course of business, otherwise than on market terms, or likely to have
            a material
            impact on the company’s profitability, assets or liabilities, and in which the
            office holder’s personal interest results solely from the personal interest of
            his or her relative. Once the office holder complies with his or her
            disclosure
            requirement, if the transaction is not an extraordinary transaction,
            the Israeli
            Companies Law provides that only the approval of the board of directors
            is
            required unless the articles of association provide otherwise. Approval
            of these
            types of transactions is conditioned on the transaction not being adverse
            to the
            company’s interest. If the transaction is an extraordinary transaction, then,
            in
            addition to any approval stipulated by the articles of association, it
            also must
            be approved by the company’s audit committee and then by the board of directors.
            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, may generally
            not be
            present at this meeting or vote on this matter. However, a director may
            be
            present at a meeting of the board of directors or audit committee and
            participate in the vote despite having a personal interest in the transaction
            under consideration, if most of the directors or most of the members
            of the
            audit committee, as the case may be, have a personal interest in the
            transaction. If most of the directors have a personal interest in a transaction,
            the transaction also requires shareholders’ approval.
  75
 **Disclosure
            of Personal Interests of a Controlling Shareholde** **r**
  The
            Israeli Companies Law applies the same disclosure requirements to a controlling
            shareholder of a public company. A controlling shareholder is a shareholder
            who
            has the ability to direct the activities of a company, and may include
            a
            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. Subject to exceptions
            specified in regulations promulgated under the Israeli Companies Law,
            extraordinary transactions with a controlling shareholder or in which
            a
            controlling shareholder has a personal interest, and the terms of compensation
            of a controlling shareholder or his or her relative who is an office
            holder or
            employee, require the approval of the audit committee, the board of directors
            and a majority of the shareholders of the company in a general meeting,
            provided
            that either such majority include at least one-third of the shareholders
            who
            have no personal interest in the transaction and are present at the meeting,
            or
            the total shareholdings of those who have no personal interest in the
            transaction that vote against the transaction does not represent more
            than one
            percent of the total voting rights in the company. For information concerning
            the direct and indirect personal interests of certain of our office holders
            and
            principal shareholders in certain transactions with us, see “Item 7--Major
            Shareholders and Related Party Transactions--Related Party
            Transactions.”
  **Duties
            of Shareholder** **s**
  In
            addition, under the Israeli Companies Law each shareholder has a duty
            to act in
            good faith in exercising his or her rights and fulfilling his or her
            obligations
            toward the company and other shareholders and to refrain from abusing
            any power
            he or she has in the company, such as in shareholder votes. In addition,
            certain
            shareholders have a duty of fairness toward the company, although such
            duty is
            not defined in the Israeli Companies Law. These shareholders include
            any
            controlling shareholder, any shareholder who knows that it possesses
            the power
            to determine the outcome of a shareholder vote and any shareholder who,
            pursuant
            to the provisions of the articles of association, has the power to appoint
            or to
            prevent the appointment of an office holder or any other power in regard
            to the
            company.
  **Exculpation,
            Insurance and Indemnification of Directors and Officer** **s**
  Our
            articles of association provide that, to the extent permitted by the
            Israeli
            Companies Law, we may indemnify our office holders for liabilities or
            expenses
            incurred by an office holder as a result of an act done by him/her in
            his/her
            capacity as an office holder, such as: 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; 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 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 determines is reasonable under the
            circumstances and, provided, further, that such undertaking lists the
            events
            which the Board 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.
  76
 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
                      harm us;
                      or
  ·
                  financial
                      liability imposed upon him in favour of another
                      person.
  These
            provisions are specifically limited in their scope by the Israeli Companies
            Law,
            which provides that a company may not indemnify or procure insurance
            for an
            office holder for:
  ·
                  a
                      breach of the duty of loyalty, unless the office holder acted
                      in good
                      faith and had reasonable grounds to assume that the action
                      would not harm
                      the company;
  ·
                  an
                      intentional or reckless breach of the duty of care (excluding
                      mere
                      negligence);
  ·
                  an
                      act done with the intent to unlawfully realize personal gain;
                      or
  ·
                  a
                      criminal fine or penalty imposed on the office
                      holder.
  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.
  We
            have
            obtained directors and officers liability insurance for the benefit of
            our
            office holders.
  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 an office holder of our company (or serving or having
            served,
            at our request, as an employee, consultant, office holder or agent of
            any
            subsidiary of our company, 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. At
            present, we are not aware of any pending litigation or proceeding involving
            an
            office holder where indemnification would be required or permitted under
            the
            indemnification agreements.
  **D.**
                  **EMPLOYE****E****S**
  As
            of
            December 31, 2005, we had 1037 employees of which 398 were engaged in
            research and development, 284 in operations, 261 in sales and marketing
            and 94
            in administration and management. Of our full-time employees, as of
            December 31, 2005, 667 were located in Israel, 169 in the United States and
            201 at our other branch offices, listed in Item 4C - Information on the
            Company
            - ‘Organizational Structure’.
  77
 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
            Labor and Welfare. 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
            13.3% and 15.8% of the employee’s base salary. Full-time employees who are not
            insured in this way are entitled 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 ranging from 5% to 14.33% of the employee’s base
            salary, or alternatively, to a savings account, to which the employee
            and the
            employer each make a monthly contribution of 5% 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. We also provide our employees with additional health insurance
            coverage
            for instances of severe illnesses.
  Like
            all
            Israeli employers we are required to provide salary increases as partial
            compensation for increases in the Israeli consumer price index. The specific
            formula for such increases varies according to agreements reached among
            the
            Government of Israel, the Manufacturers’ Association and the General Federation
            of Labor in Israel. Employees and employers also are required to pay
            predetermined sums, which include a contribution to provide a range of
            social
            security benefits.
  **Management
            Employment Agreement** **s**
  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 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.
  78
  **E.**
                  **SHARE
                      OWNERSH****I****P**
  The
            following table sets forth certain information regarding the ownership
            of our
            ordinary shares by our directors and executive officers as of May 5,
            2006. The
            percentage of outstanding ordinary shares is based on 60,762,404 ordinary
            shares
            outstanding as of May 5, 2006.
  **Nam****e**
                  
                  **Number
                      of**
                    **Ordinary
                      Share****s**
                  
                  **Percentage
                      of Outstanding**
                    **Ordinary
                      Share****s**Amnon
                      Yacoby
                  
                  836,507*
                  
                  1.37%Dr.
                      Meir Barel
                  
                  999,507**
                  
                  1.60%
 _________________
 *Includes
            142,030 options for ordinary shares which are exercisable within 60 days
            of date
            stated above
  **
            Includes 303,828 options for ordinary shares which are exercisable within
            60
            days of the date stated above. Includes 22,915 shares beneficially owned
            through
            STAR Israel, and 672,764 ordinary shares beneficially owned through Star
            Germany. Dr. Barel, Star Israel and Star Germany each disclaim beneficial
            ownership of all of the foregoing shares except to the extent of any
            pecuniary
            interest therein, except for 22,915 ordinary shares held directly by
            Star
            Israel. SVM
            STAR VENTURE CAPITAL Management Ltd. (“STAR
            Israel”), an Israeli company which manages investments primarily in securities
            of Israeli and Israel-related companies. The sole director and primary
            owner of
            STAR Israel is Dr. Barel. SVM
            Star Ventures Management GmbH No. 3 (“STAR
            Germany”), a German company which manages investments primarily in securities
            of
            Israeli and Israel-related companies. STAR Germany manages the affairs
            of SVE
            Star Ventures Enterprises No. III, a German Civil Law Partnership (with
            limitation of liability), SVE Star Ventures Enterprises No. IIIA, a German
            Civil
            Law Partnership (with limitation of liability), SVM Star Ventures
            Managementgesellschaft mbH Nr. 3 & Co. Beteiligungs KG, SVE Star Ventures
            Enterprises No. V, a German Civil Law Partnership (with limitation of
            liability)
            and SVM Star Ventures Managementgesellschaft mbH Nr. 3 & Co. Beteiligungs KG
            No. 2, which invest primarily in securities of Israeli and Israel-related
            companies including the securities of the Company which are the subject
            of this
            filing. The sole director and primary owner of STAR Germany is Dr.
            Barel.
  None
            of
            the other directors and executive officers listed in Item 6.A hold more than 1%
            of our
            outstanding shares as of May, 2006.
  As
            of May
            5, 2006, the directors and executive officers listed above, as a group,
            held
            4,401,430 options to purchase of our ordinary shares at a weighted average
            exercise price of $7.90 with expiration dates ranging from January 2009
            to
            December 2015. The voting rights of our directors and executive officers
            do not
            differ from the voting rights of other holders of our ordinary
            shares.
  **Share
            Option Plan** **s**
  As
            of
            December 31, 2005 a total of 24,998,651 ordinary shares have been reserved
            for
            issue 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 2002 Global Share Option Plan, or 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 1999 Stock Option Plan and
            Floware’s Key Employee Share Incentive Plan (1996).
  79
 Options
            granted under the share option plans usually vest over a period of four
            years.
            Of the options reserved under the share option plans, options to purchase
            11,932,522 ordinary shares have been exercised, options to purchase 967,097
            ordinary shares are available for future grant and options to purchase
            12,099,033 ordinary shares, including options issued pursuant to the
            terms of
            the Floware merger and interWAVE amalgamation, were outstanding as of
            December
            31, 2005, at a weighted average exercise price of $7.69 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 12,099,033
            options outstanding expire between eight and ten years from the date
            of
            grant.
  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 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
            (see
            note 2m to our financial statements).
  On
            March
            23, 2006, Alvarion’s board of directors based on the recommendation of our
            Compensation Nominating and Corporate Governance Committee, has approved
            the
            adoption of the 2006 Global Share Based Compensation Plan designed to
            allow
            options and restricted share to be granted. The new plan has an initial
            pool of
            1.5 million shares. The plan also contains a provision whereby the pool
            reserved
            for grant will be reset annually to equal 4% of our total outstanding
            shares as
            of such reset date.
  The
            plan
            was approved solely by our board 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, employee retention as well as generally
            accepted guidelines and practices in the US. The number of eligible employees
            is
            planned to be reduced significantly and actual grants to each employee
            are also
            planned to be reduced compared to prior guidelines.
  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.
  80
 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
            exercise 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.
  In
            September 2002, the board of directors approved an option exchange program.
            Under the program, holders of options with exercise prices in excess
            of $4.60
            were given the opportunity to voluntarily tender unexercised vested and
            non-vested stock options previously granted to them, in exchange for
            replacement
            options to be granted at a later date. The exchange offer expired on
            September
            20, 2002. Depending upon the exercise price of the options tendered,
            those
            participants who elected to tender options under the terms of the program
            received new options in an amount ranging from 2% to 85% of the number
            of the
            options tendered. As a result of the option exchange program, the amount
            of
            options outstanding was reduced by approximately 3 million. The exercise
            price
            of the new options is $2.02 per share, which was the closing price of
            our
            ordinary shares as reported by the Nasdaq National Market on March 21,
            2003, the
            last trading day prior to the date of the grant, March 23, 2003.
   81
 **ITEM
                            7.**
                          **MAJOR
                                SHAREHOLDERS AND RELATED PARTY TRANSACTIO****N****S**
 **A.**
                  **MAJOR
                      SHAREHOLDE****R****S**
  As
            of May
            5, 2006, we do not know of any person or entity who own beneficially
            more than
            5% of our outstanding ordinary shares.
  As
            of May
            5, 2006, there were 76 holders of our ordinary shares of record registered
            with
            a United States mailing address, including banks, brokers and nominees.
            As of
            May 5, 2006, these holders of record held approximately 58,127,592 ordinary
            shares representing approximately 96% of our then outstanding share capital.
            Because these holders of record include banks, brokers and nominees,
            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 TRANSACTIO****N****S**
  Not
            applicable.
  **C.**
                  **INTERESTS
                      OF EXPERTS AND COUNS****E****L**
  Not
            applicable.
  82
  **ITEM
                          8.**
                        **FINANCIAL
                              INFORMATION**
 **A.**
                  **CONSOLIDATED
                      STATEMENTS AND OTHER FINANCIAL INFORMATI****O****N**
  The
            Financial Statements required by this item are found at the end of this
            annual
            report, beginning on page F-1.
  **Legal
            Proceedings**
  A
            lawsuit
            was filed by a former customer of interWAVE on December 8, 2004, for
            compensatory damages with respect to certain alleged damages caused by
            interWAVE
            actions in the amount of approximately $4 million. This claim has been
            dismissed
            on March 2006, following a settlement agreement according to which we
            paid back
            the $3.1 million to the former customer.
  During
            2001 a purported Class Action (the “Action”) lawsuit was filed against interWAVE
            asserting failure to disclose certain alleged improper actions by various
            underwriters and interWAVE’s officers and directors under the Securities Act of
            1933 and the Securities Exchange Act of 1934 followed by interWAVE’s initial
            public offering. A stipulation of Settlement (the “Settlement”) has been
            submitted to the Court for preliminary approval. Under the Settlement
            interWAVE
            will be dismissed of all claims in exchange for a contingent payment
            guarantee
            by the insurance companies responsible for insuring interWAVE as an issuer.
            There is no guarantee that the settlement will become effective as it
            is subject
            to certain terms. In that case under which settlement will not occur,
            we are of
            the opinion that it has a good defense against the action however, the
            litigation results can not be predicted at this point.
  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
            Sale** **s**
  Export
            sales constitute a significant portion of our sales. In 2005, export
            sales were
            approximately $194.4 million constituting approximately 99.4% 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
            Polic** **y**
  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
                      CHANG****E****S**
  Except
            as
            otherwise disclosed in this annual report, no significant change has
            occurred
            since December 31, 2005.
 83
  **ITEM
                            9.**
                          **THE
                                  OFFER AND LISTI****N****G**
 **A.**
                  **OFFER
                      AND LISTING DETAI****L****S**
  The
            following table sets forth the high and low sales prices for our ordinary
            shares
            as reported by the Nasdaq National Market for each full financial year
            since our
            initial public offering in March 2000 and as reported by the Tel Aviv Stock
            Exchange, in NIS, since our ordinary shares commenced trading on the
            Tel Aviv
            Stock Exchange in August 2001:
  **Nasdaq
                      National Market**
                  
                  **Tel
                      Aviv Stock Exchange****Year**
                  
                  **High**
                  
                  **Low**
                  
                  **High**
                  
                  **Low**2000
                  
                  $
                  53.13
                  
                  $
                  9.69
                  
                  
                  N.A.
                  
                  
                  N.A.2001
                  
                  $
                  17.50
                  
                  $
                  1.55
                  
                  
                  NIS
                      21.99
                  
                  
                  NIS
                      7.982002
                  
                  $
                  4.05
                  
                  $
                  1.64
                  
                  
                  NIS
                      18.04
                  
                  
                  NIS
                      8.542003
                  
                  $
                  11.55
                  
                  $
                  1.84
                  
                  
                  NIS
                      51.10
                  
                  
                  NIS
                      8.692004
                  
                  $
                  17.15
                  
                  $
                  8.50
                  
                  
                  NIS
                      74.30
                  
                  
                  NIS
                      41.472005
                  
                  $
                  13.49
                  
                  $
                  7.39
                  
                  
                  NIS
                      60.79
                  
                  
                  NIS
                      34.38
 
 The
            following table sets forth the high and low sales price for our ordinary
            shares
            as reported by the Nasdaq National Market for each full financial quarter
            in
            2004 and 2005 and as reported by the Tel Aviv Stock Exchange, in
            NIS:
  **Nasdaq
                      National Market**
                  
                  **Tel
                      Aviv Stock Exchange****2004**
                  
                  **High**
                  
                  **Low**
                  
                  **High**
                  
                  **Low**First
                      Quarter
                  
                  $
                  17.15
                  
                  $
                  11.40
                  
                  
                  NIS
                      74.30
                  
                  
                  NIS
                      51.70Second
                      Quarter
                  
                  $
                  14.44
                  
                  $
                  8.50
                  
                  
                  NIS
                      64.04
                  
                  
                  NIS
                      41.47Third
                      Quarter
                  
                  $
                  13.47
                  
                  $
                  9.99
                  
                  
                  NIS
                      59.96
                  
                  
                  NIS
                      46.36Fourth
                      Quarter
                  
                  $
                  16.01
                  
                  $
                  12.20
                  
                  
                  NIS
                      67.89
                  
                  
                  NIS
                      55.73
  **2005**
                  
                  
                  **High**
                  
                  
                  **Low**
                  
                  
                  **High**
                  
                  
                  **Low**First
                      Quarter
                  
                  $
                  13.49
                  
                  $
                  9.03
                  
                  
                  NIS
                      60.79
                  
                  
                  NIS
                      39.67Second
                      Quarter
                  
                  $
                  11.62
                  
                  $
                  8.04
                  
                  
                  NIS
                      52.39
                  
                  
                  NIS
                      36.26Third
                      Quarter
                  
                  $
                  11.46
                  
                  $
                  8.07
                  
                  
                  NIS
                      51.88
                  
                  
                  NIS
                      36.71Fourth
                      Quarter
                  
                  $
                  9.37
                  
                  $
                  7.39
                  
                  
                  NIS
                      44.16
                  
                  
                  NIS
                      34.38
 
 The
            following table sets forth the high and low sales price for our ordinary
            shares
            as reported by the Nasdaq National Market and the Tel Aviv Stock Exchange
            for
            the most recent six months:
  **Nasdaq
                      National Market**
                  
                  **Tel
                      Aviv Stock Exchange****Month**
                  
                  **High**
                  
                  **Low**
                  
                  **High**
                  
                  **Low**November
                      2005
                  
                  $
                  9.50
                  
                  $
                  7.40
                  
                  
                  NIS
                      44.16
                  
                  
                  NIS
                      35.05December
                      2005
                  
                  $
                  9.51
                  
                  $
                  8.50
                  
                  
                  NIS
                      43.28
                  
                  
                  NIS
                      39.86January
                      2006
                  
                  $
                  10.96
                  
                  $
                  8.70
                  
                  
                  NIS
                      48.63
                  
                  
                  NIS
                      40.28February
                      2006
                  
                  $
                  10.90
                  
                  $
                  9.04
                  
                  
                  NIS
                      49.71
                  
                  
                  NIS
                      43.24March
                      2006
                  
                  $
                  9.64
                  
                  $
                  8.72
                  
                  
                  NIS
                      44.95
                  
                  
                  NIS
                      41.34April
                      2006
                  
                  $
                  9.23
                  
                  $
                  7.97
                  
                  
                  NIS
                      42.54
                  
                  
                  NIS
                      37.41
  84
 As
            of May
            5, 2006, the exchange rate of the NIS to the US$ was $1 to NIS
            4.433.
  **B.**
                  **PLAN
                      OF DISTRIBUTI****O****N**
  Not
            applicable.
  **C.**
                  **MARKE****T****S**
  Our
            ordinary shares began trading on the Nasdaq National 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.
  **D.**
                  **SELLING
                      SHAREHOLDE****R****S**
  Not
            applicable.
  **E.**
                  **DILUTI****O****N**
  Not
            applicable.
  **F.**
                  **EXPENSES
                      OF THE ISSU****E**
  Not
            applicable.
   85
 **ITEM
                            10.**
                          **ADDITIONAL
                                    INFORMATI****O****N**
 **A.**
                  **SHARE
                      CAPIT****A****L**
  Not
            applicable.
  **B.**
                  **MEMORANDUM
                      AND ARTICLES OF ASSOCIATIO****N**
  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.
  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.
  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 favour of
            the
            shareholders, as deemed appropriate by the liquidator.
  86
 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 the lesser number of: (i) any two
            directors of our company; ora 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 five percent of the issued share capital of our company.
            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, unless specifically determined
            otherwise, until the third annual general shareholders’ meeting following the
            meeting at which such directors were elected. 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 21 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,
            unless a shorter period is permitted by law.
  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.
  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 the American Stock Transfer & Trust Co. at
            address 59 Maiden Lane, New York, NY 10038.
  87
 **C.**
                  **MATERIAL
                      CONTRAC****T****S**
  On
            December 9 th ,
            2004
            Alvarion Mobile, Inc., a wholly-owned subsidiary of Alvarion Ltd. amalgamated
            with interWAVE Communications, Ltd. As a result of the amalgamation,
            Alvarion
            Mobile, Inc. continued as the surviving company and interWAVE Communications
            Ltd.’s separate existence ceased. Upon the closing, Alvarion paid interWAVE’s
            shareholders $4.18 for each interWAVE share, and a total consideration
            of $47.9
            million.
  Except
            as
            otherwise disclosed in this annual report, we have no other material
            contracts.
  **D.**
                  **EXCHANGE
                      CONTRO****L****S**
  Israeli
            law and regulations do not impose any material foreign exchange restrictions
            on
            non-Israeli holders of our ordinary shares.
  Dividends,
            if any, paid to our shareholders, and any amounts payable upon our dissolution,
            liquidation or winding up, as well as the proceeds of any sale in Israel
            of our
            ordinary shares to an Israeli resident, may be paid in non-Israeli currency
            or,
            if paid in Israeli currency, may be converted into freely repatriable
            U.S.
            dollars at the rate of exchange prevailing at the time of
            conversion.
  However
            legislation remains in effect pursuant to which currency controls can
            be imposed
            by administrative action at any time.
  **E.**
                  **TAXATI****O****N******
  **Genera** **l**
  The
            following is a discussion of Israeli and United States tax consequences
            material
            to our shareholders. To the extent that the discussion is based on new
            tax
            legislation 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 of Our Shareholder** **s**
  *Capital
            Gains Tax*
  Israeli
            law imposes a capital gains tax on the sale of capital assets. The law
            distinguishes between inflationary surplus and real gain. The inflationary
            surplus is a portion of the total capital gain that is equivalent to
            the
            increase of the relevant asset’s purchase price that is attributable to the
            increase in the Israeli consumer price index between the date of purchase
            and
            the date of sale. The real gain is the excess of the total capital gain
            over the
            inflationary surplus. The inflationary surplus accumulated from and after
            December 31, 1993 is exempt from any capital gains tax in Israel. Real gain
            accrued before January 1, 2003 is added to ordinary income, which generally
            is
            taxed at ordinary rates of up to 49% for individuals and 35% for corporations,
            while real gain accrued on or after January 1, 2003, in accordance with
            the
            provisions of the recent tax reform discussed below, generally is taxed
            at a
            capital gains rate of 25% for both individuals and corporations. The
            allocation
            of the real gain accruals between the periods before and after January
            1, 2003
            is calculated on a linear basis proportionately to the lengths of such
            periods.
  88
 Real
            gain
            accrued before January 1, 2003 on sales of our ordinary shares purchased
            in our
            initial public offering or thereafter, other than sales by entities that
            are
            subject to the Inflationary Adjustments Law, as discussed below, generally
            is
            exempt from Israeli capital gains tax. On
            January 1, 2003, the Law for Amendment of the Income Tax Ordinance
            (Amendment No. 132), 5762-2002, known as the “tax reform,” came into
            effect. The tax reform and the regulations promulgated thereunder include,
            among
            other things, the imposition of capital gains tax at a rate of 15% on
            gains
            derived from and after January 1, 2003 by Israeli residents, from the sale
            of shares in Israeli companies publicly traded on the Tel Aviv Stock
            Exchange or
            on a recognized stock exchange outside of Israel. This tax rate does
            not apply
            to: (1) dealers in securities, (2) shareholders that report in
            accordance with the Inflationary Adjustment Law, (3) shareholders who
            acquired their shares prior to an initial public offering, (4) the sale
            of
            shares to a relative; or (5) shareholders claiming a deduction for financing
            expenses in connection with the sold securities. The tax basis of shares
            acquired prior to January 1, 2003 will be determined in accordance with the
            average closing share price in the three trading days preceding January 1,
            2003. However, a request may be made to the tax authorities to consider
            the
            actual adjusted cost of the shares as the tax basis if it is higher than
            such
            average price. Non-Israeli residents are generally exempt from Israeli
            capital
            gains tax on any gains derived from the sale of shares publicly traded
            on a
            recognized stock exchange or regulated market outside of Israel, provided
            such
            shareholders did not acquire their shares prior to an initial public
            offering
            and provided such gains did not derive from a permanent establishment
            of such
            shareholders in Israel. The provisions of the tax reform do not affect
            the
            exemption from capital gains tax for gains accrued before January 1, 2003,
            as described in the previous paragraph.
  Furthermore,
            pursuant to the Convention Between the Government of the United States
            of
            America and the Government of the State of Israel with Respect to Taxes
            on
            Income, as amended (the U.S.-Israel tax treaty), the sale, exchange or
            disposition of ordinary shares that are held as a capital asset by a
            person who
            qualifies as a resident of the United States within the meaning of the
            U.S.-Israel tax treaty and who is entitled to claim the benefits afforded
            to
            such resident by the U.S.-Israel tax treaty (Treaty U.S. Resident), generally
            will not be subject to Israeli capital gains tax unless such Treaty U.S.
            Resident holds, directly or indirectly, shares representing 10% or more
            of our
            voting power during any part of the 12-month period preceding such sale,
            exchange or disposition. A sale, exchange or disposition of ordinary
            shares by a
            Treaty U.S. Resident who holds, directly or indirectly, shares representing
            10%
            or more of our voting power at any time during such preceding 12-month
            period
            would be subject to such Israeli tax, to the extent applicable. As of
            January 1,
            2006, the tax rate applicable to capital gains derived from the sale
            of shares,
            whether listed on a stock market or not, is 20% for Israeli individuals,
            unless
            such shareholder claims a deduction for financing expenses in connection
            with
            such shares, in which case the gain will generally be taxed at a rate
            of 25%.
            Additionally, if such shareholder is considered a “significant shareholder” at
            any time during the 12-month period preceding such sale (i.e., such shareholder
            holds directly or indirectly, including jointly with others, at least
            10% of any
            means of control in the company) the tax rate will be 25%. Israeli companies
            are
            subject to the corporate tax rate on capital gains derived from the sale
            of
            shares, unless such companies were not subject to the Adjustments Law
            (or
            certain regulations) at the time of publication of the aforementioned
            amendment
            to the Tax Ordinance, in which case the applicable tax rate is 25%. However,
            different tax rates may apply to dealers in securities and shareholders
            who
            acquired their shares prior to an initial public offering.
  89
  *Special
            Provisions Relating to Taxation Under Inflationary Conditions*
  The
            Israeli Income Tax Ordinance and regulations promulgated there under
            allow
“Foreign-Invested Companies,” which maintain their accounts in U.S. dollars in
            compliance with the regulations published by the Israeli Minister of
            Finance, to
            base their tax returns on their operating results as reflected in the
            dollar
            financials statements or to adjust their tax returns based on exchange
            rate
            changes rather than changes in the Israeli CPI, in lieu of the principles
            set
            forth by the Inflationary Adjustments Law. For these purposes, a
            Foreign-Invested Company is a company, more than 25% of whose share capital,
            in
            terms of rights to profits, voting and appointment of directors, and
            of whose
            combined share and loan capital is held by persons who are not residents
            of
            Israel. A company that elects to measure its results for tax purposes
            based on
            the dollar exchange rate cannot change that election for a period of
            three years
            following the election. We believe that we qualify as a Foreign Investment
            Company within the meaning of the Inflationary Adjustments Law. We have
            elected
            to measure our results for tax purposes based on the U.S. dollar exchange
            rate
            from 2003 and forth.
  Prior
            to
            2003 we measured our results for tax purposes based on the changes in
            the
            Israeli CPI as set forth by the Inflationary Adjustments Law. The Income
            Tax Law
            (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law,
            represents an attempt to overcome the problems presented to a traditional
            tax
            system by an economy undergoing rapid inflation. The Inflationary Adjustments
            Law is highly complex. The features that are material to us may be described as
            follows:
  A
            special
            tax adjustment for the preservation of equity whereby certain corporate
            assets
            are classified broadly into fixed (inflation resistant) assets and non-fixed
            (soft) assets. Where a company’s equity, as defined in such law, exceeds the
            depreciated cost of its fixed assets, the company may take a deduction
            from
            taxable income that reflects the effect of the annual rate of inflation
            on such
            excess, up to a ceiling of 70% of taxable income in any single tax year,
            with
            the unused portion carried forward on a linked basis. If the depreciated
            cost of
            fixed assets exceeds a company’s equity, then such excess multiplied by the
            annual rate of inflation is added to taxable income.
  Subject
            to limitations set forth in the Inflationary Adjustments Law, depreciation
            deductions on fixed assets and losses carried forward are adjusted for
            inflation
            based on the increase in the Israeli consumer price index.
  Gains
            on
            sales of traded securities are taxable under the Inflationary Adjustments
            Law.
  *Taxation
            of Non-Resident Holders of Our Shares*
  Non-residents
            of Israel are subject to income tax on income accrued or derived from
            sources in
            Israel or received in Israel. Such sources of income include passive
            income such
            as dividends, royalties, interest and capital gain, as well as non-passive
            income from business conducted in Israel. Unless a different rate is
            provided in
            a treaty between Israel and the shareholder’s country of residence, dividends,
            other than bonus shares or stock dividends, not generated by an Approved
            Enterprise are subject to income tax at the rate of 25%, which is withheld
            at
            source. Under the U.S.-Israel tax treaty, these distributions to a Treaty
            U.S.
            Resident are subject to income tax at a maximum rate of 25%, or 12.5%
            if the
            Treaty U.S. resident is a U.S. corporation and holds at least 10% of
            our voting
            power, in general, in the current and preceding tax years. Dividends
            distributed
            from income generated by an Approved Enterprise are subject to 15% tax,
            which is
            withheld at source.
  90
 For
            information with respect to the applicability of Israeli capital gains
            taxes to
            the sale of our ordinary shares by United States residents, see “—Israeli
            Taxation of our Shareholders—Capital Gains Tax,” above.
  **United
            States Federal Income Tax Considerations with Respect to the Ownership
            and
            Disposition of Our Ordinary Shares**
  The
            following is a discussion of the material United States 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,” 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;
  ·
                  taxpayers
                      that are subject to the alternative minimum tax provisions
                      of the
                      Code;
  ·
                  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;
  ·
                  partnerships,
                      other passthrough entities, or persons who hold our ordinary
                      shares in a
                      partnership or other passthrough
                      entity;
  ·
                  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 either: (i) foreign, state or
            local tax laws on the ownership or disposition of our ordinary shares;
            or
            (ii) United States federal and state estate and/or gift
            taxation.
  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 United
                      States federal income tax purposes;
  91
 ·
                  a
                      corporation or partnership (or other entity treated as a corporation
                      or
                      partnership for United States federal income tax purposes)
                      created or
                      organized in the United States or under the laws of the United
                      States or
                      of any State or the District of
                      Columbia;
  ·
                  an
                      estate the income of which is includible in gross income for
                      United States
                      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.
   Material
            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
            in his or
            her particular circumstances.**
  *Dividend
            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 Israeli withholding tax thereon) will be includible for United States
            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%), 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) for any year, dividends paid on
            our ordinary shares in such year or in the following 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 such distribution exceeds our earnings and profits and provided
            that
            we were not a passive foreign investment company, or PFIC, such distribution
            will be treated as a non-taxable return of capital to the extent of the
            U.S.
            Holder’s adjusted 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 Israeli
            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 will 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.
  92
 Subject
            to certain conditions and limitations set forth in the Code, U.S. Holders
            generally will be able to elect to claim a credit against their United
            States
            federal income tax liability for any Israeli 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
            will
            be treated as income from sources outside the United States and generally
            will
            constitute foreign source “passive income” for U.S. foreign tax purposes or, in
            the case of a financial services entity, “financial services income” (and for
            tax years beginning after December 31, 2006, as “general category income”). In
            lieu of claiming a tax credit, U.S. Holders may instead claim a deduction
            for
            foreign taxes withheld, subject to certain limitations.
  **The
            rules relating to the determination of the amount of foreign 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.**
  *Sale
            or Exchange*
  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 United States 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. 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 will 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 foreign corporation is treated as a PFIC for United States federal
            income tax
            purposes if either:
  ·
                  75%
                      or more of its gross income (including the pro rata gross income
                      of any
                      company (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 the average value of its gross assets (including
                      the pro rata
                      fair market value of the assets of any company in which such
                      corporation
                      is considered to own 25% or more of the ordinary shares by
                      value) during
                      the taxable year produce or are held for the production of
                      passive
                      income.
  93
 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
            United States federal income tax purposes. Based upon our market capitalization
            during 2004 and 2005 and each year prior to 2001, we do not believe that
            we were
            a PFIC for any such year and 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
            years. We cannot assure you, however, that the 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 a subsequent
            year.
  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 distributions
                      in
                      respect of, our ordinary shares would be taxable as ordinary
                      income;
  ·
                  the
                      U.S. Holder would be required to allocate such dividend income
                      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 dividend payment 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
                      dividend
                      payment 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 decedent’s basis, if lower than the fair market
                      value.
  Although
            a determination as to a corporation’s PFIC status is made annually, an initial
            determination that a corporation is a PFIC for any taxable year generally
            will
            cause the above-described consequences to apply for all future years
            to U.S.
            Holders who held shares in the corporation at any time during a 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.
  94
 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;
  ·
                  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; and
  ·
                  the
                      U.S. Holder would not be required under these rules to include
                      any amount
                      in income for any taxable year for which we are not a
                      PFIC.
  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, and that certain classes of investors
            (for example, consolidated groups and grantor trusts) are subject to
            special
            rules regarding the QEF election.
  Under
            certain circumstances, a U.S. Holder may also obtain treatment similar
            to that
            afforded a shareholder who has made a timely QEF election by making an
            election
            in a year subsequent to the first 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 on the first day of the first QEF year for
            an amount
            equal to its fair market value and recognizing 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
            protective statement currently 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, an amount equal to the difference
            between the shareholder’s adjusted tax basis in the PFIC stock and its fair
            market value. Ordinary loss 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 and the interest charges (described above). A mark-to-market
            election applies for so long as our ordinary shares are “marketable,” and is
            irrevocable without obtaining the consent of the IRS and would continue
            to apply
            even in years that we were no longer a PFIC. 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.
  95
 U.S.
            Holders of our ordinary shares are urged to consult their tax advisors
            about the
            PFIC rules, including the advisability, procedure and timing of making
            a QEF
            election, in connection with their holding of our ordinary shares, including
            warrants or rights to acquire 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:
  ·
                  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,
  ·
                  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 certain other conditions
                      are met.
  ·
                  the
                      Non-U.S. Holder is subject to tax pursuant to the provisions
                      of United
                      States tax law applicable to U.S.
                      expatriates.
  *Information
            Reporting and Backup Withholding*
  U.S.
            Holders generally are subject to information reporting requirements with
            respect
            to dividends paid in the United States on our ordinary shares. In addition,
            U.S.
            holders of our ordinary shares are subject to backup withholding (currently
            at a
            rate of 28%) upon any dividends paid in the United States on 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.
  U.S.
            Holders are subject to information reporting on proceeds paid from the
            sale,
            exchange, redemption or other disposition of our ordinary shares and
            also to
            backup withholding (currently at a rate of 28%) on such proceeds unless
            the U.S.
            Holder provides an IRS Form W-9 or otherwise establishes an
            exemption.
  Non-U.S.
            Holders generally are not subject to information reporting or back-up
            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 Internal Revenue Service.
  96
 **F.**
                  **DIVIDENDS
                      AND PAYING AGEN****T****S**
  Not
            applicable.
  **G.**
                  **STATEMENT
                      BY EXPER****T****S**
  Not
            applicable.
  **H.**
                  **DOCUMENTS
                      ON DISPLA****Y**
  We
            are
            subject to the informational requirements of the Securities Exchange
            Act of
            1934, as amended, applicable to foreign private issuers and fulfil the
            obligation with respect to such requirements by filing reports with the
            Securities and Exchange Commission. 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
            Securities and Exchange Commission as frequently or as promptly as United
            States
            companies whose securities are registered under the Exchange Act. You
            may read
            and copy any document we file with the Securities and Exchange Commission
            without charge at the Securities and Exchange Commission’s public reference room
            at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material
            may
            be obtained by mail from the Public Reference Branch of the Securities
            and
            Exchange Commission at such address, at prescribed rates. Please call
            the
            Securities and Exchange Commission at l-800-SEC-0330 for further information
            on
            the public reference room. A copy of each report submitted in accordance
            with
            applicable United States law is also available for public review at our
            principal executive offices.
  In
            addition, the Securities and Exchange Commission maintains an Internet
            website
            at http://www.sec.gov that contains reports, proxy statements, information
            statements and other material that are filed through the Securities and
            Exchange
            Commission’s Electronic Data Gathering, Analysis and Retrieval, or 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
                      INFORMATI****O****N**
  97
 Not
            applicable.
  **ITEM
                    11.**
                  **QUANTITATIVE
                      AND QUALITATIVE DISCLOSURES ABOUT MARKET RI****S****K**
  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. During
            2004,
            in order to protect ourselves against the volatility of future cash flows
            caused
            by changes in foreign exchange rates, we used currency forward contracts
            and put
            and call options. We hedge the majority of our forecasted expenses denominated
            in NIS. During
            the year ended December 31, 2005 we recognized  gains
            of $80,000 as a result of these derivatives. All amounts have been
            included in salary expenses in the statement of operations .
            Our
            hedging program reduces, but does not eliminate, the impact of foreign
            currency
            rate movements. We have, based on our past experience, concluded that
            there is
            no material foreign exchange rate exposure.
  Our
            investment portfolio includes held to maturity marketable securities. The
            contractual cash flows of these investments are either guaranteed by
            the U.S.
            government or an agency of the U.S. government or were issued by highly
            rated
            corporations. Since
            we
            generally do not intend to sell these securities before their maturity
            date, we
            do not attempt to reduce our exposure to changes in interest rates.
 **ITEM
                      12.**
                    **DESCRIPTION
                          OF SECURITIES OTHER THAN EQUITY SECURITI****E****S**
  Not
              applicable.
  98
 **PART
            II**
  **ITEM
                      13.**
                    **DEFAULTS,
                            DIVIDEND ARREARAGES AND DELINQUENCI****E****S**
 Not
            applicable.
  **ITEM
                      14.**
                    **MATERIAL****MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
                            OF
                            PROCEED****S**
 **A.
            to D.** Not
            applicable.
  **E.**  **USE
            OF PROCEEDS**
  The
            effective date of the registration statement (No. 333-11572) for our
            initial
            public offering of our ordinary shares, par value NIS 0.01 per share,
            was
            March 22, 2000. The offering commenced on March 23, 2000, and
            terminated after the sale of all the securities registered. The managing
            underwriter of the offering was CIBC World Markets. We registered 5,750,000
            ordinary shares in the offering, including shares issued pursuant to
            the
            exercise of the underwriter’s over-allotment option. We sold all of the
            5,750,000 ordinary shares at an aggregate offering price of $115 million
            ($20.00
            per share). Under the terms of the offering, we incurred underwriting
            discounts
            of approximately $8 million. We also incurred other expenses of approximately
            $3.2 million in connection with the offering. None of the expenses consisted
            of
            amounts paid directly or indirectly to any of our directors, officers,
            general
            partners or their associates, any persons owning 10% or more of any class
            of our
            equity securities, or any of our affiliates. The net proceeds that we
            received
            as a result of the offering were approximately $104 million. None of
            the net
            proceeds was paid, directly or indirectly, to any of our directors or
            officers,
            or their associates, any persons owning 10% or more of any class of our
            equity
            securities, or any of our affiliates. From March 23, 2000 to
            December 31, 2005 the net offering proceeds were used to finance the
            continued growth including acquisitions of our business and for general
            corporate purposes.
  **ITEM
                      15.**
                    **CONTROLS
                            AND PROCEDUR****E****S**
 Our
            chief
            executive officer and chief financial officer, after evaluating the
            effectiveness of our disclosure controls and procedures (as defined in
            Rule
            13a−15(e) of the Securities Exchange Act of 1934, as amended) as of December
            31,
            2005, have concluded that, as of such date, our disclosure controls and
            procedures were effective to ensure that information required to be disclosed
            by
            us in reports that we file or submit under the Exchange Act is accumulated
            and
            communicated to our management, including our chief executive officer
            and chief
            financial officer, to allow timely decisions regarding required disclosure
            and
            is recorded, processed, summarized and reported within the periods specified
            by
            the SEC’s rules and forms.
  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
                      16A.**
                    **AUDIT
                          COMMITTEE FINANCIAL EXPE**R****T****
 Our
            board
            of directors has determined that Professor Amit, a member of our audit
            committee, is qualified as an “audit committee financial expert” as defined in
            the applicable regulations.
  99
 **ITEM
                      16B.**
                    ****CODE
                          OF ETHICS AND CODE OF CONDUC****T****
 In
            2003
            we adopted a Code of Ethics that applies to our CEO, CFO and all other
            senior
            officers. This Code of Ethics was filed as an exhibit to our 2003 Annual
            Report.
 **ITEM
                      16C.**
                    **PRINCIPAL
                          ACCOUNTANT FEES AND SERVIC**E****S****
 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, 2004 and December 31,
            2005:
  **Fee
                      Category**
                  
                  **2004
                      Fees**
                  
                  **2005
                      Fees**Audit
                      Fees
                  
                  $
                  172,500
                  
                  $
                  191,000Audit-Related
                      Fees
                  
                  $
                  71,500
                  
                  $
                  18,864Tax
                      Fees
                  
                  $
                  105,200
                  
                  $
                  69,645Total
                      Fees
                  
                  $
                  349,200
                  
                  $
                  279,509
  *Audit
            Fees:* Consists
            of the aggregate fees billed 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.” In 2004, these
            services primarily consist of due diligence services related to the interWAVE
            acquisition.
  *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 2005 and
            2004.
  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.
  100
 **ITEM
                      16D.**
                    **EXEMPTIONS
                          FROM THE LISTING STANDARDS FOR AUDIT COMMITTE**E****S****
 Not
            applicable.
  **ITEM
                      16E.**
                    **PURCHASES
                          OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASE**S****
 Not
            applicable.
  **PART
            III**
   **ITEM
                      16.**
                    **FINANCIAL
                            STATEMEN****T****S**
 We
            have
            responded to Item 18 in lieu of this item.
   **ITEM
                      17.**
                    **FINANCIAL
                            STATEMENT****S**
 The
            financial statements required by this item are found at the end of this
            annual
            report, beginning on page F-1.
  101
  **ITEM
                      18.**
                    **EXHIBIT****S**
 The
            exhibits filed with or incorporated into this annual report are listed
            on the
            index of exhibits below.
  Exhibit
                      No.
                  Description1.1
                  Memorandum
                      of Association (English translation accompanied by Hebrew original)
                      (1)1.2
                  Articles
                      of Association(1)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
                      Officers4.3
                  Addendum,
                      dated September 2000, to Lease Agreement between the Registrant and
                      Bet Dror Ltd. and Ziviel Investments Ltd. (English summary
                      accompanied by
                      Hebrew original)(4)4.4
                  Sublease
                      Agreement, dated July 5, 2001, between Floware Wireless Systems Ltd.
                      and Ceragon Networks Ltd. (English summary accompanied by Hebrew
                      original)(4)4.5
                  Amalgamation
                      Agreement, by and among interWAVE Communications, Ltd, Alvarion
                      Mobile,
                      Inc. and Alvarion Ltd., dated as of 27 July, 2004 (5)8
                  Subsidiaries
                      of Alvarion Ltd.*10.1
                  Consent
                      of Kost, Forer, Gabay & Kasierer *11
                  Code
                      of Conduct (6)12.1
                  Certification
                      of Chief Executive Officer required by Rules 13a-14(a) and
                      Rule 15d-14(a)
                      under the Securities Exchange Act of 1934, as amended *12.2
                  Certification
                      of Chief Financial Officer required by Rules 13a-14(a) and
                      Rule 15d-14(a)
                      under the Securities Exchange Act of 1934, as amended *13.1
                  Certification
                      of the Chief Executive Officer pursuant to 18 U.S.C Section
                      1350, as
                      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002
                      *13.2
                  Certification
                      of the Chief Financial Officer pursuant to 18 U.S.C Section
                      1350, as
                      adopted 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, 2001
  (5)
                  Incorporated
                      by reference to the Annual Report on Form 20-F for the fiscal
                      period
                      ending December 31, 2004
  (6)
                  Incorporated
                      by reference to the Annual Report on Form 20-F for the fiscal
                      period
                      ending December 31, 2003
  102
 
 **SIGNATURE** **S**
  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.
  ALVARION
                    LTD.By:
                  /s/ Tzvika
                    FriedmanTzvika
                    Friedman
                    Chief
                      Executive OfficerDate:
                    May 11, 2006
 103
 EXHIBIT
            INDEX
  Exhibit
                      No.
                  Description1.1
                  Memorandum
                      of Association (English translation accompanied by Hebrew original)
                      (1)1.2
                  Articles
                      of Association (1)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
                      Officers4.3
                  Addendum,
                      dated September 2000, to Lease Agreement between the Registrant and
                      Bet Dror Ltd. and Ziviel Investments Ltd. (English summary
                      accompanied by
                      Hebrew original) (4)4.4
                  Sublease
                      Agreement, dated July 5, 2001, between Floware Wireless Systems Ltd.
                      and Ceragon Networks Ltd. (English summary accompanied by Hebrew
                      original)
                      (4)4.5
                  Amalgamation
                      Agreement, by and among interWAVE Communications, Ltd, Alvarion
                      Mobile,
                      Inc. and Alvarion Ltd., dated as of 27 July, 2004 (5)8
                  Subsidiaries
                      of Alvarion Ltd.*10.1
                  Consent
                      of Kost, Forer, Gabay & Kasierer *11
                  Code
                      of Conduct (6)12.1
                  Certification
                      of Chief Executive Officer required by Rules 13a-14(a) and
                      Rule 15d-14(a)
                      under the Securities Exchange Act of 1934, as amended *12.2
                  Certification
                      of Chief Financial Officer required by Rules 13a-14(a) and
                      Rule 15d-14(a)
                      under the Securities Exchange Act of 1934, as amended *13.1
                  Certification
                      of the Chief Executive Officer pursuant to 18 U.S.C Section
                      1350, as
                      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002
                      *13.2
                  Certification
                      of the Chief Financial Officer pursuant to 18 U.S.C Section
                      1350, as
                      adopted 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, 2001
  (5)
                  Incorporated by reference to the Annual Report
                    on Form
                    20-F for the fiscal period ending December 31,
                    2004
  (6)
                  Incorporated by reference to the Annual Report
                    on Form
                    20-F for the fiscal period ending December 31,
                    2003
  104




**ALVARION
        LTD. AND ITS SUBSIDIARIES**
  **CONSOLIDATED
        FINANCIAL STATEMENTS**
  **AS
        OF DECEMBER 31, 2005**
  **IN
        U.S. DOLLARS**
 
 
 **INDEX**
 
 
 **Page****Reports
                  of Independent Registered Public Accounting Firm**
              **F-2****Consolidated
                  Balance Sheets**
              **F-3
                  - F-4****Consolidated
                  Statements of Operations**
              **F-5****Statements
                  of Changes in Shareholders' Equity**
              **F-6****Consolidated
                  Statements of Cash Flows**
              **F-7
                  - F-8****Notes
                  to Consolidated Financial Statements**
              **F-9
                  - F-44**
 
 
 
 
 **-
        - - - - - -**
 
 
 
 
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 **To
        the Shareholders of**
 
 **ALVARION
        LTD.**
 
 We
        have
        audited the accompanying consolidated balance sheets of Alvarion Ltd. ("the
        Company") and its subsidiaries as of December 31, 2004 and 2005, and the
        related
        consolidated statements of operations, changes in shareholders' equity and
        cash
        flows for each of the three years in the period ended December 31, 2005.
        These
        financial statements are the responsibility of the Company's management.
        Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
  We
        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 the financial
        statements are free of material misstatement. We
        were
        not engaged to perform an audit of the Company's internal control over financial
        reporting. Our
        audit included consideration of internal control over financial reporting
        as a
        basis for designing audit procedures that are appropriate in the circumstances,
        but not for the purposes of expressing an opinion on the effectiveness of
        the
        Company's internal control over financial reporting. Accordingly, we express
        no
        such opinion. An audit also includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements assessing
        the
        accounting principles used and significant estimates made by management,
        and
        evaluating the overall financial statement presentation. We believe that
        our
        audits 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 at December 31, 2004 and 2005, and the consolidated
        results of their operations and their cash flows for each of the three years
        in
        the period ended December 31, 2005, in conformity with U.S generally accepted
        accounting principles.
 
  Tel-Aviv,
                  Israel
              KOST
                  FORER GABBAY & KASIERERMarch
                  27, 2006
              A
                  Member of Ernst & Young Global
 
 F-2
 **ALVARION
        LTD. AND ITS SUBSIDIARIES**
  **CONSOLIDATED
        BALANCE SHEETS**
 
 **U.S.
        dollars in thousands**
  **December
                  31,****2004**
              
              **2005**ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              18,710
              
              $
              41,372Short-term
                  bank deposits
              
              
              9,325
              
              
              6,838Marketable
                  securities (Note 3)
              
              
              31,430
              
              
              47,349Trade
                  receivables (net of allowance for doubtful accounts of $ 960 and
                  $ 1,268 at December 31, 2004 and 2005, respectively)
              
              
              28,148
              
              
              39,271Other
                  accounts receivable and prepaid expenses (Note 4)
              
              
              6,492
              
              
              6,179Inventories
                  (Note 5)
              
              
              41,328
              
              
              43,363Totalcurrent assets
              
              
              135,433
              
              
              184,372LONG-TERM
                  INVESTMENTS:Long-term
                  bank deposits
              
              
              17,167
              
              
              1,745Marketable
                  securities (Note 3)
              
              
              56,050
              
              
              17,016Long-term
                  receivables
              
              
              456
              
              
              -Severance
                  pay fund
              
              
              7,025
              
              
              7,685Totallong-term investments
              
              
              80,698
              
              
              26,446PROPERTY
                  AND EQUIPMENT, NET (Note 6)
              
              
              11,925
              
              
              11,072INTANGIBLE
                  ASSETS, NET (Note 7)
              
              
              15,229
              
              
              10,862GOODWILL
              
              
              85,250
              
              
              85,250Totalassets
              
              $
              328,535
              
              $
              318,002
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-3
 ALVARION
        LTD. AND ITS
        SUBSIDIARIES
 
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **U.S.
        dollars in thousands, except share data**
 
 
 **December
                  31,****2004**
              
              **2005**LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Current
                  maturities of long-term debt (Note 9)
              
              $
              1,742
              
              $
              1,757Trade
                  payables
              
              
              26,481
              
              
              29,093Other
                  accounts payable and accrued expenses (Note 8)
              
              
              53,869
              
              
              50,063Totalcurrent liabilities
              
              
              82,092
              
              
              80,913LONG-TERM
                  LIABILITIES:Long-term
                  debt (Note 9)
              
              
              3,505
              
              
              1,749Accrued
                  severance pay
              
              
              10,126
              
              
              11,007Totallong-term liabilities
              
              
              13,631
              
              
              12,756COMMITMENTS
                  AND CONTINGENT LIABILITIES (Note 11)SHAREHOLDERS'
                  EQUITY (Note 12):Share
                  capital -Ordinary
                  shares of NIS 0.01 par value:Authorized:
                  85,080,000 shares at December 31, 2004 and 2005; Issued: 61,750,002
                  and
                  63,197,765 shares at December 31, 2004 and 2005, respectively;
                  Outstanding: 57,953,229 and 59,400,992 shares at December 31, 2004
                  and 2005, respectively
              
              
              157
              
              
              160Additional
                  paid-in capital
              
              
              388,261
              
              
              391,797Treasury
                  shares at cost 3,796,773 shares at December 31, 2004 and
                  2005
              
              
              (7,876
              )
              
              (7,876
              )Deferred
                  stock compensation
              
              
              (736
              )
              
              (173
              )Accumulated
                  other comprehensive income
              
              
              226
              
              
              263Accumulated
                  deficit
              
              
              (147,220
              )
              
              (159,838
              )Totalshareholders' equity
              
              
              232,812
              
              
              224,333Totalliabilities and shareholders' equity
              
              $
              328,535
              
              $
              318,002
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 F-4
 ALVARION
        LTD. AND ITS
        SUBSIDIARIES
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 
 **U.S.
        dollars in thousands, except share and per share data**
 
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Sales
                  (Notes 14)
              
              $
              127,208
              
              $
              201,507
              
              $
              195,715Cost
                  of sales
              
              
              68,595
              
              
              102,329
              
              
              98,315Write-off
                  of excess inventory and provision for inventory purchase commitments
                  (Note
                  2g)
              
              
              6,562
              
              
              11,412
              
              
              8,124Gross
                  profit
              
              
              52,051
              
              
              87,766
              
              
              89,276Operating
                  costs and expenses:Research
                  and development, net (Note 15a)
              
              
              23,766
              
              
              27,816
              
              
              38,921Selling
                  and marketing
              
              
              33,000
              
              
              39,038
              
              
              48,794General
                  and administrative
              
              
              6,417
              
              
              9,741
              
              
              11,495Merger
                  and acquisition related expenses
              
              
              2,201
              
              
              369
              
              
              868Amortization
                  of intangible assets
              
              
              2,606
              
              
              2,779
              
              
              4,367In-process
                  research and development write-off
              
              
              —
              
              
              10,993
              
              
              —Total
                  operating costs and expenses
              
              
              67,990
              
              
              90,736
              
              
              104,445Operating
                  loss
              
              
              (15,939
              )
              
              (2,970
              )
              
              (15,169
              )Financial
                  income, net (Note 15c)
              
              
              4,127
              
              
              3,821
              
              
              2,551Net
                  income (loss)
              
              $
              (11,812
              )
              $
              851
              
              $
              (12,618
              )Net
                  earnings (loss) per share (Note 15d):Basic
              
              $
              (0.23
              )
              $
              0.02
              
              $
              (0.22
              )Diluted
              
              $
              (0.23
              )
              $
              0.01
              
              $
              (0.22
              )
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-5
 ALVARION
        LTD. AND ITS
        SUBSIDIARIES
 
 **STATEMENTS
        OF CHANGES IN SHAREHOLDERS' EQUITY**
 
 **U.S.
        dollars in thousands, except share data**
 
 **Ordinary
                  shares**
              
              **Additional
                  paid-in**
              
              **Treasury**
              
              **Deferred**
                **stock**
              
              **Other
                  accumulated comprehensive**
              
              **Accumulated**
              
              **Total**
                **comprehensive**
              
              **Total
                  shareholders'****Number**
              
              **Amount**
              
              **capital**
              
              **shares**
              
              **compensation**
              
              **income**
              
              **deficit**
              
              **income**
              
              **equity**Balance
                  at January 1, 2003
              
              
              51,915,629
              
              $
              142
              
              
              370,978
              
              $
              (6,543
              )
              $
              (488
              )
              $
              —
              
              $
              (136,259
              )
              
              
              
              $
              227,830Exercise
                  of employee stock options
              
              
              2,607,138
              
              
              6
              
              
              4,922
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              
              
              
              4,928Purchase
                  of Treasury shares
              
              
              (701,200
              )
              
              —
              
              
              —
              
              
              (1,333
              )
              
              —
              
              
              —
              
              
              —
              
              
              
              
              
              (1,333
              )Deferred
                  stock compensation related to options granted to a
                  director
              
              
              —
              
              
              —
              
              
              183
              
              
              —
              
              
              (183
              )
              
              —
              
              
              —
              
              
              
              
              
              —Amortization
                  of deferred stock compensation related to options granted to a
                  director
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              23
              
              
              —
              
              
              —
              
              
              
              
              
              23Issuance
                  of warrant pursuant to acquisition of InnoWave
              
              
              —
              
              
              —
              
              
              78
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              
              
              
              78Amortization
                  of deferred stock compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              488
              
              
              —
              
              
              —
              
              
              
              
              
              488Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (11,812
              )
              
              
              
              
              (11,812
              )Balance
                  at December 31, 2003
              
              
              53,821,567
              
              
              148
              
              
              376,161
              
              
              (7,876
              )
              
              (160
              )
              
              —
              
              
              (148,071
              )
              
              
              
              
              220,202Exercise
                  of warrants and employee stock options
              
              
              4,131,662
              
              
              9
              
              
              9,813
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              
              
              
              9,822Deferred
                  stock compensation related to options granted to employee
              
              
              —
              
              
              —
              
              
              293
              
              
              —
              
              
              (293
              )
              
              —
              
              
              —
              
              
              
              
              
              —Assumption
                  of options granted to former interWAVE employees
              
              
              —
              
              
              —
              
              
              1,994
              
              
              —
              
              
              (343
              )
              
              —
              
              
              —
              
              
              
              
              
              1,651Amortization
                  of deferred stock compensation related to options granted to a
                  director
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              60
              
              
              —
              
              
              —
              
              
              
              
              
              60Comprehensive
                  income:Unrealized
                  gains on foreign currency cash flow hedges
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              226
              
              
              —
              
              $
              226
              
              
              226Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              851
              
              
              851
              
              
              851Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,077Balance
                  at December 31, 2004
              
              
              57,953,229
              
              
              157
              
              
              388,261
              
              
              (7,876
              )
              
              (736
              )
              
              226
              
              
              (147,220
              )
              
              
              
              
              232,812Exercise
                  of employee stock options
              
              
              1,447,763
              
              
              3
              
              
              3,536
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              
              
              
              3,539Amortization
                  of deferred stock compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              563
              
              
              —
              
              
              —
              
              
              
              
              
              563Unrealized
                  gains on foreign currency cash flow hedges
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              37
              
              
              —
              
              $
              37
              
              
              37Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (12,618
              )
              
              (12,618
              )
              
              (12,618
              )Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (12,581
              )Balance
                  at December 31, 2005
              
              
              59,400,992
              
              $
              160
              
              $
              391,797
              
              $
              (7,876
              )
              $
              (173
              )
              $
              263
              
              $
              (159,838
              )
              
              
              
              $
              224,333
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 F-6
 **ALVARION
        LTD. AND ITS SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 **U.S.
        dollars in thousands**
 
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              (11,812
              )
              $
              851
              
              $
              (12,618
              )Adjustments
                  required to reconcile net income (loss) to net cash provided by
                  (used in)
                  operating activities:Depreciation
              
              
              4,128
              
              
              4,762
              
              
              4,937Amortization
                  of deferred stock compensation
              
              
              511
              
              
              60
              
              
              563Interest,
                  amortization of premium and accretion of discounts on held-to-maturity
                  marketable securities, bank deposits and other long-term
                  liabilities
              
              
              148
              
              
              633
              
              
              823In-process
                  research and development write-off
              
              
              —
              
              
              10,993
              
              
              —Amortization
                  of other intangible assets
              
              
              2,606
              
              
              2,779
              
              
              4,367Increase
                  in trade receivables
              
              
              (5,033
              )
              
              (3,697
              )
              
              (11,658
              )Decrease
                  in long term receivables and discount accretion related to long
                  term
                  receivables
              
              
              590
              
              
              1,131
              
              
              792Decrease
                  (increase) in other accounts receivable and prepaid expenses
              
              
              915
              
              
              (486
              )
              
              549Decrease
                  (increase) in inventories
              
              
              (934
              )
              
              24
              
              
              (2,035
              )Increase
                  (decrease) in trade payables
              
              
              6,524
              
              
              (5,952
              )
              
              2,612Increase
                  (decrease) in other accounts payable and accrued expenses
              
              
              3,280
              
              
              11,066
              
              
              (3,767
              )Accrued
                  severance pay, net
              
              
              561
              
              
              826
              
              
              221Others
              
              
              95
              
              
              —
              
              
              —Net
                  cash provided by (used in) operating activities
              
              
              1,579
              
              
              22,990
              
              
              (15,214
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (3,105
              )
              
              (3,442
              )
              
              (4,084
              )Proceeds
                  from bank deposits
              
              
              8,025
              
              
              132,767
              
              
              30,375Investment
                  in bank deposits
              
              
              (14,925
              )
              
              (109,097
              )
              
              (13,200
              )Investment
                  in held-to-maturity
                  marketable securities
              
              
              (55,232
              )
              
              (63,398
              )
              
              (58,778
              )Proceeds
                  from maturity of held-to-maturity marketable securities
              
              
              69,861
              
              
              56,416
              
              
              81,766Proceeds
                  from sale of held-to-maturity marketable securities
              
              
              1,137
              
              
              —
              
              
              —Cash
                  and cash equivalents used in the acquisition of interWAVE (a) and
                  InnoWave
                  (b)
              
              
              (9,334
              )
              
              (47,907
              )
              
              —Net
                  cash provided by (used in) investing activities
              
              
              (3,573
              )
              
              (34,661
              )
              
              36,079Cash
                  flows from financing activities:Proceeds
                  from exercise of warrants and employee stock options
              
              
              4,928
              
              
              9,822
              
              
              3,539Repayment
                  of long term debt
              
              
              —
              
              
              (1,764
              )
              
              (1,742
              )Purchase
                  of Treasury shares
              
              
              (1,333
              )
              
              —
              
              
              —Proceeds
                  from long-term debt
              
              
              6,900
              
              
              —
              
              
              —Settlement
                  of an OCS long-term liability
              
              
              (8,534
              )
              
              —
              
              
              —Net
                  cash provided by financing activities
              
              
              1,961
              
              
              8,058
              
              
              1,797Increase
                  (decrease) in cash and cash equivalents
              
              
              (33
              )
              
              (3,613
              )
              
              22,662Cash
                  and cash equivalents at the beginning of the year
              
              
              22,356
              
              
              22,323
              
              
              18,710Cash
                  and cash equivalents at the end of the year
              
              $
              22,323
              
              $
              18,710
              
              $
              41,372Supplemental
                  disclosure of cash flows activities:Cash
                  paid during the year for interest
              
              $
              334
              
              $
              120
              
              $
              90Non-cash
                  transactions:Purchase
                  of property and equipment against trade payables
              
              $
              128
              
              $
              —
              
              $
              —
 
 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,****2003**
              
              **2004**
              
              **2005**(a) Cash
                  and cash equivalents used in the merger with interWAVE (see also
                  Note
                  1d):Net fair value of the assets acquired and liabilities assumed at
                the
                merger date was as follows:Working
                  capital, net(excluding cash and cash equivalents)
              
              
              
              
              $
              (15,236
              )Property
                  and equipment
              
              
              
              
              
              1,434Long
                  term receivables
              
              
              
              
              
              199In-process
                  research and development
              
              
              
              
              
              10,993Current
                  technology
              
              
              
              
              
              3,450Customer
                  relationships
              
              
              
              
              
              1,233Trade
                  name and trademark
              
              
              
              
              
              1,160Goodwill
              
              
              
              
              
              47,01950,252Deferred
                  stock compensation
              
              
              
              
              
              (1,651
              )Accrued
                  expenses related to the acquisition
              
              
              
              
              
              (694
              )$
              47,907(b) Cash
                  and cash equivalents used in the acquisition of InnoWave (see also
                  Note
                  1c):Net fair value of the assets acquired and liabilities assumed at
                  the
                  acquisition date was as follows:Working
                  capital, net
              
              $
              3,137Long-term
                  receivables
              
              
              1,512Property
                  and equipment
              
              
              2,200Technology
                  and customer relations
              
              
              1,572Goodwill
              
              
              9919,412Issuance
                  of warrant
              
              
              (78
              )$
              9,334
 
 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 data**
 **NOTE
                  1:-**
              **GENERAL**
 
 a.
              Alvarion
                  Ltd. together with its worldwide subsidiaries ("the Company") is
                  a
                  provider of wireless broadband systems. The Company supplies carriers,
                  ISPs and private network operators with WiMAX (Worldwide Interoperability
                  for Microwave Access) and other wireless broadband solutions as
                  well as
                  compact cellular networks to developing countries and remote areas.
                  The
                  Company's products cover the full range of frequency bands with
                  both fixed
                  and mobile solutions, enabling the delivery of business and residential
                  broadband access, corporate VPNs (Virtual Private Network), toll
                  quality
                  telephony, mobile base station feeding, hotspot coverage extension,
                  community interconnection, public safety communications, and mobile
                  voice
                  and data. Extending coverage of cellular networks to developing
                  countries
                  and other hard-to-serve areas, the Company offers complete and
                  scalable
                  mobile network solutions that feature a low cost of entry, local
                  switching, and integrated VAS (Value Added Services) functionality.
 
 In
        2005
        and following the acquisition of interWAVE Communications International,
        Ltd
        (see note 1 d), the Company determined that two reporting units exist - the
        WiMax and wireless broadband access unit ("BWA"), and the Cellular Mobile
        unit
        ("CMU"), former interWAVE business.
 As
        for
        disclosure about segments and related information, see Note 14.
 
 b.
              Alvarion
                  Ltd. has wholly-owned active subsidiaries: in the United States,
                  France,
                  Romania, Brazil, Hong-Kong, Japan, Mexico, Poland, Israel, Uruguay,
                  China,
                  Ireland, Spain and Philippines primarily engaged in marketing,
                  pre-sales,
                  sales and developing activities.
 
 c.  Acquisition
        of InnoWave Wireless Systems:
 
 On
        April
        1, 2003, the Company entered into an asset purchase agreement pursuant to
        the
        terms of which the Company acquired certain assets and assumed certain
        liabilities of InnoWave Wireless Systems Ltd. ("InnoWave") for an aggregate
        purchase price of $ 9,428. The purchase price consists of a cash payment
        of $
        9,100, fair value of $ 78 related to a warrant issued to the selling company
        ("ECI") to purchase 200,000 Ordinary shares of the Company and $ 250 acquisition
        related costs.
 
 InnoWave
        was a provider of fixed wireless wideband voice and data point-to-multipoint
        solutions.
 
 The
        acquisition of InnoWave strengthens and enlarges the Company's diversified
        customer base and distributions channels and enables the Company to offer
        its
        customers with a comprehensive range of integrated wireless broadband access
        products and platforms.
 
 The
        acquisition has been accounted for using the purchase method of accounting
        as
        determined in SFAS No.141,"Business Combinations" ("SFAS No.141") and
        accordingly, the purchase price has been allocated to the assets acquired
        and
        the liabilities assumed based on the estimated fair value at the date of
        acquisition.
 F-9
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
                  1:-**
              **GENERAL
                  (Cont.)**
 
 Based
        upon a valuation of tangible and intangible assets acquired, the Company
        has
        allocated the total cost of the acquisition, as follows:
 
 **April
                  1,**
                **200**3Current
                  assets
              
              $
              13,411Property
                  and equipment
              
              
              2,200Long-term
                  receivables
              
              
              1,512Intangible
                  assets:Technology
              
              
              1,072Customer
                  relations
              
              
              500Goodwill
              
              
              991Total
                  assets acquired
              
              
              19,686Liabilities
                  assumed:Current
                  liabilities
              
              
              (10,258
              )Total
                  liabilities assumed
              
              
              (10,258
              )Net
                  assets acquired
              
              $
              9,428
 
 The
        amount of the excess cost attributable to current technology of two products
        -
        the MGW and eMGW is $ 1,072 and was determined using the Income Approach
        on the
        basis of the present value of cash flows attributable to the current technology
        over expected future life.
 
 The
        value
        assigned to the customer relations amounted to $ 500. The Company's customer
        relations have been valued using the Income Approach. The valuation of the
        customer relations derives mostly from long standing relationships with
        customers with no contracts.
 
 The
        excess of the cost of $ 991 over the net amounts assigned to assets acquired
        and
        liabilities assumed is recognized as goodwill. An acquired workforce that
        does
        not meet the separability criteria has been included in the amount recognized
        as
        goodwill.
 
 The
        amounts allocated to intangible assets other than goodwill are amortized
        on a
        straight-line basis over a weighted average amortization period of 6.8 years,
        ranging between three and a half to eight years (see also Note 2k).
 
 The
        operations of InnoWave are included in the consolidated statements since
        April
        1, 2003.
 F-10
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  1:-**
              **GENERAL
                  (Cont.)**
 
 The
        unaudited pro forma information below assumes that the acquisition had been
        consummated on January 1, 2003 and includes the effect of amortization of
        intangible assets from that date. This data is presented for information
        purposes only and is not necessarily indicative of the results of future
        operations or the results that would have been achieved had the acquisition
        taken place on those dates. The pro forma information is as
        follows:
  **Year
                  ended**
                **December
                  31,****2003****Unaudited**Net
                  revenues
              
              $
              130,675Net
                  loss
              
              $
              (13,734
              )Basic
                  and diluted net loss per share
              
              $
              (0.26
              )
 
 d.  Acquisition
        of interWAVE Communications International, Ltd.:
 
 On
                  December 9, 2004, the Company entered into amalgamation agreement
                  with
                  interWAVE Communications International, Ltd. ("interWAVE") a publicly
                  traded company pursuant to the terms of which the Company acquired
                  interWave for an aggregate purchase price of $ 50,783. The purchase
                  price consists of a cash payment of $ 47,688, fair value of $ 1,651
                  in exchange for their previously held options and $ 1,444 acquisition
                  related costs.
 
 The
                  Company accounted for the assumed options under the accounting
                  guidelines
                  of Fin 44: "Accounting for certain transaction involving stock
                  compensation" and EITF 00-23"Issues
                  Related to the Accounting for Stock Compensation under APB Opinion
                  No.
                  25"
 
 The
                  fair value of the vested options should be accounted for as part
                  of the
                  purchase price of the acquired company. Unvested options granted
                  by the
                  Company in exchange for outstanding unvested options held by employees
                  of
                  InterWave should be considered part of the purchase price and accounted
                  for under SFAS 141 at fair value. However, since service was required
                  after the business combination consummation date in order to vest
                  in the
                  replacement awards, a portion of the unvested options' intrinsic
                  value was
                  allocated to unearned compensation cost and amortized over the
                  remaining
                  vesting period. The amount of the compensation cost to be recognized
                  as
                  unearned compensation cost is based on the portion of the intrinsic
                  value
                  at the consummation date related to the employee's future
                  service.
  F-11
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
  **NOTE
                  1:-**
              **GENERAL
                  (Cont.)**
 
 The
        Company determined the date of the fair value calculation by applying the
        guidelines set forth in Issue 13 of EITF 00-23 and EITF 99-12" Determination
        of
        the Measurement Date for the Market Price of Acquirer Securities Issued in
        a
        Purchase Business Combination" and should be based upon the intrinsic value
        on
        the consummation date.
 
 Hence,
        the measurement date was established on October 16, 2004, based on the average
        share price of the closing prices on the NASDAQ two days before and two days
        after the announcement date.
 
 The
        Company used the Black-Scholes options pricing model with the following
        assumptions:
 
 ·
              Dividend
                  yield of 0%
 ·
              Expected
                  life of 3 years
 ·
              Volatility
                  of 61%
 ·
              Risk
                  free interest rate of 3.32%.
 
 Based
        on
        the Black-Scholes model and the aforementioned assumptions the fair value
        of all
        the options assumed by the Company amounted to $1,995 and was allocated between
        the vested options and the unvested options as follows:
 The
        intrinsic value of the unvested options in the amount of $343 is allocated
        to
        unearned compensation cost and that amount is being amortized over the remaining
        vesting period. The remainder of $1,651, reflected the amount allocated to
        the
        purchase price.
 
 interWAVE
        was a provider of compact mobile network equipment and services, primarily
        aimed
        at low density markets in developing regions, as well as specialty vertical
        applications.
 
 The
        acquisition of interWAVE provides a complementary voice and data solution
        for
        both fixed and mobile operators in developing regions of the world, enlarges
        the
        Company's diversified customer base and sales channels, and increases the
        Company's technical expertise in design and deployment of mobile
        systems.
 
 The
        acquisition has been accounted for using the purchase method of accounting
        as
        determined in SFAS No.141. The results of operations have been included in
        the
        consolidated financial statements since December 9, 2004.
 
 Accordingly,
        the purchase price has been allocated to the assets acquired and the liabilities
        assumed based on the estimated fair value at the date of
        acquisition.
 
 The
        allocation period was closed in March 2005, when the Company determined that
        it
        is no longer waiting for information, which is known to be available or
        obtainable in order to properly identify and measure the fair value of the
        assets acquired and the liabilities assumed.
 F-12
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  1:-**
              **GENERAL
                  (Cont.)**
 
 Based
        upon a valuation of the tangible and intangible assets acquired and assumed
        liabilities, the Company has allocated the total cost of the acquisition,
        as
        follows:
 
 **December
                  9,**
                **2004**Current
                  assets
              
              $
              9,924Property
                  and equipment
              
              
              1,434Other
                  non current assets
              
              
              264Intangible
                  assets:Goodwill
              
              
              47,019In-process
                  research and development
              
              
              10,993Current
                  technology
              
              
              3,450Customer
                  relations
              
              
              1,233Trade
                  name and trademark
              
              
              1,160Total
                  assets acquired
              
              
              75,477Liabilities
                  assumed:Current
                  liabilities
              
              
              (24,694
              )Net
                  assets acquired
              
              $
              50,783
 
 The
        allocation of the intangibles assets was determined based on appraisals
        performed by an independent third party using several valuation
        approaches.
 
 The
        amount allocated to in-process research and development ("IPR&D") of the
        CDMA and a certain GSM technology was determined using the Income Approach.
        These technologies were considered to have no alternative future use other
        than
        the technological indications for which they were in development and no
        technological feasibility had been established. Accordingly, this amount
        was
        expensed in the consolidated statement of operations, upon consummation of
        the
        acquisition in accordance with FASB Interpretation No. 4, "Applicability
        of FASB
        Statement No. 2 to Business Combinations Accounted for by the Purchase Method"
        ("FIN 4").
 
 The
        amount of the excess cost attributable to current technology relates to GSM
        technology, other than the technology that was identified as IPR&D, was
        determined using the Income Approach on the basis of the present value of
        cash
        flows attributable to the current GSM technology and is amortized on a
        straight-line basis over expected future life of seven years. A seven year
        period was estimated based upon duration of the cash flow associated with
        the
        existing technology and management’s estimates of its useful life.
 F-13
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
                  1:-**
              **GENERAL
                  (Cont.)**
 
 The
        value
        assigned to the customer relations was determined using the Income Approach.
        This valuation is based upon backlog at the date of acquisition, historical
        revenues by customer and customer renewal rates, and is amortized on a
        straight-line basis over two years. A two-year period was estimated based
        upon a
        50% customer survival factor.
 
 The
        value
        of trade names and trademarks was based upon cost to generate. This cost
        was
        estimated based upon the historical advertising and promotion spending over
        the
        last two years and is amortized on a straight-line basis over two years based
        upon the expected transition time from the legacy hardware to the next
        generation hardware.
 
 The
        excess of the cost of $ 47,019 over the net of the amounts assigned to assets
        acquired and liabilities assumed is recognized as goodwill. An acquired
        workforce of $ 3,249, which did not meet the separability criteria has been
        included in the amount assigned to goodwill.
 
 The
        unaudited pro forma information below assumes that the acquisition had been
        consummated on January 1, 2003 and January 1, 2004, includes the effect of
        amortization of intangible assets and does not include the IPR&D write off
        from that date. This data is presented for information purposes only and
        is not
        necessarily indicative of the results of future operations or the results
        that
        would have been achieved had the acquisition taken place on those dates.
        The pro
        forma information is as follows:
 
 **Year
                  ended December 31,****2003**
              
              **2004****Unaudited**Net
                  revenues
              
              $
              163,435
              
              $
              233,921Net
                  loss
              
              $
              (26,495
              )
              $
              (4,108
              )Net
                  loss per share
              
              $
              (0.51
              )
              $
              (0.07
              )
 
 e.
              Concentration
                  of other risks
 
 During
        the years ended December 31, 2004 and 2005 one of the Company's customers,
        a
        large operator in Latin America (the "Operator"), has accounted for
        approximately 31% and 5% of the Company's annual revenues volume, respectively
        (see Note 14e).
 F-14
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES**
 
 The
        consolidated financial statements are prepared in accordance with generally
        accepted accounting principles in the United States ("U.S. GAAP").
 
 a.  Use
        of
        estimates:
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the amounts reported in the financial statements and accompanying
        notes.
        Actual results could differ from those estimates.
 
 b.
              Financial
                  statements in U.S. dollars
                  ("dollars"):
 
 A
        majority of the Company's revenues is generated in dollars. In addition,
        a
        substantial portion of the Company's costs is denominated and determined
        in
        dollars. The Company's management believes that the dollar is the primary
        currency in the 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.
 
 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
                  and long-term bank deposits:
 
 Bank
        deposits with maturities of more than three months and up to one year are
        included in short-term bank deposits. Bank deposits with maturities of one
        year
        or more are included in long-term bank deposits. As of December 31, 2004
        and
        2005, most of the bank deposits are in U.S. dollars and bear interest at
        a
        weighted average interest rate of 4.13% and 2.63% respectively. The deposits
        are
        presented at their cost, including accrued interest.
 F-15
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES (Cont.)**
 
 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
        when
        the Company has the positive intent and ability to hold the securities to
        maturity and are stated at amortized cost.
 
 In
        the
        years ended December 31, 2004 and 2005, 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, are included in the statements of
        operations.
 
 g.
              Inventories:
 
 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.
 
 Work
        in
        progress and finished products is 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, which approximates actual
        cost
        including direct and indirect manufacturing costs and related
        overhead.
 
 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
        2003, 2004 and 2005, the Company recorded inventories write-offs for inventory
        no longer required in a total amount of $ 5,255, $ 10,908 and $ 7,598,
        respectively and an additional $ 1,307, $ 504 and $ 526, respectively,
        related to the Company's commitments to purchase inventories no longer
        required.
 
 The
        purchase commitment liability is related to on-order inventory that is in
        excess
        of the Company's future demand forecasts, amounted to approximately $ 4,894
        and
        $ 2,410 as of December 31, 2004 and 2005, respectively.
 
 During
        2003, 2004 and 2005, as a result of the increase of the overall worldwide
        demand
        for broadband access solutions, the demand for the Company's products increased
        as well.
  F-16
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
  **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES (Cont.)******
 
 Consequently,
        the Company began utilizing part of the related products of its prior years'
        written-off components. In 2003, 2004 and 2005, approximately $6,133, $5,595
        and
        $5,959 respectively, of inventory previously written-off was used as products'
        components in the Company's ordinary production course and were sold as finished
        goods to end users . The sales of these related manufactured products were
        reflected in the Company's revenues without additional cost to the cost of
        sales
        in the period in which the inventory was utilized.
 
 h.
              Long-term
                  trade receivables
 
 Long-term
        receivables from InnoWave's acquisition carrying extended payment terms,
        were
        recorded at estimated present values determined based on appropriate interest
        rates and reported at their net amount in the accompanying financial statements.
        Imputed interest is recognized, using the effective interest method as a
        component of interest income in the accompanying statements of operations.
 
 i.
              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
                  -
                  20Computers
                  and manufacturing equipment
              
              15
                  - 33Motor
                  vehicles
              
              15Leasehold
                  improvements
              
              Over
                  the shorter of the related lease period or the life of the
                  asset
 
 j.
              Impairment
                  of long-lived assets:
 
 The
        Company's long-lived assets and certain identifiable intangible assets are
        reviewed for impairment in accordance with Statement of Financial Accounting
        Standard 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. During 2003,
        2004
        and 2005, no impairment losses have been identified.
 
 k.
              Other
                  intangible assets, net:
 
 Intangible
        assets acquired in a business combination should be amortized over their
        useful
        life using a method of amortization to reflect the pattern in which the economic
        benefits of the intangible assets are consumed or otherwise used up, in
        accordance with Statement of Accounting Standard No. 142, "Goodwill and Other
        Intangible Assets" ("SFAS No. 142"):
  F-17
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 *Current
        technology* - (i)
        the acquired Floware and interWAVE current technologies are being amortized
        over
        a period of seven years on the straight-line method and, (ii) the amount
        allocated to the InnoWave current technology is being amortized on a
        straight-line basis over 4.75 years and 7.75 years respectively reflecting
        different product amortization schedules.
 
 *Customer
        relations* - (i)
        The amount allocated to the customer relations of InnoWave is being amortized
        on
        a straight-line basis over 3.75 years reflecting the expected attrition in
        customer relationships. (ii) The amount allocated to the customer relations
        of
        interWAVE is being amortized on a straight-line basis over 2 years based
        upon a
        50% customer survival factor.
 
 *Trade
        name and trademark* -The
        amount allocated to the acquired Trade name and trademark of interWAVE was
        based
        upon cost to generate Trade name and trademark. This cost was estimated based
        upon the historical advertising and promotion spending over the last two
        years,
        due to the fact that the Company would not use interWAVE's name but would
        use
        the GSM product names. The amount allocated to trade name is being amortized
        on
        a straight-line basis over two years based upon the expected transition time
        from the legacy hardware to the next generation hardware.
 
 *Goodwill* -
        Goodwill represents the excess of the cost of businesses acquired over the
        fair
        value of the net assets acquired in the acquisition of Innowave, Interwave
        and
        Floware.
 
 SFAS
        142
        requires goodwill and indefinite lived intangible assets to be tested for
        impairment at least annually or between annual tests if certain events or
        indicators of impairments occur. The impairment tests consist of a comparison
        of
        the fair value of intangible assets with its carrying amount. If the carrying
        amount of the intangible assets exceeds its fair value, an impairment loss
        is
        recognized in an amount equal to that excess. Goodwill is tested for impairment
        at the reporting unit level by a comparison of the fair value of the reporting
        unit with its carrying amount
 
 On
        the
        date that the Company performed its annual impairment test, September 30,
        2005,
        the Company determined that two reporting units exist - the "BWA" unit and
        the
        former interWAVE business ("CMU") - (see also Note 1 a). Based on management
        projections, expected future discounted operating cash flows and market
        multiples, no indication of goodwill impairment was identified as of such
        date
        (see also note 16).
 
 l.
              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.
  F-18
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 m.
              Accounting
                  for stock-based compensation:
 
 The
        Company has elected to follow Accounting Principles Board Statement No. 25,
        "Accounting for Stock Options Issued to Employees" ("APB No. 25") and FASB
        Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
        Compensation" ("FIN No. 44") in accounting for its employee stock option
        plans.
        Under APB No. 25, when the exercise price of an employee stock option is
        equivalent to or above the market price of the underlying stock on the date
        of
        grant, no compensation expense is recognized.
 
 The
        Company adopted the disclosure provisions of Financial Accounting Standards
        Board Statement No. 148, "Accounting for Stock-Based Compensation - Transition
        and Disclosure" ("SFAS No. 148"), which amended certain provisions of SFAS
        123
        to provide alternative methods of transition for an entity that voluntarily
        changes to the fair value based method of accounting for stock-based employee
        compensation. The Company continues to apply the provisions of APB No. 25,
        in
        accounting for stock-based compensation.
 
 Pro
        forma
        information regarding the Company's net loss and net loss per share is required
        by SFAS No. 123 and has been determined as if the Company had accounted for
        its
        employee stock options under the fair value method prescribed by SFAS No.
        123.
 
 The
        fair
        value of options granted in 2003, 2004 and 2005 is amortized over their vesting
        period and estimated at the date of grant using a Black-Scholes options pricing
        model with the following weighted average assumptions:
 
 **2003**
              
              **2004**
              
              **2005**Dividend
                  yield
              
              
              0%
              
              
              0%
              
              
              0%Expected
                  volatility
              
              
              94%
              
              
              61%
              
              
              55%Risk-free
                  interest
              
              
              3%
              
              
              3.32%
              
              
              4.4%Expected
                  life of up to
              
              
              4
                  years
              
              
              3
                  years
              
              
              3
                  years
 
 Pro
        forma
        information under SFAS No. 123, is as follows:
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Net
                  income (loss) available to Ordinary shares - as reported
              
              $
              (11,812
              )
              $
              851
              
              $
              (12,618
              )Add
                  - stock-based employee compensation - intrinsic value
              
              
              511
              
              
              60
              
              
              563Deduct
                  - stock-based employee compensation -fair value
              
              
              (8,064
              )
              
              (6,541
              )
              
              (15,749
              )*Pro
                  forma net loss
              
              $
              (19,365
              )
              $
              (5,630
              )
              
              (27,804
              )Net
                  earnings (loss) per share:Basic
                  as reported
              
              $
              (0.23
              )
              $
              0.02
              
              $
              (0.22
              )Diluted
                  as reported
              
              $
              (0.23
              )
              $
              0.01
              
              $
              (0.22
              )Pro
                  forma basic and diluted net loss
              
              $
              (0.37
              )
              $
              (0.10
              )
              $
              (0.47
              )
 
 *)
              On
                  December 28, 2005, the Company accelerated the vesting of 1,834,452
                  options with a fair value amounting $ 5,224 -See also Note
                  12d.
  F-19
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 n.
              Revenue
                  recognition:
 
 The
        Company generates revenues from 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 deferred until the
        distributors resell the Company's products to their customers 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.
 
 o.
              Warranty
                  costs:
 
 The
        Company provides a 12 to 36 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 product is shipped. 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.
 F-20
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 Changes
        in the Company's warranty allowance during the period are as follows:
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Balance
                  at the beginning of the year
              
              $
              1,202
              
              $
              4,070
              
              $
              6,774Warranties
                  issued during the year
              
              
              4,529
              
              
              6,327
              
              
              4,592Settlements
                  made during the year
              
              
              (1,661
              )
              
              (3,623
              )
              
              (5,351
              )$
              4,070
              
              $
              6,774
              
              $
              6,015
 
 p.
              Research
                  and development:
 
 Research
        and development costs, net of grants received, are charged to the statement
        of
        operations as incurred.
 
 q.
              Grants
                  and participations:
 
 Royalty
        and non-royalty bearing grants from the Government of Israel 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 of research and development costs.
 
 r.
              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
        employees is fully provided by monthly deposits with severance pay funds,
        insurance policies and by an accrual. The value of these policies 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. The value of
        these
        policies is recorded as an asset in the Israeli companies' balance sheets.
 
 Severance
        pay expenses for the years ended December 31, 2003, 2004 and 2005, were
        $ 2,410, $ 3,016 and $ 3,580 , respectively.
  F-21
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 s.
              Advertising
                  expenses:
 
 Advertising
        expenses are carried to the statement of operations as incurred. Advertising
        expenses for the years ended December 31, 2003, 2004 and 2005, were $ 250,
        $ 466 and $ 680, respectively.
 
 t.
              Basic
                  and diluted net earnings (loss) per
                  share:
 
 Basic
        net
        earnings (loss) per share is computed based on the weighted average number
        of
        Ordinary shares outstanding during each year. Diluted net earnings (loss)
        per
        share is computed based on the weighted average number of Ordinary shares
        outstanding during each year, plus dilutive potential of Ordinary shares
        considered outstanding during the year, in accordance with Statement of
        Financial Standard No. 128, "Earnings Per Share." ("SFAS No. 128").
 
 The
        total
        weighted average number of shares related to the outstanding options and
        warrants excluded from the calculations of diluted net earning (loss) per
        share
        due to their anti-dilutive effect was 15,548,000, 555,000 and 12,122,000
        for the
        years ended December 31, 2003, 2004 and 2005, respectively.
 
 u.
              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,
        long-term bank deposits, marketable debt securities, trade receivables and
        long-term receivables.
 
 The
        majority of the Company's cash and cash equivalents, short-term bank deposits
        and long-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. Management believes that those corporations are financially
        sound,
        the portfolio is well diversified and, accordingly, minimal credit risk exists
        with respect to these marketable securities.
 
 The
        trade
        receivables and the long-term receivables of the Company and its subsidiaries
        are derived from sales to customers located primarily in North and South
        America, Asia, 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, to
        date,
        have not experienced material losses. An allowance for doubtful accounts
        is
        determined with respect to those amounts that the Company has determined
        to be
        doubtful of collection.
  F-22
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 During
        the year 2005, the Company recognized transactions of a sale of trade
        receivables to Israeli financial institutions (control and risk were fully
        transferred) in a total amount of $ 13,494 ,
        according to SFAS No. 140 "Accounting for Transfers and Servicing of Financial
        Assets and Extinguishments of Liabilities" ("SFAS 140"). As of December 31,
        2005, the company had a transaction that did not meet the guidance of SFAS
        140
        and is presented as secured borrowing as part of other accounts payable and
        accrued expenses in the amount of $ 3, 476 .
 
 The
        allowance for doubtful accounts expenses (income) for the years ended December
        31, 2003, 2004 and 2005, was $ (582), $ 727 and $ (1,921),
        respectively.
 
 As
        for
        derivative financial instruments, see Note 2w.
 
 v.
              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.
 
 The
        fair
        value of marketable debt securities are based on quoted market prices and
        do not
        significantly differ from carrying amount (see Note 3).
 
 The
        fair
        value of long-term bank deposits, long-term receivables, and long-term
        liabilities were estimated by discounting the future cash flows, using the
        rate
        currently available for deposits and for the long-term receivables and
        liabilities of similar terms and maturity. The carrying amount of the Company's
        long-term bank deposits, long-term receivables, and long-term liabilities
        approximate their fair value.
 
 The
        fair
        value of derivative instruments is estimated by obtaining current quotes
        from
        banks.
 
 w.
              Derivative
                  instruments:
 
 Financial
        Accounting Standards Board Statement 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.
 
 F-23
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 For
        derivative instruments that are designated and qualify as a fair value hedge
        (i.e., hedging the exposure to changes in the fair value of an asset or a
        liability or an identified portion thereof that is attributable to a particular
        risk), the gain or loss on the derivative instrument as well as the offsetting
        loss or gain on the hedged item attributable to the hedged risk are recognized
        in current earnings during the period of the change in fair values.
 
 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 forecasted foreign currency 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 forwards
        and
        put and call options (zero - cost collar). These option contracts are designated
        as cash flow hedges, as defined by SFAS No. 133 and Derivative
        Implementation Group No.20 ("DIG 20") and are all effective.
 
 The
        Company recognized gains of $ 407 during the year ended December 31, 2004
        and
        losses of $ 80 during the year ended December 31, 2005. All amounts have
        been included in salary expenses in the statement of operations.
 
 As
        of
        December 31, 2005, the Company recorded accumulated other comprehensive income
        in the amount of $ 263 from its zero cost collar with respect to anticipated
        payroll expenses expected to be incurred during 2006. Such amount will be
        recorded into earnings during 2006.
 
 *Fair
        value hedging strategy* - The
        Company enters into forward exchange contracts to hedge a portion of its
        NIS
        trade payables denominated in foreign currency for a period of one to three
        months. The purpose of the Company's foreign currency hedging activities
        is to
        protect the fair value due to foreign exchange rates.
 
 x.
              Capitalized
                  Software Costs:
 
 The
        Company follows the accounting guidance as specified in Statement of Position
        (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
        for Internal Use". The Company capitalizes costs incurred in the acquisition
        or
        development of software for internal use, including the costs of the software,
        materials, consultants, incurred in developing internal-use computer software
        once final selection of the software is made. Costs incurred prior to the
        final
        selection of software and costs not qualifying for capitalization are charged
        to
        expense. Capitalized Software Costs are amortized on a straight line basis
        over
        three years.
 F-24
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 y.
              Reclassification:
 
 Certain
        amounts in prior years’ financial statements have been reclassified to conform
        to the current year’s presentation.
 
 z.
              Impact
                  of recently issued Accounting
                  Standards:
 
 On
                  December 16, 2004, the Financial Accounting Standards Board (FASB)
                  issued
                  FASB Statement No. 123 (revised 2004), Share-Based Payment, which
                  is a
                  revision of FASB Statement No. 123, Accounting for Stock-Based
                  Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting
                  for Stock Issued to Employees, and amends FASB Statement No. 95,
                  Statement
                  of Cash Flows. Generally, the approach in Statement 123(R) is similar
                  to
                  the approach described in Statement 123. However, Statement 123(R)
                  requires all share-based payments to employees, including grants
                  of
                  employee stock options, to be recognized in the income statement
                  based on
                  their fair values. Pro forma disclosure is no longer an alternative.
                  The
                  new standard will be effective for the Company in the first interim
                  period
                  beginning after January 1, 2006.
 
 As
        permitted by Statement 123, the Company currently accounts for share-based
        payments to employees using Opinion 25's intrinsic value method and, as such,
        generally recognizes no compensation cost for employee stock options. In
        addition, non-compensatory plans under APB 25 will be considered compensatory
        for FAS 123(R) purposes. Accordingly, the adoption of Statement 123(R)'s
        fair
        value method will have a significant impact on the Company result of operations,
        although it will have no impact on the Company overall financial position.
        Had
        the Company adopted Statement 123(R) in prior periods, the impact of that
        standard would have approximated the impact of Statement 123 as described
        in the
        disclosure of pro forma net income and earnings per share in Note 2m to the
        consolidated financial statements.
 
 The
        Company will implement FAS 123(R) using the modified prospective method starting
        January 1, 2006. Under this method, the company will begin recognizing
        compensation cost for equity-based compensation for all new and existing
        unvested share-based awards after the date of adoption. The Company expects
        that
        the adoption of the SFAS No. 123(R) fair value method will have a significant
        impact on the consolidated results of operations, although it will have no
        impact on the Company's overall consolidated financial position or consolidated
        cash flows..
 
 In
        March
        2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107) to
        give
        guidance on implementation of SFAS 123R, which the Company plans to adopt
        in
        implementing SFAS 123R.
  F-25
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
  **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 In
        May
        2005, the Financial Accounting Standards Board issued SFAS No. 154, "Accounting
        Changes and Errors Corrections" ("SFAS 154). SFAS 154 replaces APB Opinion
        No.
        20, "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting
        Changes in Interim Financial Statements", although it carries forward some
        of
        their provisions. SFAS 154 requires retrospective application to prior periods'
        financial statements of changes in accounting principle, unless it is
        impracticable to determine either the period-specific effects or the cumulative
        effect of the change. A change in depreciation, amortization, or depletion
        method for long-lived, nonfinancial assets will be accounted for as a change
        in
        accounting estimate effected by a change in accounting principle. SFAS 154
        is
        effective for changes in accounting principle made in fiscal years beginning
        after December 15, 2005. The Company does not expect the adoption of SFAS
        154 to
        have material impact on its financial position or results of
        operations.
 
 In
        November 2005, the FASB issued FSP FAS 115-1. The FSP addresses the
        determination as to when an investment is considered impaired, whether that
        impairment is other than temporary, and the measurement of an impairment
        loss.
        The FSP also includes accounting considerations subsequent to the recognition
        of
        other than-temporary impairment and requires certain disclosures about
        unrealized losses that have not been recognized as other-than-temporary
        impairments. The guidance in this FSP amends FASB Statements No. 115, Accounting
        for Certain Investments in Debt and Equity. The FSP replaces the impairment
        evaluation guidance of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
        Impairment and Its Application to Certain Investments," with references to
        the
        existing other-than-temporary impairment guidance. The FSP clarifies that
        an
        investor should recognize an impairment loss no later than when the impairment
        is deemed other-than-temporary, even if a decision to sell an impaired security
        has not been made. The guidance in this FSP is to be applied to reporting
        periods beginning after December 15, 2005. As of December 31, 2005 adoption
        of
        FSP FAS 115-1 will not have a material impact on the Company’s financial
        position or results of operation.
 
 In
        November 2004, the FASB issued Statement of Financial Accounting Standard
        No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SAFS
        151"). SFAS 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter
        4,
        to clarify that abnormal amounts of idle facility expense, freight handling
        costs and wasted materials (spoilage) should be recognized as current-period
        charges. In addition, SFAS 151 requires that allocation of fixed production
        overheads to the costs of conversion be based on normal capacity of the
        production facilities. SAFS 151 is effective for inventory costs incurred
        during
        fiscal years beginning after June 15, 2005. The Company does not expect that
        the
        adoption of SFAS 151 will have a material effect on its financial position
        or
        results of operations.
  F-26
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
                  3:-**
              **MARKETABLE
                  SECURITIES**
 
 The
        following is a summary of held-to-maturity marketable securities:
 
 **Amortized
                  cost**
              
              **Gross
                  unrealized gains**
              
              **Gross
                  unrealized losses**
              
              **Estimated**
                **fair
                  market**
                **value**December
                  31, 2004:Corporate
                  and bank debentures:Maturing
                  within one year
              
              $
              31,430
              
              $
              —
              
              $
              (441
              )
              $
              30,989Maturing
                  within one to two years
              
              
              56,050
              
              
              —
              
              
              (730
              )
              
              55,320$
              87,480
              
              $
              —
              
              $
              (1,171
              )
              $
              86,309December
                  31, 2005:Corporate
                  and bank debentures:Maturing
                  within one year
              
              $
              47,349
              
              $
              71
              
              $
              (248
              )
              $
              47,172Maturing
                  within one to two years
              
              
              17,016
              
              
              —
              
              
              (105
              )
              
              16,911$
              64,365
              
              $
              71
              
              $
              (353
              )
              $
              64,083
 
 The
        unrealized losses of the Company's investments in held to maturity marketable
        securities were mainly caused by interest rate increases. The contractual
        cash
        flows of these investments are either guaranteed by the U.S. government or
        an
        agency of the U.S. government or were 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
        immaterial 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, 2005.
 F-27
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
        4:-**  **OTHER
        ACCOUNTS RECEIVABLE AND PREPAID EXPENSES**
 
 **December
                  31,****2004**
              
              **2005**Government
                  authorities
              
              $
              2,877
              
              $
              1,877Deposits
                  and options
              
              
              591
              
              
              1,015Prepaid
                  expenses
              
              
              1,358
              
              
              1,365Employees
                  and Others
              
              
              1,666
              
              
              1,922$
              6,492
              
              $
              6,179
  **NOTE
        5:-**  **INVENTORIES**
 
 **December
                    31,****2004**
              
              **2005**Raw
                  materials and components
              
              $
              10,490
              
              $
              10,398Work
                  in progress
              
              
              10,025
              
              
              15,500Finished
                  products
              
              
              20,813
              
              
              17,465$
              41,328
              
              $
              43,363
 
 See
        also
        Note 2g.
  **NOTE
                  6: -**
              **PROPERTY
                  AND EQUIPMENT, NET**
    **December
                  31,****2004**
              
              **2005**Cost:Office
                  furniture and equipment
              
              $
              1,707
              
              $
              1,848Computers
                  and manufacturing equipment
              
              
              25,598
              
              
              29,041Motor
                  vehicles
              
              
              273
              
              
              580Leasehold
                  improvements
              
              
              2,709
              
              
              2,90230,287
              
              
              34,371Accumulated
                  depreciation:Office
                  furniture and equipment
              
              
              620
              
              
              907Computers
                  and manufacturing equipment
              
              
              16,523
              
              
              20,822Motor
                  vehicles
              
              
              35
              
              
              103Leasehold
                  improvements
              
              
              1,184
              
              
              1,46718,362
              
              
              23,299Depreciated
                  cost
              
              $
              11,925
              
              $
              11,072
 F-28
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
        7:-**  **INTANGIBLE
        ASSETS, NET**
 
 **December
                  31,****2004**
              
              **2005**Cost:Current
                  technology
              
              $
              21,321
              
              $
              21,321Customer
                  relations
              
              
              1,733
              
              
              1,733Trade
                  name
              
              
              1,160
              
              
              1,16024,214
              
              
              24,214Accumulated
                  amortization:Current
                  technology
              
              
              8,677
              
              
              11,714Customer
                  relations
              
              
              272
              
              
              1,022Trade
                  name and Trademark
              
              
              36
              
              
              6168,985
              
              
              13,352Amortized
                  cost
              
              $
              15,229
              
              $
              10,862
 
 Current
        technology amortization expenses amounted to $ 2,506, $ 2,571 and $ 3,037
        for the years ended December 31, 2003, 2004 and 2005, respectively.
 
 Customer
        relations amortization expenses amounted to $ 100, $ 172 and $ 750 for the
        years ended December 31, 2003, 2004 and 2005, respectively.
 
 Trade
        name and Trademark amortization expenses amounted to $ 36 and $ 580 for the
        years ended December 31, 2004 and 2005, respectively.
 
 Estimated
        amortization expenses for the years ended:
 
 **Amortization****Year
                  ended December 31,**
              
              **expenses**2006
              
              $
              4,2902007
              
              $
              3,0352008
              
              $
              1,8252009
              
              $
              6242010
              
              $
              6242011
              
              $
              464
 F-29
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
  **NOTE
                  8:-**
              **OTHER
                  ACCOUNTS PAYABLE AND ACCRUED
                  EXPENSES**
 
 **December
                  31,****2004**
              
              **2005**Employees
                  and payroll accruals
              
              $
              11,563
              
              $
              11,675Service
                  providers and consultants
              
              
              8,028
              
              
              5,796Accrued
                  expenses
              
              
              1,031
              
              
              6,273Royalties
              
              
              2,005
              
              
              1,639Provision
                  for merger and acquisition related expenses
              
              
              2,522
              
              
              366Warranty
                  provision
              
              
              6,774
              
              
              6,015Advances
                  from customers
              
              
              10,737
              
              
              7,506Secured
                  borrowings
              
              
              —
              
              
              3,476Provision
                  for agent commissions
              
              
              3,702
              
              
              3,580Others
              
              
              7,507
              
              
              3,737$
              53,869
              
              $
              $50,063
  **NOTE
                  9:-**
              **LONG-TERM
                  DEBT**
   Long-term
                  loan (1)
              
              $
              5,248
              
              $
              3,506Less
                  - current maturities
              
              
              1,742
              
              
              1,757$
              3,506
              
              $
              1,749
  As
        of
        December 31, 2005, the aggregate annual maturities of
        long-term loan are as follows:
  First
                  year (current maturities)
              
              $
              1,757Second
                  year
              
              $
              1,749
 
 (1)
              During
                  2003, the Company entered into a long-term loan agreement with
                  a bank
                  designated for the settlement of a portion of its OCS royalties
                  payment
                  obligation (see also Note 10).
 
 The
        loan
        is linked to the U.S. dollar and is payable in four equal annual installments
        carrying variable interest of LIBOR + 0.33% per annum. The accrued interest
        as
        of December 31, 2005, amounted to $ 48.
 F-30
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  10:-**
              **OTHER
                  LONG-TERM LIABILITIES**
 
 Under
        an
        arrangement previously entered with the Office of the Chief Scientist in
        Israel's Ministry of Industry and Trade ("the OCS"), the Company settled
        its
        liability for the amount due of $8,534. The repayment to the OCS could be made
        over
        a period of five years
        from the date of settlement. The liability is linked to Israel's Consumer
        Price
        Index ("CPI") and bears annual interest of 4% (see also Note 9).
 
 This
        Arrangement enables the Company to participate in new OCS programs under
        which
        it will be 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 the
        Arrangement.
 
 **NOTE
        11:-**  **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 2011.
 
 The
                  Company has leased various motor vehicles under operating lease
                  agreements. These leases expire in fiscal year
                  2008.
 
 Future
                  minimum rental payments under such leases for the year ending
                  December 31, 2005 are as
                  follows:
 
 **Rental
                  of premises**
              
              **Lease
                    of**motor vehicles2006
              
              $
              4,165
              
              $
              2,2162007
              
              
              3,469
              
              
              1,2922008
              
              
              3,245
              
              
              1732009
              
              
              2,700
              
              
              —2010
                  and thereafter
              
              
              3,375
              
              
              —$
              16,954
              
              $
              3,681
 
 Total
        rental expenses for the years ended December 31, 2003, 2004 and 2005, were
        $ 3,991, $ 4,537 and $ 4,857, respectively. Motor vehicle leasing
        expenses for the years ended December 31, 2003, 2004 and 2005, were
        $ 2,219, $ 2,079 and $ 2,170, respectively.
 
 b.
              Litigation:
 
 A
        lawsuit
        was filed by a former customer of interWAVE on December 8, 2004, for
        compensatory damages with respect to certain alleged damages caused by interWAVE
        actions in the amount of approximately $4 million. This claim has been dismissed
        in March 2006, following a settlement agreement according to which we paid
        back
        the $3.1 million to the former customer.
  F-31
 **ALVARION
          LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
          dollars in thousands, except share data**
 **NOTE
        11:-**  **COMMITMENTS
        AND CONTINGENT LIABILITIES (Cont.)**
 
 During
        2001, a purported Class Action (the "Action") lawsuit was filed against
        interWAVE asserting for failure to disclose certain alleged improper actions
        by
        various underwriters and interWAVE's officers and directors under the Securities
        Act of 1933 and the Securities Exchange Act of 1934 followed by interWAVE's
        initial public offering ("IPO"). A stipulation of Settlement (the "Settlement")
        has been submitted to the Court for preliminary approval. Under the Settlement,
        interWAVE will be dismissed of all claims in exchange for contingent payment
        guarantee by the insurance companies responsible for insuring interWAVE as
        an
        issuer. Recently the court held a fairness hearing for final approval of
        the
        settlement, however the court has not yet issued a ruling. There is no guarantee
        that the settlement will become effective as it is subject to certain terms.
        In
        that case under which settlement will not occur, the Company is of the opinion
        that it has a good defense against the Action however, the litigation results
        can not be predicted at this point.
 
 c.
              As
                  of December 31, 2005, the Company obtained bank guarantees in the
                  total
                  amount of approximately $ 14,192, in favor of vendors, customers,
                  lessors
                  and Government authorities.
 
 d.
              Royalties:
 
 The
        Company participated in programs sponsored by the Israeli Government for
        the
        support of research and development activities. During 2004 and 2005, the
        Company had recorded royalty-bearing grants from the Office of the Chief
        Scientist of Israel's Ministry of Industry and Trade ("the OCS") aggregating
        to
        $ 480 and $ 52, respectively, for certain of the Company's research and
        development projects. The Company is obligated to pay royalties to the OCS,
        amounting to 3%-5% of the sales of the products and other related revenues
        generated from such projects, up to 100%. 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.
 
 During
        2004 and 2005, the Company has paid or accrued royalties to the OCS in the
        amount of $ 3,151 and $ 1,129, respectively. As of December 31, 2004 and
        2005,
        the aggregate contingent liability to the OCS amounted to $ 7,157 and
        $ 6,080 respectively.
  F-32
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  12:-**
              **SHARE
                  CAPITAL**
 
 a.
              The
                  Company listed its shares for trade 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
                  stocks:
 
 Through
        December 31, 2002, the Company resolved to implement a share buy-back plan
        under
        which the total amount to be paid for the repurchased shares shall not exceed
        $
        9,000.
 
 As
        of
        December 31, 2005, the Company purchased 3,796,773 shares at a weighted average
        price per share of approximately $ 2.07 per share.
 
 d.
              Share
                  options:
 
 Since
        1994, the Company has granted options to purchase Ordinary shares to key
        employees, directors and consultants as an incentive to attract and retain
        qualified personnel under several plans. Under the terms of these plans,
        options
        generally vest ratably over a period of up to four years, commencing on the
        date
        of grant. The options generally expire no later than 10 years from the date
        of
        grant, 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. Options that are cancelled or forfeited before expiration
        become
        available for future grants.
 
 The
        Company has six stock option plans under which 24,998,651 Ordinary shares
        were
        reserved for issuance. As of December 31, 2005, 967,097 Ordinary shares of
        the
        Company are still available for future grants under the various option
        plans.
  F-33
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  12:-**
              **SHARE
                  CAPITAL (Cont.)**
 
 A
        summary
        of the Company's stock option activity and related information is as
        follows:
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005****Amount**
                **of
                  options**
              
              **Weighted
                  average exercise price**
              
              **Amount
                  of**
                **options**
              
              **Weighted
                  average exercise price**
              
              **Amount
                  of**
                **Options**
              
              **Weighted
                  average exercise price**Outstanding
                  at the beginning of the year
              
              
              8,074,838
              
              $
              3.18
              
              
              12,856,308
              
              $
              3.45
              
              
              12,756,127
              
              $
              7.55Granted
              
              
              8,019,296
              
              $
              3.51
              
              
              4,233,566
              
              $
              15.72
              
              
              1,641,732
              
              $
              9.46Exercised
              
              
              (2,607,138
              )
              $
              1.89
              
              
              (3,749,980
              )
              $
              2.69
              
              
              (1,447,763
              )
              $
              2.44Forfeited
                  or cancelled
              
              
              (630,688
              )
              $
              7.08
              
              
              (583,767
              )
              $
              7.89
              
              
              (851,063
              )
              $
              17.86Outstanding
                  at the end of the year
              
              
              12,856,308
              
              $
              3.45
              
              
              12,756,127
              
              $
              7.55
              
              
              12,099,033
              
              $
              7.69Options
                  exercisable at the end of the year
              
              
              5,815,793
              
              $
              2.9
              
              
              4,587,519
              
              $
              5.75
              
              
              7,945,085
              
              $
              6.46
 
 In
        connection with the grant of certain share options to employees in 2003,
        2004
        and 2005, the Company recorded amortization of deferred stock compensation
        of
        $ 511, $ 60 and $ 563, respectively, for the aggregate
        differences between the respective exercise price of options at their dates
        of
        grant and the fair value of the Ordinary shares subject to such options.
        Unamortized deferred stock compensation is presented as a reduction in
        shareholders' equity and is amortized ratably over the vesting period of
        the
        related options.
 
 The
        options outstanding as of December 31, 2005, have been classified into range
        of
        exercise prices, as follows:
 
 **Exercise
                  price**
                **(range)**
              
              **Options
                  outstanding**
                **as
                  of**
                **December
                  31, 2005**
              
              **Weighted**
                **average**
                **remaining**
                **contractual**
                **life
                  (years)**
              
              **Weighted**
                **average**
                **exercise**
                **price**
              
              **Options
                  exercisable**
                **as
                  of**
                **December
                  31, 2005**
              
              **Weighted**
                **average**
                **exercise**
                **price**$
              
              
              
              
              
              $
              
              
              
              $0.0021-0.01
              
              
              106,869
              
              
              1.871
              
              
              0.003
              
              
              106,869
              
              
              0.0030.56-0.639
              
              
              44,540
              
              
              0.657
              
              
              0.574
              
              
              44,540
              
              
              0.5740.98-1.2692
              
              
              246,057
              
              
              2.741
              
              
              1.116
              
              
              246,057
              
              
              1.1161.9-2.74
              
              
              4,464,469
              
              
              6.672
              
              
              2.128
              
              
              3,927,157
              
              
              2.1112.992-4.6023
              
              
              472,254
              
              
              1.545
              
              
              3.623
              
              
              472,254
              
              
              3.6235.01-7.39
              
              
              632,743
              
              
              6.669
              
              
              5.907
              
              
              461,917
              
              
              5.8867.56-11.32
              
              
              2,574,933
              
              
              8.813
              
              
              9.954
              
              
              817,064
              
              
              10.80211.46-17.16
              
              
              3,498,861
              
              
              8.627
              
              
              13.504
              
              
              1,811,034
              
              
              13.58117.57-866.78
              
              
              58,307
              
              
              3.625
              
              
              84.211
              
              
              58,193
              
              
              84.34012,099,033
              
              
              
              
              
              7.690
              
              
              7,945,085
              
              
              6.463
  F-34
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  12:-**
              **SHARE
                  CAPITAL (Cont.)**
 
 Weighted
        average fair value of options whose exercise price is greater than, equal
        to or
        lower than the market price of the shares at date of grant are as
        follows:
 
 **Weighted
                  average fair value of**
                **options
                  granted at an exercise price****2003**
              
              **2004**
              
              **2005**Less
                  than fair value at date of grant
              
              $
              0.16
              
              $
              7.87
              
              $
              —Equal
                  to fair value at date of grant
              
              $
              2.27
              
              $
              5.86
              
              $
              4.20Exceeds
                  the fair value at date of grant
              
              $
              —
              
              $
              1.67
              
              $
              —
 
 As
        of
        December 28, 2005, 1,834,452 unvested out-of-the-money options with an exercise
        price higher than $ 10 per share 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 the Company
        has
        accounted for stock based compensation 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 the Company's 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 $
        5,224. (See Note 2m)
 
 During
        2003, the Company issued 300,000 options to purchase Ordinary shares to one
        of
        its directors. As a result, the Company recorded deferred stock compensation
        amounting to $ 183 which is being amortized ratably over the vesting
        period.
 
 In
        connection with interWAVE's acquisition, the Company issued to interWAVE
        former
        CEO 20,850 options to purchase Company's Ordinary
        shares. As a result, the Company recorded deferred stock compensation amounting
        to $ 293, which
        was
        amortized during 2005.
  These
        grants terms are included in the aforementioned tables.
 
 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-35
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  13:-**
              **TAXES
                  ON INCOME**
 
 Income
        derived by Alvarion Ltd. is generally subject to the regular Israeli corporate
        tax rate of 34%. 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.
 
 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 provision of the law, Alvarion Ltd. has elected the "alternative benefits"
        track provisions of the investment law, pursuant to which Alvarion 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 1995, Alvarion
        Ltd. was first granted the status of "Approved Enterprise" regarding the
        production facilities in Tel-Aviv. By reason of the tax benefits, the income
        derived from this "Approved Enterprise" will be tax exempt for a period of
        four
        years, and will be taxed at a reduced rate of 10% to 25% for six additional
        years (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. 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
        February 2000, Alvarion Ltd. submitted an expansion request for its third
        "Approved Enterprise" regarding its production facilities in Nazareth and
        Carmiel (which was relocated during 2004 to Migdal Haemek). The income derived
        from this "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. Alvarion Ltd.'s expansion request has been
        approved.
 
 The
        period 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 first, second and third plans have not yet commenced,
        and
        will expire in 2008, 2010 and 2014, respectively.
 
 In
        connection with its merger with Floware in 2001, Alvarion Ltd. assumed the
        following Floware Ltd. "Approved Enterprise" agreement:
 
 Floware
        Ltd. was granted an "Approved Enterprise" status for its 1997 plan regarding
        the
        production facility in Or-Yehuda. After the merger, the operations were
        relocated to Alvarions'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.
  F-36
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  13:-**
              **TAXES
                  ON INCOME (Cont.)**
 
 In
            order
            to maintain its eligibility for benefits following the merger with Floware,
            the
            Company must continue to meet specified conditions, however, Alvarion
            has yet to
            finalize the status of the tax benefits with the tax authorities following
            the
            merger of Floware.
 
 InnoWave
        was granted an "Approved Enterprise" status for its 1997 plan regarding the
        production facility in Omer. During 1999, InnoWave's request for an expansion
        was approved.
 
 During
        2003, the Company had applied for the assignment of former InnoWave's "Approved
        Enterprise" status to Alvarion. Such approval has been obtained.
 
 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 15%-20% for an "Approved
        Enterprise". As of December 31, 2005, the accumulated deficit of the Company
        does not include tax-exempt profits earned by the Company's "Approved
        Enterprise".
 
 A
        recent
        amendment to the Investment Law (the "Amendment"), which has been officially
        published and effected since of April 1, 2005, 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 an Approved Enterprise such as provision generally
        requiring that at least 25% of the approved 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 certificate
        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 June 2005, Alvarion Ltd. submitted an expansion request for
        additional "Approved Enterprise" approval regarding its production facilities
        in
        Nazareth, Migdal Haemek, Omer and Tel-Aviv. The income derived from this
        "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. Alvarion Ltd.'s expansion request has not yet been
        approved.
 
 Alvarion
            Ltd. has had no taxable income since inception.
  F-37
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  13:-**
              **TAXES
                  ON INCOME (Cont.)**
 
 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.
              Pre-tax
                  income (loss):
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Domestic
              
              $
              (11,798
              )
              $
              1,472
              
              $
              (5,645
              )Foreign
              
              
              (14
              )
              
              (621
              )
              
              (6,973
              )$
              (11,812
              )
              $
              851
              
              
              (12,618
              )
 
 d.
              Carryforward
                  losses:
 
 As
        of
        December 31, 2005, Alvarion Ltd. had an available tax loss carryforward
        amounting to approximately $ 100,250, which may be carried forward, in
        order to offset taxable income in the future, for an indefinite
        period.
 
 In
        addition, the accumulated net tax operating loss carryforward, in a total
        amount
        of approximately $ 69,000, resulted from the merger with Floware and, at
        the effective time of the merger, may be carried forward to subsequent years
        and
        may be set off against the merged company's taxable income, commencing with
        the
        tax year immediately following the merger. This set off is limited to the
        lesser
        of:
 
 1.
              20%
                  of the aggregate net tax operating losses carryforward of the merged
                  companies prior to the effective time of the merger;
                  and
 
 2.
              50%
                  of the combined company's taxable income in the relevant tax year
                  before
                  the set off of losses from preceding
                  years.
 
 These
        restrictions, with several modifications, also apply to the set off of capital
        losses of the merged companies against capital gains of the combined
        company.
 F-38
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  13:-**
              **TAXES
                  ON INCOME (Cont.)**
 
 As
        of
        December 31, 2005, the state and the federal tax losses carryforward of the
        U.S.
        subsidiary excluding former interWAVE tax losses carryforward amounted to
        approximately $ 18,062 and $ 43,349, respectively. Such losses are
        available to be offset against any future U.S. taxable income of the U.S.
        subsidiary and will expire in 2010 and 2025, respectively.
 
 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.
 
 Following
        the acquisition of interWAVE, the Company has analyzed the annual limitations
        on
        its net operating losses as of the acquisition date and its alternatives
        to
        benefits from such losses. As of December 31, 2005, the Company estimates
        the
        annual US Federal NOL available to offset future income at approximately
        $1.67
        million. Annual amount that is not offset against taxable income will be
        accumulated until 2024.
 
 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 (hereinafter - the Amendment).
 
 Inter
        alia, the Amendment provides for a gradual reduction in the statutory company
        tax rate in the following manner: in 2006 the tax rate will be 31%, in 2007
        the
        tax rate will be 29%, in 2008 the tax rate will be 27%, in 2009 the tax rate
        will be 26% and from 2010 onward the tax rate will be 25%. Furthermore, as
        from
        2010, upon reduction of the company tax rate to 25%, real capital gains will
        be
        subject to tax of 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,****2004**
              
              **2005**Tax
                  assets in respect of:Allowance
                  for doubtful accounts
              
              $
              109
              
              $
              162Severance
                  pay and accrued vacation pay
              
              
              855
              
              
              1,156Other
                  deductions for tax purposes
              
              
              4,781
              
              
              4,825Net
                  loss carryforward
              
              
              30,043
              
              
              52,133Total
                  deferred tax assets before valuation allowance
              
              
              35,788
              
              
              58,276Valuation
                  allowance
              
              
              (35,788
              )
              
              (58,276
              )Net
                  deferred tax assets
              
              $
              —
              
              $
              —
  F-39
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  13:-**
              **TAXES
                  ON INCOME (Cont.)**
 
 The
        Company has provided valuation allowances in respect of deferred tax assets
        resulting from tax loss carryforward and other temporary differences, since
        the
        Company has a history of losses over the past three years. Management currently
        believes that it is more likely than not that the deferred tax assets regarding
        the loss carryforward and other temporary differences will not be
        realized.
 
 The
        main
        reconciling items 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 and the effect of the "Approved
        Enterprise".
  **NOTE
                  14:-**
              **DISCLOSURES
                  ABOUT SEGMENTS AND RELATED INFORMATION**
 
 **a.**
              **Segment
                  Activities Disclosure:**
 
 The
                  Company manages its business on a basis of two reportable segments
                  and
                  follows the requirements of Statement of Financial Accounting Standard
                  No.131 "Disclosures About Segments of an Enterprise and Related
                  Information" ("SFAS No. 131").
 
 Hereunder
        the Company's segments:
 
 WiMax
        and wireless broadband access unit ("BWA"):
 
 The
        WiMax
        and wireless broadband access unit focuses on development and production
        of  wireless
        broadband systems. The unit supplies carriers, ISPs and private network
        operators with WiMAX standard-based and other wireless broadband solutions.
        The
        unit provides solutions in a wide range of licensed and unlicensed frequency
        bands enabling the delivery of business and residential broadband access,
        corporate VPNs, toll quality telephony, mobile base station feeding, hotspot
        coverage extension, community interconnection, public safety communications,
        and
        mobile voice and data.
 
 Cellular
        Moble unit (CMU):
 
 The Cellular
        Mobile unit focuses on development and production of compact cellular networks
        to developing countries and remote areas.
 F-40
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  14:-**
              **DISCLOSURES
                  ABOUT SEGMENTS AND RELATED INFORMATION
                  (Cont.)**
 
 b.
              Operational
                  segments statement operation
                  disclosure:
 
 The
        following financial information is the information that management uses for
        analyzing the results. The figures are presented in consolidated method as
        presented to management.
 
 **Year
                  ended December 31, 2005****Broadband
                  Wireless Access**
              
              **Cellular
                  Mobile unit**
              
              **Consolidated**Revenues
              
              $
              176,927
              
              $
              18,788
              
              $
              195,715Operating
                  expenses (*)
              
              $
              175,050
              
              $
              35,834
              
              $
              210,884Operating
                  income (loss)
              
              $
              1,877
              
              $
              (17,046
              )
              $
              (15,169
              )
 
 (*)
              Including
                  cost of sales, research and development costs, selling and marketing
                  expenses, general and administrative expenses and amortization
                  of related
                  intangible assets.
 
 **Year
                  ended December 31, 2004****Broadband
                  Wireless Access**
              
              **Cellular
                  Mobile unit**
              
              **Consolidated**Revenues
              
              $
              199,931
              
              $
              1,576
              
              $
              201,507Operating
                  expenses (*)
              
              $
              190,989
              
              $
              13,488
              
              $
              204,477Operating
                  income (loss)
              
              $
              8,942
              
              $
              (11,912
              )
              $
              (2,970
              )
 
 (*)
              Including
                  cost of sales, research and development costs, selling and marketing
                  expenses, general and administrative expenses, amortization of
                  related
                  intangible assets and in-process research and development
                  write-off.
 
 c.
              The
                  following financial information identifies the assets to
                  segments:
 
 **As
                  of December 31, 2005****Broadband
                  Wireless Access**
              
              **Cellular
                  Mobile unit**
              
              **Consolidated**Assets
                  (*)
              
              $
              149,170
              
              $
              46,827
              
              $
              195,997Depreciation
                  and amortization
              
              
              7,111
              
              
              2,193
              
              
              9,304Capital
                  investments
              
              $
              3,803
              
              $
              281
              
              $
              4,084
 
 (*)
              The
                  assets include: other receivables, trade receivables, inventories,
                  property, equipment, goodwill and other
                  intangibles.
 F-41
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 
 **NOTE
                  14:-**
              **DISCLOSURES
                  ABOUT SEGMENTS AND RELATED INFORMATION**
 
 **As
                  of December 31, 2004****Broadband
                  Wireless Access**
              
              **Cellular
                  Mobile unit**
              
              **Consolidated**Assets
                  (*)
              
              $
              146,423
              
              $
              41,949
              
              $
              188,372Depreciation
                  and amortization
              
              
              7,435
              
              
              106
              
              
              7,541Capital
                  investments
              
              $
              4,748
              
              $
              —
              
              $
              4,748
 
 (*)
              The
                  assets include: other receivables, trade receivables, inventories,
                  property, plant and equipment, goodwill and other
                  intangibles.
 
 d.
              Information
                  on sales by geographic distribution
 
 The
                  following present's total revenues for the years ended December
                  31, 2003,
                  2004 and 2005:
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005****Total
                  revenues**
              
              **Total
                  revenues**
              
              **Total
                  revenues**Israel
              
              $
              1,294
              
              $
              2,268
              
              $
              1,271United
                  States (including Canada)
              
              
              31,710
              
              
              34,772
              
              
              41,315Europe
                  (without Russia, and Spain)
              
              
              21,655
              
              
              29,843
              
              
              49,498Russia
              
              
              9,802
              
              
              13,794
              
              
              11,790Mexico
              
              
              18,655
              
              
              64,005
              
              
              14,790Africa
              
              
              13,223
              
              
              18,285
              
              
              26,640Spain
              
              
              1,200
              
              
              8,678
              
              
              10,678Asia
              
              
              13,415
              
              
              9,150
              
              
              14,529Latin
                  America (without Mexico)
              
              
              12,273
              
              
              13,742
              
              
              18,573Romania
              
              
              3,981
              
              
              6,970
              
              
              6,631$
              127,208
              
              $
              201,507
              
              $
              195,715
 
 e.
              Major
                  customers' data as percentage of total
                  sales:
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Customer
                  A
              
              
              13.90
              %
              
              30.58
              %
              
              5.20
              %
  F-42
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  15:-**
              **SELECTED
                  STATEMENTS OF OPERATIONS
                  DATA**
 
 a.
              Research
                  and development:
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Research
                  and development costs
              
              $
              27,612
              
              $
              31,713
              
              $
              41,983Less
                  - grants
              
              
              3,846
              
              
              3,897
              
              
              3,062$
              23,766
              
              $
              27,816
              
              $
              38,921
 
 b.
              Amortization
                  of deferred stock compensation:
 
 Cost
                  of sales
              
              $
              60
              
              $
              —
              
              $
              —Research
                  and development, net
              
              
              261
              
              
              —
              
              
              —Selling
                  and marketing
              
              
              96
              
              
              —
              
              
              —General
                  and administrative
              
              
              94
              
              
              60
              
              
              563$
              511
              
              $
              60
              
              $
              563
 
 c.
              Financial
                  income, net:
 
 **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Financial
                  income:Interest
                  and others
              
              $
              4,710
              
              $
              4,072
              
              $
              3,161Foreign
                  currency translation differences
              
              
              (8
              )
              
              187
              
              
              (42
              )4,702
              
              
              4,259
              
              
              3,119Financial
                  expenses:Interest
                  and bank expenses
              
              
              (575
              )
              
              (438
              )
              
              (568
              )$
              4,127
              
              $
              3,821
              
              $
              2,551
 
 F-43
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share data**
 **NOTE
                  15:-**
              **SELECTED
                  STATEMENTS OF OPERATIONS DATA
                  (Cont.)**
 
 d.
              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,****2003**
              
              **2004**
              
              **2005**Numerator:Numerator
                  for basic and diluted net earnings (loss) per share- income (loss)
                  available to shareholders of Ordinary shares
              
              $
              (11,812
              )
              $
              851
              
              $
              (12,618
              )Denominator:Denominator
                  for basic net earnings (loss) per share- weighted average number
                  of
                  Ordinary shares
              
              
              52,127,250
              
              
              56,549,169
              
              
              58,687,658Effect
                  of dilutive securities:Employee
                  stock options
              
              
              *)
                  —
              
              
              7,205,148
              
              
              *)
                  —Denominator
                  for diluted net earnings (loss) per share - adjusted weighted average
                  number of shares
              
              
              52,127,250
              
              
              63,754,317
              
              
              58,687,658
 
 *)
              Antidilutive.
 
 
 **NOTE
                  16:-**
              **SUBSEQUENT
                  EVENT (UNAUDITED)**
 
 During
        the second quarter of 2006, the company identified circumstances that will
        require the reassessment of the recoverability of the various assets associated
        with the CMU. The company is currently beginning the
        process of evaluating the recoverability of these assets. At this point the
        company cannot have reasonable estimate as to the potential
        impairment ,
        if
        any .
        If such
        impairment will be required this may have a significant effect on the company’s
        result of operations.
 
 -
        - - - -
        - - - - - -
 
 
 F-44