**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,
      200 6


**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.**




**Ordinary
      Shares, NIS 0.01 par value per share**


**(Title
      of Class)**




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


**Title
      of
      each class**  **Name
      of each exchange on which registered**


**None**   **None**




**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.


















**61,629,211
      Ordinary Shares, NIS 0.01 par value per share (as of December 31,
      2006)**







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 x Non-Accelerated Filer o




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 INVOLVED 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
      concentrate our resources on a single line of business - wireless
      broadband . With
      more
      than 3 million units deployed in approximately 150 countries, we believe we
      are
      the worldwide leader in providing wireless broadband access systems. We supply
      top tier carriers, ISPs and private network operators with solutions based
      on
      the WiMAX standard as well as other wireless broadband solutions. Currently,
      our
      business is mainly focused on solutions based on the WiMAX standard that are
      used for primary wireless broadband access. In addition, we continue to sell
      our
      non-WiMAX products. These solutions provide high-speed wireless “last mile”
connection to the internet for homes and businesses in both developed and
      emerging regions. Our strategy is to leverage our experience and leadership
      in
      both non-standard broadband wireless access (BWA) and current WiMAX markets,
      combined with our brand strength, broad customer base and innovative technology
      in order to play an important role in the WiMAX-based mobile broadband market
      as
      well.




We
      were
      incorporated in September 1992 under the laws of the State of Israel. Since
      our
      inception, we have devoted substantially all of our resources to the design,
      development, manufacturing and marketing of wireless products. On August 1,
      2001, Floware Wireless Systems Ltd., a company incorporated under the laws
      of
      the State of Israel, or Floware, merged with and into us. As a result of the
      merger we continued as the surviving company and Floware’s separate existence
      ceased. Upon the closing of the merger, we changed our name from BreezeCOM
      Ltd.
      to Alvarion Ltd. On April 1, 2003, we acquired most of the assets and the
      assumption of related liabilities of InnoWave Wireless Systems Ltd. In December
      2004, we completed the amalgamation of interWAVE Communications International
      Ltd., and most of the InterWAVE operations became our Cellular Mobile business
      unit. In
      November 2006, we sold our Cellular Mobile business unit (“CMU”) to LGC
      Wireless, Inc. (“LGC”), a privately-held supplier of wireless networking
      solutions. See
      Item
      5.A. - "Operating and Financial Review and Prospects - Operating
      Results".




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.




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,
      BreezeLINK, BreezeMAX, BreezeACCESS, BreezeNET, BreezeLITE, BreezePHONE,
      WALKair, WALKnet, EASYBRIDGE, 4Motion, OPEN, OPEN WiMAX, BreezeACCESS Wi2,
      InnoWave Wireless Systems (Design), INTERWAVE, INTERWAVE & Design, INTERWAVE
      COMMUNICATIONS, WAVENET,
      WaveGain,








i





MULTIPOINT NETWORKS, 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                      
1




ITEM
      1. DENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
      ADVISERS 1




ITEM
      2. OFFER
      STATISTICS AND EXPECTED TIMETABLE 1




ITEM
      3. KEY
      INFORMATION 2




A. SELECTED
      FINANCIAL DATA 2




B. CAPITALIZATION
      AND
      INDEBTEDNESS 3




C. REASONS
      FOR THE OFFER AND USE OF PROCEEDS 3




D. RISK
      FACTORS 3




ITEM
      4. INFORMATION
      ON THE
      COMPANY 22




A. HISTORY
      AND DEVELOPMENT OF THE COMPANY 22




B. BUSINESS
      OVERVIEW 22




C. ORGANIZATIONAL
      STRUCTURE 41




D. PROPERTY,
      PLANTS AND EQUIPMENT 42




ITEM
      4A. UNRESOLVED
      STAFF COMMENTS 43




ITEM
      5. OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS 44




A. OPERATING
      RESULTS 44




B. LIQUIDITY
      AND CAPITAL RESOURCES 57




C. RESEARCH
      AND DEVELOPMENT, PATENTS AND LICENSES 64




D. TREND
      INFORMATION 64




E. OFF-BALANCE
      SHEET ARRANGEMENTS 65




F.  TABULAR
      DISCLOSURE OF CONTRACTUAL OBLIGATIONS 65




ITEM
      6. DIRECTORS,
      SENIOR MANAGEMENT AND
      EMPLOYEES 66




A.  DIRECTORS
      AND SENIOR MANAGEMENT 66




B.  COMPENSATION 70






iii






C. BOARD
      PRACTICES 71




D. EMPLOYEES 76




E. SHARE
      OWNERSHIP 77




ITEM
      7. MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 80




A. MAJOR
      SHAREHOLDERS 80




B. RELATED
      PARTY TRANSACTIONS 80




C. INTERESTS
      OF EXPERTS AND COUNSEL 80




ITEM
      8. FINANCIAL
      INFORMATION 81




A. CONSOLIDATED
      STATEMENTS AND OTHER FINANCIAL INFORMATION 81




B. SIGNIFICANT
      CHANGES 82




ITEM
      9. THE
      OFFER
      AND LISTING 83




A. OFFER
      AND
      LISTING DETAILS 83




B. PLAN
      OF
      DISTRIBUTION 84




C. MARKETS 84




D. SELLING
      SHAREHOLDERS 84




E. DILUTION 84




F. EXPENSES
      OF THE ISSUE 84




ITEM
      10. ADDITIONAL
      INFORMATION 85




A. SHARE
      CAPITAL 85




B. MEMORANDUM
      AND ARTICLES OF ASSOCIATION 85




C. MATERIAL
      CONTRACTS 87




D. EXCHANGE
      CONTROLS 87




E. TAXATION 87




F. DIVIDENDS
      AND PAYING AGENTS 98




G. STATEMENT
      BY EXPERTS 98




H. DOCUMENTS
      ON DISPLAY 98






iv






I. SUBSIDIARY
      INFORMATION 98




ITEM
      11. QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK 99




ITEM
      12. DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES 99




PART
      II 100




ITEM
      13. DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES 100




ITEM
      14. MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 100




ITEM
      15. CONTROLS
      AND PROCEDURES 100




ITEM
      16A. AUDIT
      COMMITTEE FINANCIAL EXPERT 101




ITEM
      16B. CODE
      OF
      ETHICS AND CODE OF CONDUCT 101




ITEM
      16C. PRINCIPAL
      ACCOUNTANT FEES AND SERVICES 101




ITEM
      16D.  EXEMPTIONS
      FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEES 102




ITEM
      16E. PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 102




PART
      III


103


ITEM 17. FINANCIAL
      STATEMENTS




ITEM
      18. FINANCIAL
      STATEMENTS 103




ITEM
      19. 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.
















1








**ITEM
              3.**
            **KEY
                INFORMATION**




**A.**
            **SELECTED
                FINANCIAL DATA**




We
      have
      derived the following selected consolidated financial data presented below
      as of
      December 31, 2005 and 2006 and for each of the years ended December 31,
      2004, 2005 and 2006 from our audited consolidated financial statements and
      related notes included in this annual report. The consolidated financial data
      for the year ended December 31, 2003 include the results of operations of the
      assets and assumed liabilities of the 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, referred to as the Cellular Mobile Unit, from December 9,
      2004.Following the sale of net assets of the Cellular Mobile Unit, or CMU,
      on
      November 21, 2006, the
      results of the CMU activities for the
      years
      ended December 31, 2004, 2005 and 2006 were
      reclassified to one line item in the statement of operations as "Loss from
      discontinued operations" below the results from continuing
      operations. We have
      derived the selected consolidated financial data as of December 31, 2002, 2003
      and 2004 and for each of the years ended December 31, 2002 and 2003 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,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**(1)****(in
                thousands except per share data)**Statement
                of Operations Data:**Sales
            
            
            
            
            $
                88,849
            $
                127,208
            $
                200,051
            $
                176,927
            $
                181,594Cost
                of sales
            
            
            
            
            55,192
            68,595
            101,169
            85,817
            80,410Write-off
                of excess inventory and provision for inventory purchase commitments
            
            
            
            
            250
            6,562
            11,412
            7,338
            9,472Gross
                profit
            
            
            
            
            33,407
            52,051
            87,470
            83,772
            91,712**Operating
                costs and expenses:**Research
                and development, gross
            
            
            
            
            27,907
            27,612
            31,231
            32,772
            42,042Less
                grants
            
            
            
            
            3,520
            3,846
            3,897
            3,062
            3,235Research
                and development, net
            
            
            
            
            24,387
            23,766
            27,334
            29,710
            38,807Selling
                and marketing
            
            
            
            
            26,684
            33,000
            38,748
            39,900
            44,929General
                and administrative
            
            
            
            
            6,102
            6,417
            9,385
            9,602
            13,680Merger
                and acquisition related
              expenses
            
            
            
            
            -
            2,201
            -
            -
            -Amortization
                of intangible assets
            
            
            
            
            2,400
            2,606
            2,676
            2,685
            2,676Restructuring
            
            
            
            
            1,102
            -
            -
            -
            -Total
                operating costs and expenses
            
            
            
            
            60,675
            67,990
            78,143
            81,897
            100,092Operating
                profit (loss)
            
            
            
            
            (27,268)
            (15,939)
            9,327
            1,875
            (8,380)Financial
                income, net
            
            
            
            
            6,587
            4,127
            3,821
            2,551
            3,796Income
                (loss) from continuing  operations
            
            
            
            
            (20,681)
            (11,812)
            13,148
            4,426
            (4,584)Loss
                from discontinued operations, net
            
            
            
            
            -
            -
            (12,297)
            (17,044)
            (36,167)










2






Net
                income (loss)
            
            
            
            
            $
                (20,681)
            $
                (11,812)
            $
                851
            $
                (12,618)
            $
                (40,751)Net
                earnings (loss) per shareBasic:Continuing
                operations
            
            
            
            
            $
                (0.38)
            $
                (0.23)
            $
                0.23
            $
                0.08
            $
                (0.08)Discontinued
                operations
            
            
            
            
            -
            -
            (0.21)
            (0.30)
            (0.59)Total
            
            
            
            
            $
                (0.38)
            $
                (0.23)
            $
                0.02
            $
                (0.22)
            $
                (0.67)Weighted
                average number of shares used in computing basic net earnings (loss)
                per
                share.
            
            
            
            
            53,941
            52,127
            56,549
            58,688
            60,841Diluted:Continuing
                operations
            
            
            
            
            $
                (0.38)
            $
                (0.23)
            $
                0.20
            $
                0.08
            $
                (0.08)Discontinued
                operations
            
            
            
            
            -
            -
            (0.19)
            (0.30)
            (0.59)Total
            
            
            
            
            $
                (0.38)
            $
                (0.23)
            $
                0.01
            $
                (0.22)
            $
                (0.67)Weighted
                average number of shares used in computing diluted net earnings (loss)
                per
                share
            
            
            
            
            53,941
            52,127
            63,754
            58,688
            60,841





(1) Includes
      charges for stock-based compensation of $6.9 million as a result of the adoption
      of SFAS 123(R) .








**As
                of December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**Working
                capital
            
            $
            74,237
            
            $
            90,359
            
            $
            53,341
            
            $
            101,713
            
            $
            97,169Total
                assets
            
            $
            272,075
            
            $
            284,957
            
            $
            328,535
            
            $
            318,002
            
            $
            280,063Shareholders’
                equity
            
            $
            227,830
            
            $
            220,202
            
            $
            232,812
            
            $
            224,333
            
            $
            195,301Capital
                Stock
            
            $
            371,120
            
            $
            376,309
            
            $
            388,418
            
            $
            391,957
            
            $
            403,708






**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**








3




We
      have incurred losses in the past, we may incur losses in the near term and
      may
**continue to** incur losses in the future.




We
      incurred an operating loss from continuing operations and a net loss in 2006
      of
      approximately $(8.4) million and $(40.8) million, respectively. In 2005, our
      operating profit from continuing operations and net loss were approximately
      $1.9
      million and $(12.6) million, respectively. In 2004, our operating profit from
      continuing operations and net income were approximately $9.3 million and $0.9
      million, respectively. We may 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.




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




Our
      systems are used by telecom carriers and service providers. Some carriers and
      service providers using wireless broadband are emerging companies with unproven
      business models. Adverse market conditions in the last couple of years 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 decline and increase our losses.




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




The
      mobile market and any new markets we attempt to penetrate may not become
      substantial commercial markets or may not evolve in a manner that will enable
      our products to achieve market acceptance.




In
      addition, in order to maintain or increase the share we expect **** of
      the
      markets we participate in, we must:






·
            sustain
                our attained technology position in designing, developing, and
                manufacturing broadband wireless access
                products;




·
            develop
                and cultivate additional sales channels, including original equipment
                manufacturer, or OEM agreements, regional local partners or other
                strategic arrangements with leading manufacturers of access equipment
                to
                market our wireless broadband products to prospective customers, such as
                local exchange carriers, cellular operators, Internet and application
                service providers, municipalities and local telephone companies;




·
            effectively
                establish and support relationships with customers, including local
                exchange carriers, internet and application service providers, public
                fixed or mobile telephone service providers and private network operators
                sometimes offered on special commercial terms;
                and




·
            effectively
                develop and market our OPEN WiMAX strategy in our broadband mobile
                solution together with our current and potential
                partners.




Our
      efforts in these markets may not succeed.






4






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




Many
      companies compete with us in the wireless broadband equipment market in which
      we
      sell our products. We expect that competition from large vendors as well as
      new
      market vendors will increase in the future, including both with respect to
      products that we currently offer and products that we intend to introduce in
      the
      future. As the market transitions toward standardization, it increasingly
      becomes more challenging for us to compete. In addition, some, or all, of the
      systems integrators and other strategic partners to which we sell our wireless
      broadband products could develop the capability to manufacture systems similar
      to our wireless broadband products. We expect our competitors to continue to
      improve the performance of their current products and to introduce new products
      or new technologies that may supplant or provide lower cost
      alternatives to our products or products with better performance. We are also
      facing additional and new competition from large telecommunications equipment
      vendors, such as Samsung, Motorola, Alcatel-Lucent, Nortel and Nokia and we
      expect this competition to grow, especially with respect to the mobile
      WiMAX based products. Tier
      1
      operators, such
      as
      Sprint Nextel, may
      prefer to purchase products from these large vendors.




There
      has
      been a trend towards consolidation in the telecommunications equipment market.
      This trend may continue in the future and result in larger competitors with
      enhanced resources, financial and otherwise. This may intensify the competitive
      nature of the markets in which we operate . Furthermore,
      this consolidation process, such as the mergers of Nokia and Siemens and Alcatel
      and Lucent, limits and may further reduce the potential variety of our
      customers.




In
      addition, as the market grows, we may 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, Wi-Fi and other
      broadband access technologies.




We expect these
      competitors to
      continue to improve their technologies and products which may cause us to lose
      some of our customers or prevent us from penetrating into new
      markets . Some
      of
      our existing and potential competitors, including large competitors arising
      from
      the continued consolidation in the telecommunications equipment market, have
      substantially greater resources including: financial, technological,
      manufacturing and marketing and distribution capabilities, and enjoy greater
      market recognition than we do. 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 operations.




**Standardization
      and increased competition may have an adverse effect on our
      operations.**




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.








5







**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
      802.16d-2004 and IEEE 802.16e-2005) may not continue to be or will not be
      broadly adopted which could significantly limit our market opportunity and
      harm
      our business. In addition, our focus on anticipated future standards, including
      the IEEE 802.16e-2005 certified 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;




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




·
            the
                market transition to product standardization could significantly
                delay the
                time we recognize revenue, shifting from the date of shipping of
                existing
                products to the date of achievement of product certification and
                fulfillment of all revenue recognition
                criteria.




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




**Our
      products under development, including our 802.16e-2005 standards compliant
      WiMAX
      certified products, may not be available on our planned timetable. If customers
      refrain from buying our current products in order to wait for such products,
      our
      business will suffer.**




In
      2005
      and 2006, we experienced delays in orders for, and decreasing revenues from
      both
      non WiMAX products and products based on IEEE802.16d standards. These delays
      were primarily due to the market transition to WiMAX certified products based
      on
      802.16e Time Division Duplex, or TDD, systems. We may continue to suffer from
      the market transition to 802.16e-2005 WiMAX certified products or to any other
      new WiMAX standards as customers continue to slow or cease their purchases
      of
      our commercially available products in order to wait for such products. If
      such
      products are not available on our planned timetable, our customers may seek
      other providers to fulfill their wireless needs and our revenues could
      decrease.




**Some
      of 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






6




changes
      could render this technology obsolete or subject to intense competition by
      alternative technologies. This may harm the sales of our standards compliant
      products, and consequently, our results of operations.




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




The
      markets for our products and the technologies utilized in the industry in which
      we operate evolve rapidly. We rely on key technologies, including wireless
      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 and other
      technologies. 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. In addition, the introduction of WiMAX certified products may
      not
      increase the demand for wireless broadband solutions. These may adversely affect
      our results of operations.




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




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




·
            acceptance
                of new and innovative technologies;




·
            acceptance
                of standards for wireless broadband
                products;




·
            timely
                availability and maturity of technology from technology suppliers,
                such as
                Intel;




·
            capacity
                to handle growing demands for faster transmission of increasing amounts
                of
                data and voice;




·
            cost-effectiveness
                and performance compared to other fixes and other broadband wireless
                technologies;




·
            reliability
                and security;




·
            suitability
                for a sufficient number of geographic
                regions;




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




·
            safety
                and environmental concerns regarding wireless broadband
                transmissions.




**We
      may experience difficulties or delays in the introduction of new or enhanced
      products, which could result in reduced sales, 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 and intensified competition. The difficulties could result in
      reduced sales, unexpected expenses or delays in the launch of new or enhanced
      products or inability to timely introduce to the market the appropriate
      products, all which may adversely affect our results of operations.








7




**We
      face a number of risks relating to the sale of our Cellular Mobile Unit, or
      CMU,
      in 2006, which may adversely affect our financial results.**




In
      November 2006, we completed the sale of substantially all the assets comprising
      our CMU business to LGC Wireless, Inc., or LGC, in exchange for promissory
      and
      convertible notes, or LGC Notes, due December 31, 2007 and 2008 and the
      assumption of certain liabilities.





Because
      we did not receive any cash at the time the transaction was completed, and
      the
      consideration for the sale of the assets was in the form of the LGC Notes due
      December 31, 2007 and 2008, we may not eventually realize all or a portion
      of
      the proceeds from the sale of the CMU business.





**Our
      recent collaboration with Accton Technology Corporation to form Accton Wireless
      Broadband (AWB) may not achieve our expectations to build our market position
      in
      the WiMAX Consumer Electronic Devices market.**




We
      have
      recently collaborated with Accton Technology Corporation to form Accton Wireless
      Broadband (AWB) to develop mass market WiMAX Consumer Electronic Devices. These
      efforts may not result in the anticipated product capabilities in a timely
      fashion or at all, or in achieving market acceptance and may prevent us from
      maintaining or expanding our position in the WiMAX Customer Premise Equipment
      market. Each of these outcomes could have a material adverse effect on our
      results of operations.





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




We
      have
      pursued, and 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.
      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 ordinary
      shares:




·
            issuance
                of equity securities that would dilute our current shareholders’
                percentages of ownership;




·
            large
                write-offs;




·
            the
                incurrence of debt and contingent
                liabilities;




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




·
            diversion
                of management’s attention from other business
                concerns;




·
            contractual
                disputes;




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




·
            potential
                loss of key employees of acquired organizations;
                and




·potential
      effects
      on our cash reserve.









8






**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:






·
            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
                deployments;




·
            the
                fulfillment of all revenue recognition criteria;




·
            customer
                deferral of orders in anticipation of new products, product features
                or
                price reductions;




·
            the
                timing of our product introductions or enhancements or those of our
                competitors or of providers of complementary
                products;




·
            the
                purchasing patterns of our customers and end-users, as well as the
                budget
                cycles of customers for our
                products;




·
            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;




·
            one-time
                charges such as asset impairment and
                restructuring;




·
            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.






9




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.




**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.




**We
      may fail to deliver "turn-key" solutions to our customers**




Recently,
      we experienced an increase demand from existing and potential customers to
      provide a complete operational or "turn key" solution for their deployment
      needs
      where we are responsible for third party deliverables. These solutions require
      us to integrate sub-contractors' technologies, equipment and services. Relying
      on these third-parties increases our liabilities towards these customers. If
      we
      or any of our subcontractors fail to fully comply with the customers'
      requirements, it may adversely affect our results of operations.




If
      we are unable to attain and/or retain large customers our revenues may be
      adversely affected.




In
      2004,
      2005 and 2006, 30.8%, 5.7% and 2.0% of our sales were to a Latin American
      operator respectively. In 2005, sales to our Latin American customer decreased
      significantly due to the nearing completion of a large deployment. Our reliance
      on this large customer adversely affected our results of operations in 2005.
      If
      we are unable to attain and/or retain other large customers our revenues may
      be
      adversely affected.




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




A
      significant portion of our revenues is derived from sales to independent
      distributors. These distributors then resell the products to others, who further
      resell those products to end-users. Changes in the distribution and sales
      channels of our products, a loss of a major distributor, or our inability to
      establish effective distribution and sales channels for new products may impact
      our ability to sell our products and result in a loss of revenues. We are
      dependent upon the acceptance of our products by the market through our
      distributors’ efforts in marketing and sales. In some cases, arrangements with
      our distributors do not prevent them from selling competitive products and
      those
      arrangements do not contain minimum sales or marketing performance requirements.
      These distributors






10






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.




**We
      are dependent upon the success of our direct sales
      efforts.**




Direct
      sales accounted for a t otal
      of
      approximately 52% of our sales in 2004, 48% of our sales in 2005 and 40% of
      our
      sales in 2006.  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 and solutions 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
      or
      project sales and management expertise. We may also face difficulties locating
      and retaining carrier customers who purchase directly from us. 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.




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.




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.




If
      our DSOs **(****Days Sales Outstanding)**increase and
      our revenues decrease we may suffer from a cash shortfall.




In
      2004,
      2005 and 2006 our DSOs were 51, 73 and 69, respectively.  Excluding
      the large Latin American customer the DSOs in 2004, 2005 and 2006 were 73,
      77
      and 70, respectively. We may experience an increase in DSOs and a decline in
      revenues in the future, resulting in a cash shortfall .




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




We
      believe that due to several market developments, including increased competition
      in regions in which we currently operate, the transition in the market demand
      of
      some of our existing and potential products and the mix of our products, such
      as
      Customer Premise Equipment, or CPEs, to commodities and the entry of new large
      operators into developed regions, our gross margin will decline
      overtime from its 2006 rate of 50.5%. If we are






11




unable
      to
      maintain or otherwise increase this gross margin level, it will negatively
      affect our profitability and results of operations.




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




Some
      of
      our products are highly complex and are designed to be deployed in complex
      networks. Although our products are tested during manufacturing and prior to
      deployment, our customers may discover errors after the products have been
      fully
      deployed. If we are unable to fix errors or other problems that may be
      identified in full deployment, we could experience:




·
            costs
                associated with the remediation of any
                problems;




·
            loss
                of or delay in revenues;




·
            loss
                of customers;




·
            failure
                to achieve market acceptance and loss of market
                share;




·
            diversion
                of deployment resources;




·
            diversion
                of research and development resources to fix errors in the
                field;




·
            increased
                service and warranty costs;




·
            legal
                actions or demands for compensation by our customers;
                and




·
            increased
                insurance costs.




In
      addition, our products 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.




**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 .






12




**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 could adversely
      affect our results of operations. In
      2004,
      2005 and 2006,
      we wrote
      off inventory in
      the
      amounts of $11.4 million, $7.3 million and $9.5 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 or with the quality specifications 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.




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 2005 and 2006, as a result of an over-estimation
      of
      our sales, we recorded in our balance sheet an allowance for irrevocable
      inventory purchase commitments in an aggregate amount of approximately $2.4
      million and $2.6 million, respectively. If we experience manufacturing delays,
      we could lose orders for our






13






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 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 which may require us to modify our products and which may
                cause
                delays in product shipments, increased manufacturing costs and increased
                product prices;




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




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




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




**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






14






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.




·
            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.




We
      may
      also 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.






15




**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 infringed a patent,
      trademark or other proprietary right belonging to them. As the Broadband
      Wireless Access market transitions toward standardization, we are more exposed
      to intellectual property litigation by third parties who claim to hold
      intellectual property rights related to such standards. In addition, based
      on
      the size and sophistication of our competitors and the history of rapid
      technological change in our industry, 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.




**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.






16




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




Our
      acquisition of most of the assets and assumed liabilities of InnoWave and our
      amalgamation with interWAVE have significantly strained our management,
      operational and financial resources. Any future growth, including through
      mergers and acquisitions, may increase the strain on our management, operational
      and financial resources. If we do not succeed in managing 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




**We
      depend on key personnel.**




Our
      future success depends, in part, on the continued service of key personnel.
      We
      have recently experienced changes in several senior management personnel
      positions. We believe we were able to retain qualified replacement for such
      positions. However, there is no assurance that the new senior management
      personnel will provide the same or a better level of service to us. In addition,
      if one or more of our key technical, sales or senior management personnel
      terminates his or her employment and we are unable to retain a qualified
      replacement, our business and results of operations could be
      harmed.




**Our
      ability to achieve our strategic, operational and financial goals depends on
      our
      ability to hire, train and retain qualified employees.**




Our
      success depends in large part on the continued contributions of our managerial,
      technical, and sales and marketing personnel. Our
      employees are employed “at will”. This means that our employees are not
      obligated to remain employed by us for any specific period.




The
      process of hiring, training and successfully integrating qualified personnel
      into our operations is a lengthy and expensive one. The market for the qualified
      personnel we require is very competitive. Although
      we did not increase significantly the number of our employees, we are
      experiencing large growth in manpower. Our
      failure to hire and retain qualified employees could cause our revenues to
      decline and impair our ability to achieve our strategic, operational and
      financial goals.




**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 2006 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 and an independent valuation of our assets as of the end of each
      quarter of 2001, we do not believe that we were a PFIC for 2001, 2002 or 2003
      despite the relatively low market price of our ordinary shares during some
      of
      those years. We cannot assure you, however, that the United States Internal
      Revenue Service or the courts would agree with our conclusion if they were
      to
      consider our situation. There is no assurance that we will not become a PFIC
      in
      2007 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 to make 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






17




at
      "Taxation - United States Federal Income Tax Considerations With Respect to
      the
      Acquisition, Ownership and Disposition of our Ordinary Shares - Passive Foreign
      Investment Company Status".




**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 spend 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.
      In connection with our compliance with Section 404 and the other applicable
      provisions of the Sarbanes-Oxley Act of 2002, our management and other personnel
      devote a substantial amount of time, and may need to hire additional accounting
      and financial staff, to assure that we comply with these requirements.
      Compliance may also make some of our activities more time-consuming and costly.
      For example, we expect these rules and regulations to make it more difficult
      and
      more expensive for us to obtain director and other liability insurance, and
      we
      may be required to incur substantial costs to maintain current levels of
      coverage. The additional management attention and costs relating to compliance
      with the Sarbanes-Oxley Act could materially and adversely affect our growth
      and
      financial results.




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




The
      trading price of our ordinary shares has experienced significant volatility
      in
      the past and may continue to do so in the future. Since our initial public
      offering in March 2000, the sales prices of our ordinary shares on the
      NASDAQ Global Market have ranged from a high of $53.12 to a low of $1.55. -On
      April 25, 2007, the last sale price of our ordinary shares on the NASDAQ Global
      Market was $8.48. We may continue to experience significant volatility in the
      future, based on the following factors, among others :






·
            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.






**We
      are defendants in securities class action litigation, which requires extensive
      management attention and resources and can be expensive, lengthy and
      disruptive.**




We
      are
      the defendants in a few lawsuits, including securities class action litigation
      as noted in “Item 8 - Financial Information” under the caption “Legal
      proceedings”. Legal proceedings can be expensive, lengthy and disruptive to
      normal business operations, and can require extensive management attention
      and
      resources, regardless of their merit. Moreover, we cannot predict the results
      of
      legal proceedings, and an unfavorable






18






resolution
      of a lawsuit or proceeding could materially adversely affect our business,
      results of operations and financial condition.




**Operating
      in international markets exposes us to risks, which could cause our sales to
      decline and our operations to suffer.**




While
      we
      are headquartered in Israel, approximately 99% of
      our sales in 2004, 2005 and 2006 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




**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.




19


**Risks
      Relating to Our Location in Israel**




**Conducting
      business in Israel entails special risks.**




We
      are
      incorporated under Israeli law and our principal offices and the majority of
      our
      manufacturing and research and development facilities are located in the State
      of Israel. Political, economic and military conditions in Israel directly affect
      our operations. We could be harmed by any major hostilities involving Israel,
      the interruption or curtailment of trade between Israel and its trading partners
      or a significant downturn in the economic or financial condition of Israel.
      In
      the event of war, we and our Israeli subcontractors and suppliers may cease
      operations which may cause delays in the development, manufacturing or shipment
      of our products. 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.




In
      addition, many of our male employees in Israel, including members of senior
      management, are obligated to perform one month (in some cases more) of annual
      military reserve duty until they reach age 45 and, in the event of a military
      conflict, could be called to active duty. Our operations could be disrupted
      by
      the absence of a significant number of our employees related to military service
      or the absence for extended periods of military service of one or more of our
      key employees. A disruption could materially adversely affect our business,
      operating results and financial condition.




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




We
      have
      received grants from the Government of Israel through the Office of the Chief
      Scientist of the Ministry of Industry, Trade and Labor, or OCS, for the
      financing of a portion of our research and development expenditures in Israel,
      pursuant to the provisions of The Encouragement of Industrial Research and
      Development Law, 1984, referred to as the Research and Development Law. Pursuant
      to our current arrangement with the OCS, it will finance up to 20% of our
      research and development expenses by reimbursing us for up to 50% of the
      approved expenses
      related to our generic research and development projects. In addition, we obtain
      other grants from the OCS to partially fund certain other research and
      development projects. These programs currently restrict our ability to
      manufacture particular products or transfer particular technology outside of
      Israel. The Research and Development Law and related regulation permits the
      OCS
      to approve the transfer of manufacturing rights outside Israel subject to an
      approval of the research committee and in exchange for payment of higher
      royalties, for 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.




In
      addition, we have been granted "Approved Enterprise" status 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. On April 1, 2005, an amendment to the Investment Law came into
      effect which significantly changed the provisions of the Investment Law. The
      amendment revised the criteria for investments qualified to receive tax
      benefits. An eligible investment program under the amendment will qualify for
      benefits as a Privileged Enterprise (rather than the previous terminology of
      Approved Enterprise). Among
      other things the amendment provides tax benefits to both






20




local
      and
      foreign investors and simplifies the approval process. However, the amendment
      provides that terms and benefits included in any certificate of approval granted
      prior to December 31, 2004 will remain subject to the provisions of the law
      as
      they were on the date of such approval. We
      believe that we are currently in compliance with these requirements. However,
      i f
      we fail
      to comply with these conditions in the future, the tax benefits received could
      be canceled and we could be required to pay increased taxes in the
      future. We could
      also be required to refund tax benefits, with interest and adjustments for
      inflation based on the Israeli consumer price index.




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




**We
      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 that 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 2006, the value of the dollar decreased in
      relation to the NIS by 8.2%, and the inflation rate in Israel was (0.1)%. If
      this trend continues, it will adversely affect our result of
      operations.




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




Our
      articles of association contain certain provisions that may delay or prevent
      a
      change of control, including a classified board of directors. In
      addition, Israeli corporate law regulates acquisitions of shares through tender
      offers and mergers, requires special approvals for transactions involving
      directors, officers or significant shareholders, and regulates other matters
      that may be relevant to these types of transactions. These
      provisions of Israeli law could have the effect of delaying or preventing a
      change in control and may make it more difficult for a third party to acquire
      us, even if doing so would be beneficial to our shareholders, and may limit
      the
      price that investors may be willing to pay in the future for our ordinary
      shares. Furthermore,
      Israeli tax considerations may make potential acquisition transactions
      unappealing to us or to some of our shareholders. For example, Israeli tax
      law
      may subject a shareholder who exchanges his or her ordinary shares for shares
      in
      a foreign corporation to taxation before disposition of the investment in the
      foreign corporation.




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




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




21


**ITEM
      4.** **INFORMATION
      ON THE COMPANY**




**A.** **HISTORY
      AND DEVELOPMENT OF THE COMPANY**




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




On
      August 1, 2001, Floware merged with and into us. As a result of the merger
      we 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., and the InterWAVE operations became our Cellular Mobile
      business unit (“CMU”).




In
      November 2006, we completed the sale of our CMU to LGC Wireless, Inc. (“LGC”), a
      privately-held supplier of wireless networking solutions. See
      Item
      5.A. - "Operating and Financial Review and Prospects - Operating
      Results".




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




We
      also
      have several wholly owned subsidiaries worldwide 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
      OVERVIEW**




**General.**




We
      concentrate our resources on a single line of business - wireless broadband.
      As
      a wireless broadband pioneer, we have been driving and delivering innovations
      for more than 10 years, from 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. The WiMAX standard
      is
      the outcome of the standardization work done by the WiMAX ForumTM, widely based
      on the IEEE 802.16 standard working group.




Our
      primary focus is to provide solutions based on the WiMAX standard that are
      used
      for primary wireless broadband access. These solutions provide high-speed
      wireless “last mile” connection to the internet for homes and businesses in both
      developed and emerging regions. We also continue to sell our non-WiMAX products
      in the short and mid term. With more than 3 million units deployed in
      approximately 150 countries, we believe we are the worldwide leader in providing
      wireless broadband access systems. We supply top tier carriers, Internet Service
      Providers, or ISP, and private network operators with solutions based on the
      WiMAX standard as well as other wireless broadband solutions.






22




We
      are
      also targeting the nascent Personal Broadband equipment market. Personal
      Broadband is always- on, all IP-based, high-speed internet access, enabling
      subscribers to use various mobile electronic devices to take their broadband
      connection with them anywhere and enjoy mobile services and applications at
      broadband speeds above 1Mbps. Our strategy is to leverage our experience and
      leadership in both non-standard broadband wireless access (BWA) and current
      WiMAX markets, combined with our brand strength, broad customer base and
      innovative technology in order to play an important role in the WiMAX-based
      mobile broadband market as well.




Our
      products cover the full range of frequency bands targeting fixed, nomadic and
      mobile applications, including, business and residential broadband access,
      corporate VPNs, toll quality telephony, mobile base station feeding, hotspot
      coverage extension, community interconnection, public safety communications
      and,
      in the future, personal broadband services.




**INDUSTRY
      DYNAMICS**




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




***The
      Early Demand for Wireless Broadband***




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 broadband infrastructure). These networks
      involved high investment costs, so the access network infrastructure was not
      established everywhere the demand for broadband existed. Wireless broadband
      networks stepped in to meet this un-served need for broadband services, and
      this
      has been the primary application of wireless broadband networks. This market
      exists primarily in the rural and suburban areas in developed countries and
      in
      more developed areas in developing countries. By bridging the “digital divide”,
      or providing both broadband and basic telephony services in areas where
      telecommunications infrastructure is poor or does not exist, wireless broadband
      grew to comprise more than 5% of the world’s broadband networks.




***The
      Evolution of Wireless Broadband***




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




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




***Government
      Deregulation Creates Demand***




Global
      telecom deregulation is opening up the telecommunications/Internet access
      industries to competition by new players. Unlike the built-in delivery systems
      of wireline infrastructure, wireless technology requires the use of frequencies
      contained within a given spectrum to transfer voice 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, ISPs and other service providers, enabling
      them to launch a variety of broadband initiatives based exclusively on wireless
      networking solutions. During 2006, additional licensed and unlicensed spectrums
      were added in many regions around the world. Increased availability of licensed
      and unlicensed spectrums enables operators to address increasing demand for
      wireless broadband.






23




***Additional
      Factors in the Widespread Adoption of Wireless
      Broadband***




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




·
            Competition
                among various types of telecommunications players to offer multiple
                services using a single network;




·
            Growing
                trend of public access providers to build municipalities’ own
                infrastructures




·
            Rapid
                progression of standardization by international bodies, such as the
                WiMAX
                ForumTM, combined with the wide adoption of these standards by equipment
                vendors and carriers; and




·
            The
                attractive business model that is offered to operators by using high
                performance standardized and interoperable
                products.




***WiMAX
      Technology, Applications and Industry Advantages***




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 is the worldwide standard for
      wireless broadband access and personal mobile broadband applications. Solutions
      based on WiMAX technology enable fixed-line, cable, and mobile operators and
      new
      challengers to compete with each other in the anticipated market for higher
      Average Revenue Per User, or ARPU, services. WiMAX technology has the capacity
      to deliver sufficient bandwidth to enable value-added applications,
      including live video broadcasting, high-speed data, toll-quality voice and
      multimedia content. Most importantly, the WiMAX (IEEE-802.16) 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. This 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.




The
      WiMAX
      standards are defined by the WiMAX ForumTM. The WiMAX ForumTM 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 ForumTM members work to promote the interoperability
      of multiple vendors’ products in the wireless broadband market. Since its
      establishment, the WiMAX ForumTM 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
      ForumTM 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; and






24






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




***Our
      Developing Market: The WiMAX Demand for Personal
      Broadband***




We
      envision a new generation of Personal Broadband networks and services which
      would enable subscribers to take their broadband connection with them anywhere
      and extend their mobile services to broadband speeds above 1Mbps. Personal
      Broadband would reside at the intersection of the fixed and mobile broadband
      worlds, offering subscribers a unique combination of high speed broadband and
      mobile services that are available anywhere. Personal Broadband would be
      always-on, high-speed and all IP-based, providing direct access to the mobile
      internet and creating a dynamic market for various services and applications.




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




However,
      for this next service level of Personal Broadband services to be adopted by
      consumers and businesses, the technology must offer tight security, diverse
      innovative applications, reliability, high quality of service and broadband
      data
      speeds.




To
      differentiate themselves and target customers with the highest ARPU operators
      are interested in providing what may be characterized as “DSL on the move”. So
      far, no technology has been able to technically or economically support this
      type of services which would be targeted initially to highly developed,
      metropolitan areas.




We
      believe that WiMAX is currently the technology that is the most advanced and
      best suited to cost-effectively meet the requirements of Personal Broadband.
      WiMAX solutions, in addition to being standards-based, benefit from the open
      architecture of an all-IP network. Legacy wireline and wireless technologies
      are
      indeed standard but not totally IP-based with an open architecture, as is WiMAX.
      The WiMAX industry, in contrast to other telecom standards and technologies,
      leverages the capabilities of the consumer electronics market such as IP
      innovation, creativity, low cost and advanced services. Alvarion is aiming
      to be
      at the center of this dynamic via its position as a member of the WiMAX
      Forum TM and via
      its go-to-market strategy and business relationships with various partners.




**COMPANY
      STRENGTHS**




For
      more
      than ten years, our primary business activity has been focused on fulfilling
      the
      growing demand for Primary Broadband access by providing solutions and services
      to build wireless broadband networks. 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. We believe
      we
      are the largest vendor with a single business focus in broadband wireless access
      equipment and enjoy a strong brand identity. We have a broad customer base,
      with
      over 200 WiMAX trials or commercial deployments, with product offerings, which
      we believe are the most extensive offered.






25






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




Our
      Wireless Broadband experience enabled us to identify the potential of WiMAX
      in
      early 2002, ahead of most equipment vendors. As a result of this experience
      and
      early strategic decisions, by 2006, we led the market in the number of deployed
      WiMAX-based networks. We have been at the forefront of developments with WiMAX
      technology since its inception, at a company and industry level. Examples of
      our
      active involvement include major roles in the standardization process through
      our work in the WiMAX 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).




***Our
      Mobile Experience***




In
      addition to our wireless broadband and WiMAX experience and expertise, we gained
      expertise in mobility by acquiring interWAVE Communications International at
      the
      close of 2004. Through this acquisition we acquired the know-how to build
      end-to-end cellular mobile solutions, which together with our experience and
      expertise of wireless technologies has assisted us in gaining the essential
      experience in the development of mobile WiMAX solutions.




***Single
      Evolving WiMAX Platform***




We
      believe that 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




**STRATEGY
      FOR GROWTH**




Our
      strategy for future growth is focused on providing complete end-to-end broadband
      wireless solutions, maintaining our current leadership position in existing
      markets and growing along with the market for fixed and nomadic applications,
      while also leveraging our strengths to become a significant participant in
      the
      personal broadband market.




**Opportunities
      for providing Personal Broadband Solutions based on OPEN Architecture**




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




Our
      goal
      is to become a major global vendor of Personal Broadband solutions by being
      at
      the forefront of exploiting the benefits of open architecture characteristics
      of
      WiMAX to create a new operator-centric model based on best-of-breed solutions
      from a host of Open Personal Networks, or OPEN WiMAX ecosystem
      partners.




**The
      WiMAX transformation to OPEN Architecture**




The
      dynamics of WiMAX create an all-IP open architecture, removing barriers to
      entry
      and fostering rapid innovation. Designed from the start as an open standardized
      interoperable technology, OPEN WiMAX enables a complete eco system including
      core network equipment, consumer electronics, service offerings and the end
      user






26




experience.
      This new strategy enables communication service providers to choose the
      combination of vendors and partners that best fit their specific requirements.




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




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




We
      believe that pure players, each an expert in its own field, will team together
      to create best of breed offering. We believe that adopting our OPEN WiMAX
      strategy, provides us with a competitive advantage over large telecom vendors,
      as we offer a one best-of-breed stop-shop.




Our
      OPEN
      WiMAX solution empowers service providers to choose best of breed products,
      whether best-in-class or simply the best-fit solution. As one example of our
      expanding ecosystem, in January 2007 we formed Accton Wireless Broadband, or
      AWB, together with Accton Technology Corporation of Taiwan, to develop mass
      market cost effective WiMAX consumer electronic devices in order to complement
      our WiMAX offerings while facilitating the availability of WiMAX- based Personal
      Broadband services. This cooperation is planned to augment Alvarion’s 4MotionTM,
      our OPEN WiMAX solution, in order to include a variety of
      industry-standards, WiMAX enabled devices and customer-premise equipment while
      enhancing the number and types of self-installable and outdoor WiMAX subscriber
      units. See "WiMAX and Wireless Broadband Solutions - 4MotionTM
Solutions".




**PRODUCTS:**




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




Our
      WiMAX-based BreezeMAX platform is 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 2.3, 2.5,
      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
      quadruple 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 feature set and cost-effective and versatile subscriber units make
      BreezeMAX a preferred broadband wireless solution for service providers who
      are
      interested in improving their business model.




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. In June 2006, we introduced






27




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 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. The
      BreezeMAX Si opens the door for anticipated Personal Broadband and primary
      broadband WiMAX standard-based solutions to become nomadic 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.




BreezeMAX's
      first generation was designed according to the IEEE 802.16-2004 standard,
      partially certified by the WiMAX Forum TM during
      2006 for fixed and nomadic networks, for both Bases Stations and CPEs. Our
      -new
      BreezeMAX platform under development is expected to provide support for fixed,
      nomadic and mobile WiMAX and is being designed according to the IEEE
      802.16e-2005 standard for portable and mobile networks. We intend to have
      BreezeMAX certified according to the evaluation standards and timetable set
      by
      the WiMAX Forum TM for
      802.16-2005(e).




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 TM 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, in which the subscriber terminal is
      disconnected from one base station before connecting to the next base station.
      Mobile access ranges in scope from low to high vehicular speeds, but adds PDAs
      and smart-phone devices, multiple locations and enables a soft handoff, in
      which
      the subscriber maintains a simultaneous connection with two or more base
      stations for a seamless handoff to the base station with the highest quality
      connection. Both consumer and business users have driven the demand for this
      technology that has resulted from the convergence of fixed broadband networks
      and mobile voice networks towards mobile broadband communications.




*4Motion
      Solutions*




Our
      WiMAX
      solution, called 4Motion was introduced to the market during the second half
      of
      2006 and is planned to be commercially available in the second half of 2007.
      This target is planned to coincide with the availability of mobile OPEN WiMAX,
      our Personal Broadband -enabled devices, that utilize chips currently at the
      end
      of the development phase. 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, end-to-end, carrier-class, scalable and cost-effective mobile data
      solutions that deliver true Personal Broadband services of several Mbps per
      subscriber or more with full quality of service (QoS) capabilities that enable
      various applications, anytime, anywhere. Compliance with 802.16e-2005 standards
      and OPEN WiMAX, our 4motionTM solution is expected to give the operators the
      flexibility to choose Best of Breed multi-vendor partners to add third party
      IP
      services, while controlling costs.




The
      4MotionTM solution includes Radio Access Network, or RAN, which is based on
      Alvarion's BreezeMAX product and is comprises of third parties’ core network,
      radio and IP networking elements and end-user devices.




4MotionTM
      will enable a wide range of deployment scenarios such as: personal mobile and
      fixed broadband, Wireless DSL, Residential and business quadruple-play and
      Municipal, public safety and video surveillance.






28




4MotionTM
      will support broadband services for both business and personal services such
      as
      mobile TV, online gaming, instant messaging (IM),voice (VoIP), video
      conferencing, internet browsing, mobile applications, location-based services
      (LBS), virtual private networks (VPN) and file transfers (FTP).





***Our
      Wireless Broadband Access Solutions (Non-WiMAX)***




Although
      our primary focus is to provide solutions based on the WiMAX standard that
      are
      used for primary wireless broadband access, we also continue to sell our
      non-WiMAX products in the short and mid term. We provide a broad range of
      integrated fixed wireless broadband solutions, addressing different markets
      and
      frequency bands, designed 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, 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.




*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 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, 5.7 GHz bands,
      which are mostly unlicensed, and provide gross data rates of up to 54 Mbps
      BreezeACCESS Wi 2 ,
      which
      is planned to become available in 2007, combines the advantages of WiFi access
      with the capabilities of BreezeACCESS VL systems to provide cost-effective
      solutions for personal broadband services today. With its design, BreezeACCESS
      Wi 2 gateway
      solutions can be deployed almost anywhere to provide broadband mobility to
      standard IEEE 802.11 b/g end user devices such as laptops, PDAs, smart-phones
      and portable gaming devices. BreezeACCESS Wi 2






29




solutions
      are ideal for operators, municipalities and communities looking to build
      metropolitan broadband networks or to integrate WiFi hot zone capabilities
      into
      their existing broadband wireless access networks. This solution provides
      Personal Broadband services ranging from public Internet access to public safety
      and Intranet applications




OFDM
      technology, on which BreezeACCESS OFDM and BreezeACCESS VL are based, 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 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.




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 Virtual Local Networks, or VLANs, enabling
      secure operation, and VPN services, allowing tele-workers or remote offices
      to
      conveniently access their enterprise network.






30




*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.




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.




*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.






31




*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 Solutions for both WiMAX and Non-WiMAX Wireless Broadband***




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




Our
      full
      portfolio of network management products include:




·
            *AlvariSTAR,*which
                configures, monitors and manages our*BreezeMAX*,*4Motion,**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; and




·
            *IMS*,
                which configures, monitors and manages our eMGW
                product.




BreezeMANAGE,
      WALKnet, BreezeVIEW, AlvariSTAR, 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.




***Accessories
      Offered by Alvarion***




In
      order
      to support our products and provide comprehensive solutions to our customers,
      we
      provide a family of accessories designed to extend the range of our BreezeMAX,
      4Motion, BreezeACCESS, WALKair and BreezeNET solutions. These accessories
      include antennas, cables, surge arrestors, amplifiers and other components.
      We
      also offer various configuration and monitoring tools in addition to the
      BreezeMANAGE,






32




WALKnet
      and BreezeVIEW network management applications for our BreezeACCESS, WALKair
      and
      BreezeACCESS products.




***Our
      Geographic Markets***




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
      the
      business opportunities, robust equipment, extensive coverage and non
      line-of-sight capabilities. In addition, government assistance in ‘closing the
      digital divide’ in these countries, also serves as an incentive for alternative
      operators to consider wireless systems to provide broadband services. Examples
      of these locations have been identified in the U.S., Western and Eastern Europe,
      Asia Pacific and South America.




We
      believe that wireless broadband service providers have found that deploying
      wireless broadband and new WiMAX solutions in developing countries (where
      telecommunication coverage is lacking due to poor infrastructure) have enabled
      such providers to afford major networks to provide broadband and telephony
      services. Within this group are countries where basic voice services remain
      scarce, that look to our toll quality voice networks to fill the gap and provide
      telephony service. Examples of these locations have been identified in Africa,
      CIS (Commonwealth of Independent States, former USSR), Latin America and Asia
      Pacific.




In
      2006,
      the industry showed signs of early benefits of WiMAX and a growing interest
      in
      Personal Broadband. We are increasing our sales and marketing efforts in certain
      regions in developed countries by offering our nomadic and portable solutions
      and intend to offer Personal Broadband and mobile applications in high-density
      areas.




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




*Geographic
      breakdown of revenue*




2004
            2005
            2006In thousandsNorth
                America
            $
                33,316
            16.7%
            $
                29,564
            16.7%
            $
                25,047
            13.8%Latin
                America
            77,747
            38.9%
            32,946
            18.6%
            30,857
            17.0%Europe,
                Middle East and Africa
            79,838
            39.8%
            102,685
            58.0%
            111,959
            61.6%Asia
                Pacific
            9,150
            4.6%
            11,732
            6.7%
            13,731
            7.6%$
                200,051
            100.0%
            $
                176,927
            100.0%
            $
                181,594
            100.0%







**Our
      Target Customers**




*Tier
      One and Two and Cellular Operators*




Tier
      one
      and tier 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. These carriers
      are a primary focus for our WiMAX equipment since they have a strong strategic
      interest in deploying WiMAX in their network. Tier one and two carriers are
      looking for the technology






33




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 , Telkom
      South Africa Ltd., Cable & Wireless International, Sviaz Invest ,Nippon
      Telegraph and Telephone West Corporation (NTT West), Bharti Tele-Ventures
      Limited (Airtel Enterprise Services) and Telefonos de Mexico S.A. de C.V.
      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.




In
      addition, 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 media centric, Personal
      Broadband service and competitive broadband Internet access services to their
      existing or new customer base. Some examples of this group include , Orange,
      Vodafone , TMobile, Cegetel, Megafone, Meditel, MTN, China Mobile, and Entel
      (Chile).




*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 have increasingly exhibited an interest 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 Euskaltel, Finnet, TDS, Airzed, Czech on
      line, Altitude 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), a subsidiary of Telefonica de Espana, eMobile (Japan),
      WorldMAX (Holland), Irish Broadband, and Ertach (Argentina). This group is
      expected to become early adopters of WiMAX portable and mobile
      services.




*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. Examples may be found in
      various U.S communities like Lexena, Kansas and Corpus Christi, Texas, and
      many
      others in the Silicon Valley.






34






*2006
      Partial Customer List for WiMAX and other fixed wireless broadband
      systems*




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




·
            AIRCEL


·
            ALCATEL
                SHANGHAI BELL COMPANY


·
            ALLTEL,
                USA


·
            ALTITUDE
                TELECOM, FRANCE


·
            AXTEL
                MEXICO, MEXICO


·
            BHARTI
                TELE-VENTURES LIMITED ( AIRTEL ENTERPRISE
                SERVICES)


·
            CABLE
                & WIRELESS, Worldwide


·
            DIGITAL
                BRIDGE, USA


·
            ENFORTA,
                RUSSIA


·
            ENTEL
                CHILE SA, CHILE


·
            ERTACH
                SA (formerly MILLICOM), ARGENTINA


·
            FINNET
                GROUP, FINLAND


·
            FRANCE
                TELECOM, FRANCE


·******
            GHANA
                TELECOM, GHANA


·
            IBERBANDA,
                S.A, SPAIN


·
            IRISH
                BROADBAND INTERNET, IRELAND


·
            JSC
                COMSTAR - UNITED TELESYSTEMS,
                RUSSIA


·
            MEGAFONE,
                RUSSIA


·
            MOSSEL
                JAMAICA LIMITED, JAMAICA


·
            MTN
                UGANDA, UGANDA


·
            NETIA
                SA, POLAND


·
            ORANGE
                ROMANIA S.A., ROMANIA


·
            SOVINTEL,
                RUSSIA


·
            TELEFONICA
                CELULAR DEL PARAGUAY


·
            TELEFONOS
                DE MEXICO S.A., MEXICO


·
            TELEKOM
                SERBIA, SERBIA


·
            TELKOM
                SOUTH AFRICA LTD., SOUTH AFRICA


·
            TELMEX
                PERU S.A., PERU


·
            TPSA
                POLAND, POLAND


·
            TRANS
                TELEKOMUNIKACJA POLSKA S.A., BULGARY


·
            VODAFONE
                ROMANIA S.A, ROMANIA







**TECHNOLOGIES
      UNDERLYING OUR PRODUCTS**




We
      use
      internally developed core technologies and continue to invest heavily in
      augmenting our expertise in networking, radio and digital signal processing,
      or
      DSP, modem technologies. We also participate as active members in international
      standards committees.




***Networking
      Technology***




To
      support the OPEN WiMAX concept and our 4Motion solution as well as our BreezeMAX
      and other products, we have developed or otherwise acquired, and continue to
      invest in, networking expertise in the areas of IP Access Mobile IP that is
      particularly adapted for mobile WiMAX networks, Access Service Networks Gate
      Ways (ASN-GW), PPPoE (Point-to-Point Protocol Over Ethernet) tunneling, Virtual
      Private Networks (VPN) and






35






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.




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
      Technology***




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, 3.3-3.8 GHz, 4.9-6 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. 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 Technology***




We
      maintain strong expertise in DSP and in modem design. Our capabilities include
      a
      hardware oriented design, as well as programmable DSP oriented design. Our
      modem
      design hinges on the Software Defined Radio paradigm. The extensive
      configurability of our base station modems, through 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, as well as the IEEE 802.16e-2005 standard
      for broadband mobile, while enjoying the benefits of OFDMA and smart-antenna
      processing. The base station architecture and capabilities 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.




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






36






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.




***Participation
      in International Standards Committees***




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 ForumTM, 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 ForumTM is Dr. Mohammad Shakouri, Vice President of
      Business Development at Alvarion, who holds the position of Vice Chair of the
      WiMAX ForumTM, and chairs the Marketing Working Group. For a more detailed
      description of the WiMAX ForumTM, please see "Item 4B - Business Overview -
      General - WiMAX Technology, Applications and Industry Advantages".




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. Our representative, Dr. Vladimir Yanover, holds the position of co-chair
      of WiMAX ForumTM’s Technical Working Group (TWG), responsible for defining the
      interoperability profiles and the interoperability and conformance tests for
      the
      IEEE802.16e-2005 standard.




We
      actively participate in the IEEE 802.16’s Broadband Wireless Access work group.
      Similarly, we are part of the WiMAX ForumTM’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
      Goldhamer, 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 has recently embraced
      the OFDMA mode. Ms. Goldhamer is acting to harmonize the IEEE and ETSI standards
      to create a worldwide broadband standard for converged Fixed-Mobile
      applications.




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






37




We
      are
      very active in the international regulatory 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 PRODUCTS**




We
      market
      our products through an extensive network of more than 220 active partners.
      These include original equipment manufacturers (OEM), local partners in various
      geographic regions, system integrator partners, solution partners, 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
      operators.




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




Our
      products are aimed at the WiMAX and other wireless broadband and wireless voice
      markets. We sell in these markets through OEM agreements or other strategic
      partner 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 cultivate direct relationships with
      communication service providers. By doing so, we believe that we are better
      able
      to understand the needs of new operators, such as innovative challengers, Tier
      1
      and global operators, and are better able to identify and anticipate trends
      in
      the WiMAX and wireless broadband market.




We
      have
      strategic relationships with major telecommunications equipment manufacturers,
      such as Siemens, Alcatel- Lucent, Nera and global system integrators, such
      as
      IBM. Pursuant to arrangements entered into with these partners, they are
      permitted to distribute our products on either a regional or worldwide basis
      under private labels. We are seeking additional strategic relationships with
      international partners, strong local partners and other key companies to
      increase our exposure and establish ourselves as a supplier to 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
      industry and 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.






38




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 SUPPLIERS**




We
      currently subcontract most of the manufacturing of our products. We have a
      pre-qualification process for our contract manufacturers, which includes the
      examination of the technological skills, production capacity and quality
      assurance ability of each contract manufacturer. Our manufacturing capacity
      planning is based on rolling 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 and Taiwan. We perform our quality assurance,
      final assembly and testing operations of our products at our facilities in
      Tel
      Aviv, Omer, 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 and
      Omer 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 contract manufacturers are ISO 9002 certified. Our Tel Aviv and Omer
      locations are ISO 14000 certified.




**PROPRIETARY
      RIGHTS**




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 59 patents issued by patent offices in several countries,
      with 40 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.






39




Given
      the
      rapid pace of technological development in the communications industry, we
      also
      cannot assure you that our products may not be adjudicated as infringing on
      existing or future proprietary rights of others. Although we believe that our
      technology has been independently developed and that none of our intellectual
      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 or to design around such 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.




**THE
      COMPETITIVE ENVIRONMENT IN WHICH WE OPERATE**




The
      markets for our products are very competitive and we expect that competition
      will increase in the future when the personal broadband WiMAX market matures,
      both with respect to products that we are currently offering, and with respect
      to products that we are developing. We also expect more competition in this
      market in light of announcements by large telecom equipment vendors that they
      intend to serve this market. We believe the principle competitive factors in
      the
      markets for our products include: price
      and
      price/performance ratio;




·
            technology;


·
            regulation
                and product certifications;


·
            ability
                to support new industry standards;


·
            product
                time to market;


·
            brand
                strength and sales channels;


·
            integration
                and financing capabilities; and


·
            quality
                of service.




Companies
      that are engaged in the manufacture and sale, or the development, of products
      that compete with our wireless broadband products include Airspan Inc,
      Alcatel-Lucent, Aperto Networks, Ericsson, IP Wireless, Motorola, Navini,
      Nortel, Terabeam, Inc., Redline, Samsung, Siemens, SR Telecom and ZTE. Other
      vendor members of the WiMAX ForumTM 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 ,3G and LTE cellular technologies and satellite.




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




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.






40




**GOVERNMENT
      REGULATION**




Our
      business is premised on the availability of certain radio frequencies for
      two-way broadband communications. Radio frequencies are subject to extensive
      regulation under the laws of each country and international treaties. Each
      country has different regulation and regulatory processes for wireless
      communications equipment and uses of radio frequencies. In the United States,
      our products are subject to FCC rules and regulations. In other countries,
      our
      products are subject to national or regional radio authority rules and
      regulations. Current FCC regulations permit license-free operation in
      FCC-certified bands in the radio spectrum in the United States. 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.




In
      many
      countries, the unavailability of radio frequencies for two-way broadband
      communications has inhibited the growth of these networks. The process of
      establishing new regulations for Wireless Broadband frequencies and allocating
      these frequencies to operators is complex and lengthy. The regulation of
      frequency licensing began during 1999 in many countries in Europe and South
      America and continues in many countries in these and other regions. Licensed
      blocks in 2.3, 2.5, 3.3, 3.5, 3.6 GHz were released in some countries. However,
      this frequency licensing regulation process may suffer from delays that may
      postpone commercial deployment of products that operate in licensed bands in
      any
      country that experiences this delay. 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
      5GHz.




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
      STRUCTURE**




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.;






41




·
            Alvarion
                UK LTD., incorporated under the laws of
                England;




·
            Alvarion
                SARL*, incorporated under the laws of
                France;




·
            Alvarion
                SRL, incorporated under the laws of
                Romania;




·
            Alvarion
                Asia Pacific Ltd., incorporated under the laws of Hong
                Kong;




·
            Alvarion
                do Brasil LTDA, incorporated under the laws of
                Brazil;




·
            Alvarion
                Uruguay SA, incorporated under the laws of
                Uruguay;




·
            Alvarion
                Japan KK, incorporated under the laws of
                Japan;




·
            Alvarion
                Israel (2003) Ltd., incorporated under the laws the State of
                Israel;




·
            Alvarion
                Spain, S.L, incorporated under the laws of
                Spain;




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




·
            Alvarion
                Telsiz Sistemleri TicaretA.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;




·
            Advance
                Communication Inc. incorporated under the laws of Delaware, United
                States;




·
            Microcellular
                San Diego incorporated under the laws of California, United
                States;




·
            Wireless
                Inc. incorporated under the laws of Delaware, United
                States;




·
            Interwave
                Communications incorporated under the laws of
                Holland;




·
            Alvarion
                Philippines incorporated under the laws of
                Philippines;




·
            Kermadec
                Telecom B.V. incorporated under the laws of
                Holland;




·
            Alvarion
                GmbH incorporated under the laws of Germany;
                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 EQUIPMENT**




We
      do not
      own any real estate. On December 31, 2006, we leased an aggregate of
      approximately 235,000 square feet in Israel for annual lease payments (including
      management fees) of approximately $2.8 million and incur annual parking expenses
      in connection with this lease of approximately $0.4 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 the year 2011. We
      also lease approximately 17,250 square feet of office facilities in Mountain
      View California, at an annual rent of approximately $0.2 million. These premises
      serve as the corporate headquarters of our U.S. subsidiary, Alvarion Inc, and
      as
      our principal sales and marketing office in North America. In addition, we
      lease
      office space for the operation of our facilities in France, Romania, China,
      Hong
      Kong, Uruguay, Japan, Brazil, Mexico, Philippines, Poland, Russia, Singapore,
      Italy and Spain.




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






42






**ITEM
      4A.** **UNRESOLVED** **STAFF** **COMMENTS**




Not
      applicable














43


**ITEM
      5.** **OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS**




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




**A.**  **OPERATING
      RESULTS**




**Overview**




We
      are a
      leading provider of WiMAX and non-WiMAX wireless broadband systems. We supply
      carriers, ISPs and private network operators with WiMAX (Worldwide
      Interoperability for Microwave Access) and other wireless broadband solutions.
      Our solutions are designed to cover the full range of frequency bands with
      fixed, portable and mobile applications, to enable the delivery of Personal
      Broadband services, business and residential broadband access, corporate VPNs
      (Virtual Private Network), toll quality telephony, mobile base station feeding,
      hotspot coverage extension, community interconnection and public safety
      communications.




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




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




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
      solutions are usually used in a point-to-multipoint architecture and address
      a
      wide scope of end-user profiles, from the consumers, residential and small
      office, home office, or SOHO, markets, through small and medium enterprises,
      or
      SMEs, and multi-tenant units/multi-dwelling units.




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.






44




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.




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




On
      November 21, 2006, we sold substantially all of the assets and certain
      liabilities related to our CMU business, to LGC Wireless Inc (“LGC”), a
      privately held US company. The CMU business is classified as discontinued
      operations.




**2006
      Highlights**




In
      2006
      we continued to focus strategically on our main businesses, broadband wireless
      access and WiMAX solutions. We believe that a variety of our achievements in
      2006 will enable us to continue to improve our long term performance and
      to
      meet our Broadband Wireless and WiMAX technical, financial and strategic
      objectives.




During
      2006 we focused on expanding the breadth of our customer base, and received
      orders from a variety of incumbents and other customers from around the world.
      We accomplished several strategic and financial milestones including:





 ̈
            Converting
                operators from trialsand
                smaller scaledeployments
                to larger scale commercial deployments withrepeated
                customerssuch
                as Iberbanda, a subsidiary of Telefonica de Espana, Netia in Poland,
                and
                Telecom South Africausing our WiMAX solution.


 ̈
            Completing
                the development of a WiMAX solution in a wide range of frequencies
                and
                applicationsand
                reaching progress in our WiMAX mobile solutions development road
                map.


 ̈
            Developing
                our go-to-market strategy, our new OPENTM WiMAX strategy, based on a
                variety of strategic partnerships
                with:


·
            Premier
                technical partners including Intel, collaboration with Cisco for
                core
                network components, and our cooperation with Accton, a Taiwanese
                manufacturer, that will work with us to produce customer premises
                units
                and PC cards to complement our 4Motion personal broadband
                solution.


·
            We
                have been developing relationships with strong local partners in
                key
                geographies and expanding our already extensive network of distributors
                both geographically and within key vertical markets.





The
      breadth of our WiMAX customer base is one of our major achievements this year.
      Working with a number of different operators provides us with a greater
      understanding of our customers’ application requirements and plants the seeds
      for our future growth. We believe the importance of these new partners and
      others will become more visible over the next year or two.





In
      2006
      and onwards, one of our key challenges is to successfully manage the transition
      from our non-WiMAX to WiMAX products and from one WiMAX solution to the other.
      During the year, we experienced delays in orders for our non-WiMAX products,
      and
      low revenue growth (approximately 3% over 2005) due to the continuing market
      transition to WiMAX based products. This trend may continue as customers may
      continue to






45




delay
      orders for our products until the introduction of our additional new WiMAX
      products. In addition we continued to increase our investments on our WiMAX
      solutions in particular mobile WiMAX products and as a result increased
      our overall operating expenses by approximately 22%. The increase in our
      operating expenses was partially offset by the continuing improvement in our
      gross margins of approximately 3% mainly due to the continued implementation of operational efficiency measures and cost reduction
      programs, including improvement in manufacturing processes and in the terms
      with
      our subcontractors, and due to the utilization of previously written-off
      inventory, as well as the change in the mix of our revenues by
      products.




During
      2006 we continued to experience challenges in our CMU business
      and were not satisfied with the performance of this unit. Consequently, during the fourth quarter, we completed
      the sale of substantially all of the assets of the CMU business and the
      assumption of certain liabilities of that unit. The transaction enables us
      to
      focus all of our resources and attention on our WiMAX initiatives .
      Hence,
      results of the CMU are classified under U.S. GAAP as discontinued operations
      and
      are not included in the results from continuing operations for all
      periods .





Our
      net
      loss in 2006 increased significantly by $28.1 million to approximately $40.8
      million. This increase was primarily a result of the net loss from discontinued
      operations of approximately $36.2
      million, which increased by $19.1 million in 2006, and the effect of the
      adoption of SFAS 123(R) of approximately $6.5
      million which was a portion of the $18.2 million increase in our operating
      expenses over
      2005. These amounts were partially
      offset by a
      $7.9
      million increase in gross profit over our 2005 gross profit.




**Critical
      Accounting Principles**




Our
      financial statements are prepared in accordance with generally accepted
      accounting principles in the United States, and audited in accordance with
      standards of the Public Company Accounting Oversight Board (United States).
      A
      discussion of the significant accounting policies 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:




*Discontinued
      Operations.* On
      November 21, 2006, we signed an agreement to sell substantially all of the
      assets and assign certain liabilities related to the Cellular Mobile unit
      ("CMU"). At closing, we recognized such transaction as a divestiture of
      operations and therefore the results of the CMU activities for all reported
      periods were reclassified into one-line item in the statement of operations
      below the results from continuing operations under the "Loss from discontinued
      operations". The assets and liabilities related to the CMU as at December 31,
      2005 and 2006 were reclassified in our balance sheets as assets and liabilities
      from discontinued operations, respectively. In addition, the cash flow of the
      CMU was also disclosed separately in our statements of cash flows for 2004,
      2005
      and 2006.





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






46




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. We regularly review the amounts
      due
      and related allowance by considering factors such as historical experience,
      credit quality, age of the accounts receivable balances, and current economic
      conditions that may affect a customer’s ability to pay. For certain accounts
      receivable balances, we are also covered by foreign trade risk insurance. 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 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.




Note
      2g
      to our financial statements describes the write-offs and provisions which we
      made and recorded in 2004, 2005 and 2006 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.






47




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, InnoWave in 2003 and our merger
      with Floware in 2001, our balance sheet as of December 31, 2006 and 2005
      includes acquired intangible assets, such as goodwill, current technology,
      customer relations and trade names, which totaled approximately $61.2 million
      and $63.9 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 impairment, our projections
      are
      based on the information available at the respective valuation dates, and may
      differ from actual results. As a result of the sale of substantially all of
      the
      assets and
      the
      assignment of certain liabilities of the
      CMU, the intangible assets related to the acquisition of interWAVE that were
      allocated to the CMU activity in 2005, were classified in our balance sheet
      as
      assets from discontinued operations.




*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
      impairment 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, 2006 we had total goodwill of $57.1 million on our balance sheet. Goodwill
      is tested for impairment by comparing the fair value of the reporting unit
      with
      its carrying value. 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. During 2006, before the sale of the CMU
      business, we identified indications of impairment of goodwill of $23.4 million
      related to this unit. This charge is included in the results of discontinued
      operations. There was no indication of impairment related to our continuing
      operations. 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.




*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, 2006, the amounts
      allocated to current technology from the InnoWave acquisition and the Floware
      merger totaled $0.5 million and $3.6 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, 2006 and 2005, 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.




*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






48




primarily
      estimated based upon historical trends in the volume of product returns within
      the warranty period and the cost to repair or replace the equipment. Technical
      support labor cost is primarily estimated based upon historical trends in the
      rate of customer calls and the cost to support the customer calls within the
      warranty period . To the
      extent we experience increased warranty claim activity or increased costs
      associated with servicing those claims, our warranty accrual will increase,
      resulting in decreased gross profit.




*Stock-Based
      Compensation Expense.* **** On
      January 1, 2006, we adopted FASB Statement No. 123 (Revised 2004),
      Share-Based Payment, or SFAS 123(R), which requires the measurement and
      recognition of compensation expense for all share-based payment awards made
      to
      our employees and directors including employee stock options which are based
      on
      estimated fair values. Stock-based compensation expense recognized under SFAS
      123(R) for 2006 was $6.9 million. For fiscal 2005 and fiscal 2004, stock-based
      compensation expense of $563,000 and $60,000, respectively had been recognized
      under previous accounting standards. See Note 2m to our Consolidated Financial
      Statements for additional information.





Upon
      adoption of SFAS 123(R), we began estimating the value of employee stock options
      on the date of grant using a Black-Scholes model. Prior to the adoption of
      SFAS
      123(R), the value of each employee stock option was estimated on the date of
      grant using the intrinsic value method in accordance with APB No. 25 and the
      Black-Scholes model for the purpose of the pro forma financial information
      provided in the notes to the financial statement in accordance with SFAS 123.





The
      determination of fair value of stock options awards on the date of grant is
      affected by several factors including our stock price, our stock price
      volatility, risk-free interest rate, expected dividends and employee stock
      option exercise behaviors. If such factors change and we employ different
      assumptions in the application of SFAS 123(R) in future periods, the
      compensation expense that we record under SFAS 123(R) may differ significantly
      from what we have recorded in the current period.




*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




49




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.




**Results
      of Operations**




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, 2004, 2005 and 2006.




**2004**
            
            **2005**
            
            **2006****Total**
            
            
            **Total**
            
            
            **Total****revenues**
            **Percentage**
            
            **revenues**
            **Percentage**
            
            **revenues**
            **Percentage**Inthousands
            Of
                sales
            
            Inthousands
            Of
                sales
            
            Inthousands
            Of
                salesIsrael
            
            $
                2,268
            1.1%
            
            $
                1,271
            0.7%
            
            $
                863
            0.5%United
                States (including Canada)
            
            33,316
            16.7%
            
            29,564
            16.7%
            
            25,047
            13.8%Europe
                (without Russia, Romania, Italy and Spain)
            
            24,845
            12.4%
            
            40,341
            22.8%
            
            39,903
            22.0%Russia
            
            13,794
            6.9%
            
            11,278
            6.4%
            
            9,517
            5.2%Mexico
            
            64,005
            32.0%
            
            14,790
            8.4%
            
            8,023
            4.4%Africa
            
            18,285
            9.1%
            
            25,924
            14.7%
            
            22,904
            12.6%Spain
            
            8,678
            4.3%
            
            10,678
            6.0%
            
            14,563
            8.0%Asia
            
            9,150
            4.6%
            
            11,732
            6.6%
            
            13,731
            7.6%Latin
                America (without Mexico)
            
            13,742
            6.9%
            
            18,156
            10.3%
            
            22,834
            12.6%Italy
            
            4,998
            2.5%
            
            6,565
            3.7%
            
            10,771
            5.9%Romania
            
            6,970
            3.5%
            
            6,628
            3.7%
            
            13,438
            7.4%$
                200,051
            100.0%
            
            $
                176,927
            100.0%
            
            $
                181,594
            100%





50






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,****2004**
            
            **2005**
            
            **2006**(In
                thousands)Sales
            
            $
                200,051
            
            $
                176,927
            
            $
                181,594Cost
                of sales
            
            101,169
            
            85,817
            
            80,410Write-off
                of excess inventory and provision for inventory purchase
                commitments
            
            11,412
            
            7,338
            
            9,472Gross
                profit
            
            87,470
            
            83,772
            
            91,712Operating
                costs and expenses:Research
                and development, gross
            
            31,231
            
            32,772
            
            42,042Less
                - grants
            
            3,897
            
            3,062
            
            3,235Research
                and development, net
            
            27,334
            
            29,710
            
            38,807Selling
                and marketing
            
            38,748
            
            39,900
            
            44,929General
                and administrative
            
            9,385
            
            9,602
            
            13,680Amortization
                of intangible assets
            
            2,676
            
            2,685
            
            2,676Total
                operating expenses
            
            78,143
            
            81,897
            
            100,092Operating
                profit (loss)
            
            9,327
            
            1,875
            
            (8,380)Financial
                income, net
            
            3,821
            
            2,551
            
            3,796Income
                (loss) from continuing operations
            
            13,148
            
            4,426
            
            (4,584)Loss
                from discontinued operations, net
            
            (12,297)
            
            (17,044)
            
            (36,167)Net
                income (loss)
            
            $
                851
            
            $
                (12,618)
            
            $
                (40,751)








**Year
                Ended December 31,****2004**
            
            **2005**
            
            **2006**(As
                a percentage of sales)**Statement
                of Operations Data:**Sales
            100.0%
            
            100.0%
            
            100.0%Cost
                of sales
            50.6
            
            48.5
            
            44.3Write-off
                of excess inventory and provision for inventory purchase
                commitments
            5.7
            
            4.1
            
            5.2Gross
                profit
            43.7
            
            47.4
            
            50.5**Operating
                costs and expenses:**Research
                and development, gross
            15.6
            
            18.5
            
            23.2Less
                - grants
            1.9
            
            1.7
            
            1.8Research
                and development, net
            13.7
            
            16.8
            
            21.4Selling
                and marketing
            19.4
            
            22.6
            
            24.7General
                and administrative
            4.7
            
            5.4
            
            7.5Amortization
                of intangible assets
            1.3
            
            1.5
            
            1.5Total
                operating expenses
            39.1
            
            46.3
            
            55.1Operating
                profit (loss)
            4.6
            
            1.1
            
            (4.6)Financial
                income, net
            1.9
            
            1.4
            
            2.1Income
                (loss) from continuing operations
            6.5
            
            2.5
            
            (2.5)Loss
                from discontinued operations, net
            (6.1)
            
            (9.6)
            
            (19.9)Net
                income (loss)
            0.4%
            
            (7.1%)
            
            (22.4%)








51




**Year
      Ended December 31, 2006 Compared with Year Ended December 31,
      2005**




*On
      November 21, 2006, we sold substantially all of the assets and certain
      liabilities related to the CMU, representing the majority of former interWAVE
      business, to LGC. Pursuant to the terms of the sale agreement, LGC issued to
      us
      promissory notes and a convertible note.* ** *At
      closing, we recognized such* *transaction as a divestiture of operations* *and
      therefore the results of the CMU activities for all reported periods were
      presented in one-line item in the statement of operations below the results
      from
      continuing operations under the "Loss from* *discontinued
      operations" .The assets and liabilities of the CMU business as of December
      31,
      2005 and 2006 are presented separately in our balance sheets as assets and
      liabilities from discontinued operations, respectively. The results of the
      CMU
      operations are presented as discontinued operations for all periods presented.
      In addition, the cash flow of the CMU was also disclosed separately in our
      statements of cash flows for 2004, 2005 and 2006. Note 1d to our financial
      statements further describes this transaction.*





*Sales* .
      Sales
      in 2006 were approximately $181.6 million, an increase of approximately 2.7%
      compared with sales of approximately $176.9 million in 2005. In 2006, BreezeMAX
      revenues totaled approximately $72 million, or 40% of total revenue, compared
      with approximately $30 million or 17% of revenue in 2005. The increase of our
      total sales in 2006 derived mainly from the increase of the BreezeMAX revenues,
      a result of the market transition from non-WiMAX to WiMAX based solutions,
      which
      was offset by a decrease in our non-WiMAX broadband wireless
      products.





Sales
      in
      Europe, Middle East and Africa reached approximately 62% of our sales in 2006,
      which represents an increase over 2005 sales of approximately 4% in this region.
      This increase is mainly attributed to the fact that some trials and small-scale
      WiMAX deployments emerged into larger scale commercial deployments by innovative
      challengers and incumbents. In addition we experienced continued progress in
      the
      spectrum allocation process in this region and the adoption of
      our
      broadband wireless products by
      well-capitalized independent operators. Sales in Central and Latin America
      accounted for 17% of our sales in 2006 compared to 19% of our sales in 2005
      in
      this region, which represents a decrease of approximately 2% in percentage
      of
      total sales mainly due to the completion of a large scale deployment at the
      beginning of 2005. Sales in North America accounted for approximately 14% of
      our
      sales in 2006, compared to approximately 17% in 2005 in this region. Sales
      in
      Asia Pacific accounted for approximately 8% of our sales in 2006 compared to
      approximately 7% in 2005 in this region.





*Cost
      of sales* .
      Cost of
      sales consists primarily of cost of components, cost of product manufacturing
      and assembly, labor, overhead and
      other
      costs associated with production. Cost
      of
      sales was approximately $80.4 million in 2006, a decrease of approximately
      6.3%
      compared with cost of sales of approximately $85.8 million in 2005. Cost of
      sales as a percentage of sales decreased to approximately 44.3% in 2006 from
      approximately 48.5%
      in
      2005. This decrease is primarily attributable to a reduction in the fixed
      expenses, including lease, municipality taxes and payroll expenses, cost
      reduction programs, as well as the change in the mix of our revenues by
      products.





52




*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, for example, due
      to
      the transition in demand from non-WiMAX to WiMAX products, it would be
      written-down or written-off. This would result in a charge to our statement
      of
      operations and a corresponding reduction in our inventory and shareholders’
equity. Changes in demand for our products and in our estimates for demand
      create changes in provisions for obsolete inventory. As part of our ordinary
      course of business we evaluate, on a quarterly basis, our actual inventory
      needs
      versus our sales projections and write-off excess inventory and un-cancelable
      purchase commitments from our suppliers and subcontractors. In 2006, 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 $9.5 million,
      compared to approximately $7.3 million in 2005.




*Inventory
      utilization* *.*  In
      response to the market condition in 2001 and after evaluating industry trends,
      we performed an inventory evaluation model designed to align our inventory
      levels to the market conditions and anticipated customer demand. 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 and thereafter 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. In 2006 and 2005, approximately $ 3.6  million and
      $4.2 ** million, respectively, of inventory previously written-off consistent with our inventory
      evaluation model 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
      2006 and 2005 by 2.0% and 2.4 % 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.




*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 million in 2006,
      an increase of approximately 28.4% compared with gross research and development
      expenses of approximately $32.7 million in 2005. This increase is primarily
      attributable to an increase of approximately 15% in our headcount in 2006 as
      part of the intense investment in our WiMAX development initiative. In addition,
      costs increased due to the adoption of Statement of Financial Accou nting
      Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") which
      required the measurement and recognition of compensation expense of approximately $1.41
      million based on estimated fair values for all share-based payment
      awards. Gross
      research and development, as a percentage of sales increased to 23.2% in 2006
      from 18.5% in 2005, primarily as a result of the increase in R&D expenses.
      Grants from the
      Government of Israel and other jurisdictions for funding approved research
      and
      development projects totaled
      approximately $3.2 million in 2006 and $3.1 million in 2005. Research and
      development expenses, net, were approximately $38.8 million in 2006, compared
      with approximately $29.7 million in 2005.






53




*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 $44.9 million in
      2006, an increase of approximately 12.5% compared with selling and marketing
      expenses of approximately $39.9 million in 2005. This increase is primarily
      attributable to the increase in headcount and related expenses, increased
      efforts to market our WiMAX solutions and to the recognition
      of compensation expense of approximately $1.42
      million related to
      the
      adoption of SFAS 123(R). Selling and marketing expenses as a percentage of
      sales
      increased to 24.7% in 2006 from 22.6% 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 $13.7 million in 2006, an
      increase of approximately 42.7% compared with general and administrative
      expenses of approximately $9.6 million in 2005. This increase is primarily
      attributable to the recognition
      of compensation expense of approximately $3.1
      million related to
      the
      adoption of SFAS 123(R). General and administrative expenses as a percentage
      of
      sales increased to 7.5% in 2006 from 5.4% in 2005.




*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 $1.6 million, which is amortized over
      the
      useful life of these assets, which range between 3.75 to 7.75 years.
      Amortization charges of approximately $2.7 million for all of these
      acquisition-related intangibles were recorded in 2006 and in 2005.




*Financial
      income, net* .
      Financial income, net, was approximately $3.8 million in 2006, an increase
      of
      approximately 48.8%, compared with financial income, net, of approximately
      $2.6
      million in 2005. The increase in financial income is attributed mainly to the
      increase in the dollar interest rate leading to higher yields on investments
      compared to the previous year.




*Operating
      income* (loss)
      from continuing operations. In
      2006,
      we experienced an operating loss of $(8.4) million, compared with operating
      income of $1.9 million in 2005. Our operating loss as a percentage of sales
      was (4.6)% in 2006 compared with operating income of 1.1% in 2005.




*Loss
      from discontinued operation.* The loss
      from discontinued operation for the year ended December 31, 2006 and 2005
      includes the activities of the CMU operations. The loss from discontinued
      operations in 2006 was $(36.2) million compared with a loss of $ (17.0) million
      in 2005. This increase consisted of the impairment of goodwill, which amounted
      to $(23.4) million, the loss of the discontinued operations, which amounted
      to
      $(7.6) million, and the loss from the sale of CMU operations, which amounted
      to
      $(5.2) million.




*Net
      income (loss)* .
      In
      2006, net loss was approximately $(40.8) million, compared with a net loss
      of
      approximately $(12.6) million in 2005.




54




**Year
      Ended December 31, 2005 Compared with Year Ended December 31,
      2004**




*The
      results of the CMU activities for all reported periods were reclassified into
      one-line item in the statement of operations below the results from continuing
      operations and under the "Loss from discontinued operations* .




*Sales* .
      Sales
      in 2005 were approximately $176.9 million,
      a decrease of approximately 11.6% compared with sales of approximately $200
      million in 2004. In 2005, we
      experienced delays in sales of our non-WiMAX products due to the market
      transition to WiMAX certified products.




In
      2004
      and 2005, 30.8% and 5.7% 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, our 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 sales in 2005 reflecting
      an
      increase of 29% 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 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.




*Cost
      of sales* . Cost
      of
      sales was approximately $85.8 million in 2005, a decrease of approximately 15.1%
      compared with cost of sales of approximately $101.1 million in 2004. Cost of
      sales as a percentage of sales decreased to approximately 48.5% in 2005 from
      approximately 50.6%
      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.




*Write-off
      of excess inventory and provision for inventory purchase
      commitments* .
      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 $7.3 million compared to approximately $11.4 million in
      2004.




*Inventory
      utilization* *.*  In
      2005
      and 2004, approximately $ 4.2 million
      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 2.4% and 2.7 % of
      sales, respectively.




*Research
      and development expenses, net* .
      Gross
      research and development expenses were approximately $32.8 million in 2005,
      an
      increase of approximately 5.1% compared with gross research and development
      expenses of approximately $31.2 million in 2004. Gross research and development,
      as a percentage of sales increased to 18.5% in 2005 from 15.6% in 2004,
      primarily as a result of increased investment in our WiMAX solutions as well
      as
      the decrease in our revenues. Grants from the
      Government of Israel and other jurisdictions for funding approved research
      and
      development projects totaled
      approximately $3.1 million in 2005 and $3.9 million in 2004. Research and
      development expenses, net, were approximately $29.7 million in 2005, compared
      with approximately $27.3 million in 2004.






55




*Selling
      and marketing expenses* .
      Selling
      and marketing expenses were approximately $39.9 million in 2005, an increase
      of
      approximately 3.1% compared with selling and marketing expenses of approximately
      $38.7 million in 2004 primarily as a result of increased marketing efforts.
      Selling and marketing expenses as a percentage of sales increased to 22.6%
      in
      2005 from 19.4% in 2004.




*General
      and administrative expenses* .
      General
      and administrative expenses were approximately $9.6 million in 2005, an increase
      of approximately 3.2% compared with general and administrative expenses of
      approximately $9.3 million in 2004. General and administrative expenses as
      a
      percentage of sales increased to 5.4% in 2005 from 4.7% in 2004.




*Amortization
      of intangibles assets* .
      As a
      result of the merger with Floware, we acquired current technology with an
      aggregate value of $16.8 million. This amount is being amortized over 7 years,
      the useful life of the asset. As a result of the acquisition of InnoWave, we
      acquired current technology and customer relations with an aggregate value
      of
      $1.6 million, which is amortized over the useful life of these assets, which
      ranges between 3.75 to 7.75 years. Amortization charges of $2.7 million for
      all
      of these acquisition-related intangibles were recorded in 2005 and in
      2004.




*Financial
      income, net* .
      Financial income, net, was approximately $2.6 million in 2005, a decrease of
      approximately 33%, 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 operating income of $ 1.9 million, compared with operating income
      of $9.3 million in 2004. Our operating income in 2005 as a percentage of
      sales decreased to 1.1% in 2005 compared with 4.6% in 2004.




*Loss
      from discontinued operation* .
      The
      Loss from discontinued operation for the year ended December 31, 2005 include
      the activities of CMU operations for the entire year whereas the loss from
      discontinued operation of the year ended December 31, 2004 includes CMU
      operations from December 9, 2004, the date we first consolidated former
      interWAVE operations, through December 31, 2004. The loss from discontinued
      operations in 2005 was $ (17.0) million compared with a loss of $ (12.3) million
      in the three-week period in 2004 that includes in-process research and
      development write-off which amounted to approximately $11 million in respect
      of
      the acquisition of interWAVE.




*Net
      income (loss)* .
      In
      2005, net loss was approximately $(12.6) million, compared with net income
      of
      approximately $0.9 million in 2004.




**Impact
      of Inflation and Currency Fluctuations**




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. The
      majority 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 2006, 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.






56




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”.




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 RESOURCES**




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




**Balance
      Sheet and Cash Flows**




Total
      cash, cash equivalents, short term and long term marketable securities and
      deposits were $118.4 million as of December 31, 2006, an increase of
      approximately $4.1 million or 3.6% from $114.3 million at December 31, 2005.




Our
      continuing operating activities provided cash of approximately $16.6 million,
      $7.2 million and $26.0 million in 2006, 2005 and 2004, respectively. The
      positive cash flow in 2006 resulted from an increase in other accounts payable
      and a decrease in trade receivables partially offset by our net loss in this
      period together with a decrease in trade payables. The cash flows provided
      in
      2005 resulted from our net income from continuing operations together with
      an
      increase in trade payable s
      together with the
      decrease in inventories that were partially offset by the increase of trade
      receivables and a decrease in other account payables. The cash flows provided
      in
      2004 resulted from our net income from continuing operations in this period
      together with an increase in other accounts payable partially offset by a
      decrease in trade payables and an increase in trade receivables.




Our
      continuing investing activities result mainly from investments in bank deposits,
      marketable securities and fixed assets. We used cash of approximately $9.2
      million in 2006, provided cash of approximately $36.8 million in 2005 and used
      cash of approximately $5.6 million in 2004. Capital expenditures were
      approximately $4.8 million, $3.3 million, and $3.4 million in 2006, 2005 and
      2004 respectively. These expenditures principally financed the purchase of
      research and development equipment and manufacturing equipment.




Net
      cash
      provided by continuing financing activities totaled approximately $3.3 million,
      $1.8 million and $8.1 million in 2006, 2005 and 2004, respectively. In 2006,
      the
      amount of cash provided was attributable primarily to proceeds from the issuance
      of shares in connection with the exercise of employees’ options in the amount of
      approximately $5.0 million partially offset by repayment of maturities of a
      long
      term loan of $1.7 million. In 2005, 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 $3.5
      million, partially offset by repayment of maturities of a 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 the amount of approximately $9.8
      million, partially offset by repayment of maturities of a long term loan of
      $1.8
      million.




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






57




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 $36.5 million was received
      and
      accrued as financial income from 2000 through 2006.




*Accounts
      Receivable, Net.* Accounts
      receivable, net was $34.3 million and $35.4 million as of December 31, 2006
      and
      2005, respectively. Days sales outstanding (“DSO”) in receivables as of December
      31, 2006 and December 31, 2005 were 69 and 73 days, respectively. The decrease
      in DSO’s in 2006 is primarily a result of the improved payment terms and intense
      collection of accounts receivable. During
      the year 2005, we sold trade receivables in a total amount of $ 13.5
      million. We did
      not sell trade receivables during 2006.




*Inventories.* Inventories
      were $30.5 million as of December 31, 2006, compare to $30.6 million at December
      31, 2005. Inventories consist of raw materials, work in process and finished
      goods and inventories at customers which are not recognized as revenues yet. As
      a
      result of the foregoing, inventory
      turns were approximately 2.6 times in fiscal 2006 and 2.8 times in 2005.
      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
      CAPITAL**




Our
      working capital from continuing operations was approximately $100.6 million
      as
      of December 31, 2006, compared to $107.2 million as of December 31, 2005 and
      $67.4 million as of December 31, 2004. The decrease in working capital from
      December 31, 2005 to December 31, 2006 is primarily attributable to the increase
      in other accounts payable and accrued expenses. The increase in working capital
      from December 31, 2004 to December 31, 2005 is 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




**Commitments**




*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, 2006
      the balance of the long-term loan was approximately $1.7 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 $5.1 million,
      $4.6 million and $4.5 million in 2006, 2005 and 2004, respectively. We also
      lease various motor vehicles under operating lease agreements, which expire
      in
      2009. Motor vehicles leasing expenses for the year ended December 31, 2006
      were
      $2.3 million, for the year ended December 31, 2005 were $2.2 million and for
      the
      year ended December 31, 2004 were $2.1 million.




58


Future
      annual minimum lease payments under all non-cancelable operating leases as
      of
      December 31, 2006 were as follows (in thousands):




**Rental
                of premises**
            
            **Lease
                of motor****vehicles**2007
            
            $
            3,936
            
            $
            2,4792008
            
            
            3,338
            
            
            1,4472009
            
            
            3,169
            
            
            5672010
            
            
            3,008
            
            
            -2011
            
            
            752
            
            
            -$
            14,203
            
            $
            4,493







*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.
      We did not receive royalty-bearing grants from the OCS during 2006.




During
      2006, we paid or accrued royalties to the OCS in the amount of $0.7 million.
      As
      of December 31, 2006, the aggregate contingent liability to the OCS amounted
      to
      $5.6 million.




The
      following table of our material contractual obligations as of December 31,
      2006,
      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**
            **3-5
                years**
            **More
                than 5 years**Maturity
                of Long-Term Debt
            $
                1,749
            $1,749
            --
            --
            --Rental
                Lease Obligations
            $14,203
            $3,936
            $
                6,507
            $
                3,760
            --Motor
                vehicle Leases
            $
                4,493
            $
                2,479
            $
                2,014
            --
            --









59




*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, 2006, we had purchased 3,796,773 shares
      at a
      weighted average price per share of approximately $2.07 per share. We did not
      buy back shares during 2005 or 2006.




**FUTURE
      NEEDS**




We
      believe our cash balances and investments and 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.




**Effective
      Corporate Tax Rate**




Income
      derived by Alvarion Ltd. is generally subject to the regular Israeli corporate
      tax rate, which was 31% in 2006 and is progressively being reduced to a rate
      of
      25% in 2010. However, as detailed below, income derived in Israel from certain
      “Approved Enterprises” will enjoy certain tax benefits for a specific definitive
      period. The allocation of income derived from approved enterprises is dependent
      upon compliance of certain requirements with the Investment Law.




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.






60




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
      1997,
      Floware submitted a request for Approved Enterprise status of its production
      facility in Or Yehuda. This request was approved. After the merger, Floware’s
      enterprise was relocated into our facilities in Tel-Aviv. The income derived
      from this Approved Enterprise 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.




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, 2006, our accumulated deficit does not include tax-exempt
      profits earned by our “Approved Enterprise”.




On
      April
      1, 2005, an amendment to the Investment Law came into effect (“the Amendment”)
      and, has significantly changed the provisions of the Investment Law. The
      Amendment limits the scope of enterprises, which may be approved by the
      Investment Center by setting criteria for the approval of a facility as an
      Privileged Enterprise such as provision generally requiring that at least 25%
      of
      the Privileged Enterprise's income will be derived from export. Additionally,
      the Amendment enacted major changes in the manner in which tax benefits are
      awarded under the Investment Law so that companies no longer require Investment
      Center approval in order to qualify for tax benefits. However, the Amendment
      provides that terms and benefits included in any certificate of approval already
      granted will remain subject to the provisions of the law as they were on the
      date of such approval.






61




Under
      the
      Amendment, in June 2005, we submitted an expansion request for additional
      "Approved Enterprise" approval regarding its production facilities in Nazareth,
      Migdal Haemek, Omer and Tel-Aviv. A portion of the income derived from this
      "Approved Enterprise" will be tax-exempt for a period of 10 years and the rest
      will be taxed at a reduced rate of 10% to 25% (depending on the percentage
      of
      foreign investment in the Company). The 10-year period of benefits will commence
      with the first year in which Alvarion Ltd. earns taxable income. Our expansion
      request has not yet been approved.




As
      of
      December 31, 2006, in the Israeli company we had available tax loss
      carryforwards amounting to approximately $84 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.


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 corporate income tax in Israel
      until at least 2008.




As
      of
      December 31, 2006, the state and the U.S. federal tax losses carryforward of
      our
      U.S. subsidiary, amounted to approximately $39 million and $47.5 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 2011 and
      2026, 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.




**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 was 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 and the InnoWave acquisition , we cannot
      assure you that the tax authorities will not modify the tax benefits that we
      enjoyed prior to these transactions.






62




Our
      effective corporate tax rate may substantially exceed the Israeli tax rate.
      Our
      Brazilian, French, German, Singapore, 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.




**Government
      Grants**




Under
      an
      arrangement entered during 2003 with the Office of the Chief Scientist in
      Israel’s Ministry of Industry and Trade (“the OCS”), the company settled its
      liability for the amount due of approximately $8.5 million. The repayment to
      the
      OCS can 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%.




This
      arrangement enables us to participate in new OCS programs under which we 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 this
      arrangement.




In
      addition to these grants, we obtain grants from the OCS to fund certain other
      research and development projects as part of our participation in the Magnet
      Consortium These grants do not bear any royalty repayment
      obligations.




**Recently
      issued accounting standards**




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




FIN
      48
      applies to all tax positions related to income taxes subject to the Financial
      Accounting Standard Board Statement No. 109, "Accounting for income taxes"
      ("FAS
      109"). This includes tax positions considered to be routine as well as those
      with a high degree of uncertainty.




FIN
      48
      has expanded disclosure requirements, which include a tabular roll forward
      of
      the beginning and ending aggregate unrecognized tax benefits as well as specific
      detail related to tax uncertainties for which it is reasonably possible the
      amount of unrecognized tax benefit will significantly increase or decrease
      within twelve months. These disclosures are required at each annual reporting
      period unless a significant change occurs in an interim period.




FIN 48 is effective for fiscal years beginning after December 15, 2006. The
      cumulative effect of applying FIN 48 will be reported as an adjustment to the
      opening balance of retained earnings. We are still valuating the potential
      impact of FIN 48 on our financial position and results of operations. We are
      currently assessing the impact FIN 48 will have on our financial statements.






63







In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
      (“SFAS No.  157”). This  statement  provides  a single
      definition of fair value,  establishes  a  framework 
for  measuring  fair  value, and expands disclosures 
concerning  fair  value.  Previously, different definitions of
      fair value were contained in various accounting pronouncements
      creating inconsistencies in measurement and disclosures. SFAS No. 157
      applies under those previously issued pronouncements that
      prescribe fair value as the relevant   measure  
of   value,   except  
SFAS No. 123(R) and related interpretations.




The
      statement does not apply to accounting standard that require or permit
      measurement similar to fair value but are not intended to
      measure fair  value.  This pronouncement is effective
      for fiscal years beginning after  November  15,  2007. 
We do not anticipate any material impact on our consolidated financial
      statements upon the adoption of this standard.




In
      February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
      permits entities to choose to measure many financial assets and
      financial liabilities at fair value. Unrealized gains and losses on
      items for which the fair value option has been elected are reported in
      earnings. SFAS No. 159 is effective for fiscal years beginning after November
      15, 2007. We are currently assessing the impact of SFAS
      No.159 on our consolidated financial position and results of
      operations.




**C.** **RESEARCH
      AND DEVELOPMENT, PATENTS AND LICENSES**




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




As
      of
      December 31, 2006, our research and development staff consisted of 382 full
      time employees. Our research and development is conducted at our facilities
      in
      Israel, Romania, and Spain. We occasionally use independent subcontractors
      for
      portions of our development projects.




Our
      gross
      research and development expenses were approximately $31.2 million or 15.6%
      of
      sales in 2004, $32.8 million or 18.5% of sales in 2005 and $42 million or 23%
      of
      sales in 2006. T he
      Government of Israel and other jurisdictions for funding approved research
      and
      development projects reimbursed
      us for approximately $3.9 million in 2004, $3.1 million in 2005 and $3.2 million
      in 2006.




**D.** **TREND
      INFORMATION**




See
      the
      overview section of "Operating and Financial Review and Prospects - Operating
      Results" above.






64




**E.** **OFF-BALANCE
      SHEET ARRANGEMENTS**




Not
      applicable.




**F.** **TABULAR
      DISCLOSURE OF CONTRACTUAL OBLIGATIONS**




Included
      under Section B of this Item 5.










65


**ITEM
      6.**  **DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES**




**A.**  **DIRECTORS
      AND SENIOR MANAGEMENT**




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




**Name**
            **Age**
            **Position**Anthony
                Maher
            61
            Chairman
                of the board of directors (1)(4)Dr. Meir
                Barel
            56
            Vice
                Chairman of the board of directors (4)Oded
                Eran
            51
            Director
                (1)(3)Benny
                Hanigal
            56
            DirectorProfessor
                Raphael Amit
            59
            Director(1)(2)(3)(4)Robin
                Hacke
            47
            Director
                (1)(2)(3)Amnon
                Yacoby
            57
            DirectorDr.
                David Kettler
            64
            Director
                (4)Zvi
                Slonimsky
            57
            DirectorTzvi
                Friedman
            45
            Chief
                Executive Officer, President and DirectorDafna
                Gruber
            42
            Chief
                Financial Officer (5)Efrat
                Makov
            39
            Chief
                Financial Officer Designate (5)Uzi
                Brier
            48
            President,
                Broadband Mobile unitRudy
                Leser
            42
            Corporate
                Vice President, Strategy & MarketingAvi
                Mazaltov
            45
            President,
                Operations and Infrastructure DivisionAvi
                Wellingstein
            46
            President
                of the Customers’ Business DivisionAvinoam
                Barak
            44
            President
                of the Broadband Wireless Access DivisionHaim
                Srur
            42
            Corporate
                Vice President of Human ResourcesAmir
                Tirosh
            38
            Corporate
                Vice President of Corporate DevelopmentGreg
                Daily
            43
            President,
                Alvarion, Inc.




(1)
            “Independent
                Director” under rules of the Securities and Exchange Commission and NASDAQ
                Marketplace Rules (see explanation
                below)




(2) "External
      Director" within the meaning of the Israeli Companies Law (see explanation
      below)




(3) Member
      of
      our Audit Committee.




(4)
            Member
                of our Compensation, Nominating and Corporate Governance
                Committee.




(5)
            On
                April 30, 2007,Ms. Gruber
                is scheduled to step down as Chief Financial Officer and Ms. Makov is
                scheduled to assume the office of Chief Financial
                Officer.






**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. 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 Xtellus Inc. Mr. Maher holds M.Sc.
      and B.Sc. degrees in Electrical Engineering and Physics from the University
      of
      Illinois.






66




**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. 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






67




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.




**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** 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
      College of Computing Advisory Board of Georgia Institute of Technology and
      numerous research and economic development steering committees. He has
      proactively engaged university/industry activities, led numerous consortia
      projects and facilitated the technology transfer from research laboratories
      toward commercialization. Dr. Kettler is an IEEE Fellow. He earned his BEE,
      MSEE, and Ph.D.EE from the University of Virginia and is past Chairman of the
      ECE Industrial Advisory Board and 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. Mr. Slonimsky is the chairman
      of Teledata, and New Era Biotech and board member of Sequans. He also provides
      telecom and information technology consultant through EIR ZS in Tel Aviv. From
      2002 to 2005 he served as our sole Chief Executive Officer. Prior thereto he
      served as our President and Chief Operating Officer since May 1999. Mr.
      Slonimsky had been President and Chief Executive Officer of MTS Ltd., a company
      supplying add-on software to PBXs, since its inception in December 1995 as
      a
      spin off from C. Mer Industries until 1999. Mr. Slonimsky joined C. Mer in
      November 1992 as Vice President of its products division. Before joining C.
      Mer,
      he was the General Manager of Sorek Technology Center from September 1991 to
      November 1992. From 1989 to 1991, Mr. Slonimsky was the General Manager of
      DSPG
      Ltd., the Israeli-based subsidiary of DSPG, Inc. Prior to DSPG, he held various
      management positions in Tadiran Ltd., an Israeli communication equipment
      manufacturer. Mr. Slonimsky holds the B.Sc. and M.Sc. degrees in Electrical
      Engineering from the Technion and a M.B.A. degree from Tel-Aviv
      University.




**Mr.
      Tzvi Friedman** was
      appointed Alvarion’s CEO and President in October 2005 and has been our director
      since July 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.






68




**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 is
      a
      certified public accountant in Israel since 1991and holds a B.A. degree in
      Accounting and Economics from Tel Aviv University




**Ms.
      Efrat Makov** Joined
      Alvarion on March 1, 2007. Ms. Makov will assume the Chief Financial Officer
      responsibilities in late April, 2007. Ms. Makov has held management positions
      with three Israeli-based NASDAQ-listed companies, most recently as Chief
      Financial Officer at Aladdin Knowledge Systems Ltd. where she was responsible
      for the finance, operations, information systems and human resources functions
      from September 2005 through January 2007. From September 2002 through
      August 2005, she served as Corporate Controller and Vice President of Finance
      at
      Check Point Software Technologies Ltd. and from August 2000 through August
      2002,
      as the Director of Finance for NUR Macroprinters Ltd. Prior to that, Ms.
      Makov spent seven years in public accounting with Arthur Andersen in New York,
      London and Tel Aviv. Ms. Makov is a Certified Public Accountant in Israel
      and the United States and holds a B.A. in Accounting and Economics from Tel
      Aviv
      University.




**Mr.
      Uzi Brier** joined
      Alvarion in July 2006 as President of the Broadband Mobile Unit. Most recently,
      Mr. Breier served as CEO of Optibase. Prior to Optibase, he served as CEO of
      Emblaze Semiconductor (part of the Emblaze Group). He also served as CEO of
      Ayeca and various senior positions at Flextronics and National Semiconductor
      in
      Israel and the United States.  Mr. Breier holds two bachelors of science
      degrees in computer science and industrial engineering, both from New York
      Institute of Technology, as well as an MBA from San Jose State, completing
      all
      three with honors.




**Mr.
      Rudy Leser** was
      appointed our Corporate VP Strategy and Marketing in January 2006. Mr. 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. 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.




**Mr.
      Avi Wellingstein** joined
      Alvarion in January 2006, as President of the Customers’ Business Division.
      Prior to joining Alvarion, Mr. Wellingstein led the Comverse InSight Open
      Services Environment group as Vice President and Chief Commercial Officer,
      responsible for its worldwide business. His previous positions at Comverse
      included Corporate 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






69






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.




**Mr.
      Amir Tirosh** joined
      the Alvarion management team as Corporate VP of Corporate Development at the
      beginning of 2007, bringing with him over 10 years of experience in management
      and business development. Most recently, Mr. Tirosh served as the Corporate
      Vice
      President and General Manager of the Embedded Business Unit in M-Systems and
      as
      the Corporate Vice President of Corporate Business Development, leading all
      M&A, investment and strategic agreements of the company. Prior to M-Systems,
      Mr. Tirosh served as the Director of Corporate Business Development at Teva
      Pharmaceutical. Mr. Tirosh holds a Bachelors of Science degree in Industrial
      Management Engineering from the Technion Israel Institute of Technology and
      an
      MBA from Tel Aviv University.




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




The
      terms
      of Messrs. Kettler, Slonimsky and Yacoby expire at our 2007 annual general
      meeting, the terms of Messrs. Friedman and Hanigel expire at our 2008 annual
      general meeting and the terms of Messrs. Maher, Barel and Eran expire at our
      2009 annual general meeting. The terms of our external directors, Professor
      Amit
      and Ms. Hacke, expire in September 2009 and August 2007,
      respectively.





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




**B.** **COMPENSATION** **OF DIRECTORS AND OFFICERS**




The
      aggregate direct labor costs associated with all of our directors and executive
      officers as a group (20 persons) for the year ended December 31, 2006 (including
      persons who served as directors or executive officers for only a portion of
      2006, and whether or not serving as such as of December 31, 2006) was
      approximately $3,534,000. This amount includes approximately $ 300,400 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 approximately $
      287,000 in compensation in 2006.






70




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




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




During
      2006, we granted all of our directors and executive officers as a group (20
      persons) options to purchase an aggregate of 460,000 of our ordinary shares at
      exercise prices ranging from $5.37 to $8.72, with expiration dates ranging
      from
      May 2012 to January 2016 .




As
      of
      December 31, 2006, our directors and executive officers held outstanding options
      to purchase an aggregate of 4,697,330 ordinary shares, at exercise prices
      ranging from $1.9 to $15.4 , with expiration dates ranging from January 2009
      to
      January 2016.




**C.** **BOARD
      PRACTICES**




**Appointment
      of Directors and Terms of Officers**




Our
      board
      of directors currently consists of ten members. Under our articles of
      association, the board is to consist of between four and ten members. Our
      directors are elected by our shareholders at an annual general shareholders
      meeting. Our directors generally commence the terms of their office at the
      close
      of the annual general shareholders meeting at which they are elected and, other
      than our external directors, serve in office until the close of the third annual
      general shareholders’ meeting following the meeting at which they are elected,
      and may be re-elected by the shareholders. Annual general shareholders’ meetings
      are required to be held at least once every calendar year, but not more than
      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.




**Service
      Contracts of Directors**




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




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"






71




( unless
      another member of the audit committee, who is an independent director under
      the
      NASDAQ Marketplace Rules, has "financial and accounting expertise")  and
      any
      other external director must have “accounting and financial expertise” or
“professional qualification,” as such terms are defined by regulations
      promulgated under the Israeli Companies Law. This requirement does not apply
      to
      external directors appointed prior to January 2006.  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 additional three year
      terms. 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's term will expire in August 2007,
      and Professor Amit's term will expire in September 2009. We have appointed
      the
      external directors to the committees of our board of directors as required
      by
      law.




**Audit
      Committee**




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 is an independent director under
      the requirements of the
      Securities and Exchange Commission and NASDAQ .
      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.






72




**Compensation,
      Nominating and Corporate Governance Committee**




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
      Auditor**




The
      Israeli Companies Law also requires the board of directors of a public company
      to appoint an internal auditor recommended by the audit committee. The role
      of
      the internal auditor is to examine, among other things, whether the company’s
      acts comply with applicable law and orderly business procedure. The internal
      auditor may be an employee of the company but may not be an interested party
      or
      office holder, or a relative of any interested party or office holder, and
      may
      not be a member of the company’s independent accounting firm or its
      representative. Our current internal auditor, Mr. Eyal Weitzman, has served
      in
      such role since February 2006.




**Fiduciary
      Duties of Office Holders; Approval of Specified Related Party Transactions
      Under
      Israeli Law**




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 Interest**




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






73




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.




**Disclosure
      of Personal Interests of a Controlling Shareholder**




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 Shareholders**




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 Officers**




Our
      articles of association provide that, to the extent permitted by the Israeli
      Companies Law, we may indemnify our office holders for the following liabilities
      or expenses incurred by an office holder as a result of an act done by him/her
      in his/her capacity as an office holder: a
      financial liability imposed on him or her in favor of another person by a court
      judgment, including a settlement, judgment or an arbitrator’s award approved by
      a court; reasonable costs of litigation, including attorney’s fees, expended by
      our office holders as a result of an investigation or proceeding instituted
      against the office holders by a competent authority, provided that such






74




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.




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 favor of another
                person.




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.




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




We
      have
      obtained directors and officers liability insurance for the benefit of our
      office holders.




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






75




other
      corporation or partnership). In addition, under these agreements, we exempt
      and
      release our office holders from any and all liability to us related to any
      breach by them of their duty of care to us, to the maximum extent permitted
      by
      law.




**D.** **EMPLOYEES**




As
      of
      December 31, 2006, we had 941 employees of which 382 were engaged in
      research and development, 242 in operations, 241 in sales and marketing and
      76
      in administration and management. Of our full-time employees, as of
      December 31, 2006, 645 were located in Israel, 66 in the United States and
      230 at our other branch offices, listed in Item 4C - Information on the Company
      - ‘Organizational Structure’.




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 Agreements




We
      maintain written employment agreements with substantially all of our key
      employees. These agreements provide, among other matters, for monthly salaries,
      our contributions to Managers’ Insurance 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.






76




**E.** **SHARE
      OWNERSHIP** ****




The
      following table sets forth certain information as of April 1, 2007 for (i)
      each
      of our executive
      officers and directors that beneficially owns more than 1% of
      our
      outstanding ordinary shares ,
      and
      (ii) our executive officers and directors as a group. The information in
      the table below is based
      on 61,919,561 ordinary shares outstanding as of April 1, 2007. Each of our
      outstanding ordinary shares has identical rights in all
      respects.




**Name**
            **Number
                of**
              
              **Ordinary
                Shares****(1)**
            **Percentage
                of Outstanding**
              
              **Ordinary
                Shares**Amnon
                Yacoby (2)
            838,157
            1.35%Mr.
                Tzvika Friedman (3)
            715,315
            1.14%All
                directors and executive officers as a group (20 Persons) (4)
            3,711,696
            5.73%


_________________________




·
            The
                number of ordinary sharesbeneficially
                owned includes the shares issuable pursuant to optionsare exercisable within 60 days of April 1,
                2007.






(1)
            Shares
                issuable pursuant to such options are deemed outstanding for com-puting
                the percentage of the person holding such options or restricted share
                units but are not outstanding for computing the percentage of any
                other
                person.




(2)
            Based
                on information provided by Mr. Yacoby and other information available
                to
                us. Includes options to purchase 152,030 of our ordinary shares which
                are
                exercisable within 60 days of April 1,
                2007.


(3)
            Consist
                of options to purchase 715,315 of our ordinary shares which are
                exercisable within 60 days of April 1,
                2007.


(4)
            Includes
                options to purchase 2,904,281 of our ordinary shares which are exercisable
                within 60 days of April 1, 2007.






None
      of
      our other directors and executive officers listed in Item 6.A held more than 1% of our
      outstanding shares as of April 1, 2007.




As
      of
      April 1, 2007, our directors and executive officers listed in
      Item
      6.A above,
      as
      a group, held 4,434,530 options to purchase of our ordinary shares at a weighted
      average exercise price of $6.91 with expiration dates ranging from January
      2009
      to January 2016. The voting rights of our directors and executive officers
      do
      not differ from the voting rights of other holders of our ordinary shares.




**Equity
      Incentive Plans**




As
      of
      December 31, 2006 a
      total
      of 26,498,651 ordinary shares have been reserved for issuance upon exercise
      of
      options granted to our employees, officers, directors and consultants pursuant
      to our share option plans. These ordinary shares have been reserved pursuant
      to
      our 2006 Global Share Based Incentive Plan, or 2006 Plan,








77




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).




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




As
      of
      December 31, 2006, options to purchase 10,420,697 of our ordinary shares were
      outstanding under the share option plans, including options issued pursuant
      to
      the terms of the Floware merger and interWAVE amalgamation, at a weighted
      average exercise price of $8.27 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 10,420,697 options outstanding expire between
      six
      and ten years from the date of grant. As of December 31, 2006, options to
      purchase 1,917,214 of our ordinary shares were available for issuance under
      the
      share option plans,




As
      of
      December 28, 2005, 1,834,452 unvested out-of-the-money options with an exercise
      price higher than $10 per share and related to the vesting period from January
      1, 2006 through January 1, 2007 had been accelerated. The options were
      accelerated to reduce the expense impact in 2006 and beyond of a new accounting
      standard for stock based compensation. Because we have accounted for stock
      based
      compensation prior to January 1 st ,
      2006
      using the intrinsic value method prescribed in Accounting Principles Board
      (APB)
      No. 25, and because these options were priced above current market, the
      acceleration of vesting of these options did not require accounting recognition
      in our financial statements. However, the impact of the vesting acceleration
      on
      pro forma stock based compensation required to be disclosed in the financial
      statement footnotes under the provisions of SFAS No. 123, was an increase in
      compensation cost by approximately $5.2 million (see note 2m to our financial
      statements).




In
      2006,
      our board of directors, based on the recommendation of our Compensation
      Nominating and Corporate Governance Committee, adopted the 2006 Plan. Under the
      2006
      Plan, we
      may
      grant restricted share units, restricted shares, options and other equity awards to
      employees, directors, consultants, advisers and service providers of our company
      and its subsidiaries .
      Pursuant to the 2006 Plan, 1,500,000 ordinary shares were initially reserved
      for
      issuance upon the exercise of awards is granted under the 2006 Plan. The number
      of ordinary shares available for issuance under the 2006 Plan shall be reset
      annually on April 1 of each year to equal 4% of our total outstanding shares
      as
      of such reset date. As of December 31, 2006, options to purchase 1,313,567
      of
      our ordinary shares were outstanding under the 2006 Plan.




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




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,






78




our **** share
      price means the average closing price of our ordinary shares on the **** NASDAQ
      over the five trading days up to and including the second trading day preceding
      the closing. Effective upon the closing of the acquisition of interWAVE, 25%
      of
      the unvested portion of any assumed interWAVE options accelerated and the
      remaining unvested options continued to vest according to the original vesting
      schedule. In connection with this, outstanding assumed options to purchase
      interWAVE ordinary shares were converted into options to purchase approximately
      423,156 of our ordinary shares.




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




The
      share
      option plans are administered by the board of directors which designates the
      optionees, dates of grant, vesting period and the exercise price of options.
      Each grantee is responsible for all personal tax consequences of the grant
      and
      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.








79




**ITEM
      7.** **MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**




**A.** **MAJOR
      SHAREHOLDERS** ****




As
      of
      April 1, 2007, we do not know of any person or entity who beneficially owns
      more
      than 5% of our outstanding ordinary shares .




Based
      on
      a review of the information provided to us by our transfer agent, as of April
      1,
      2007, there were 67 holders of record of our ordinary shares, including 61
      holders of record with a United States mailing address, including banks, brokers
      and nominees. As of April 1, 2007, these 61 holders of record held approximately
      59,412,731 ordinary shares representing approximately 96% of the aggregate
      61,919,561 ordinary shares outstanding as of such date. Because these holders
      of
      record include banks, brokers and nominees (including one U.S. nominee company,
      CEDE & Co., which held approximately 96% of our outstanding ordinary shares
      as of such date), the beneficial owners of these ordinary shares may include
      persons who reside outside the United States.




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




**B.** **RELATED
      PARTY TRANSACTIONS**




None.




**C.**  **INTERESTS
      OF EXPERTS AND COUNSEL**




Not
      applicable.








80


**ITEM
      8.** **FINANCIAL
      INFORMATION**




**A.** **CONSOLIDATED
      STATEMENTS AND OTHER FINANCIAL INFORMATION**




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




**Legal
      Proceedings**




On
      November 21, 2001, a purported Class Action (the "Action") lawsuit was filed
      against interWAVE, certain of its former officers and directors, and certain
      of
      the underwriters for interWAVE's initial public offering ("IPO"). On April
      19,
      2002, plaintiffs filed an amended complaint. The amended complaint alleges
      that
      the prospectus from interWAVE's IPO failed to disclose certain alleged improper
      actions by various underwriters for the offering, in violation of the Securities
      Act of 1933 and the Securities Exchange Act of 1934. Similar complaints have
      been filed concerning more than 300 other IPOs; all of these cases have been
      coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92.
      On
      October 8, 2002, the Court entered an Order of Dismissal as to all of the
      individual defendants in the IPO litigation, without prejudice. A stipulation
      of
      Settlement (the "Settlement") has been submitted to the Court. On August 31,
      2005, the Court granted preliminary approval of the Settlement. Under the
      Settlement, all claims against interWAVE would be dismissed in exchange for
      contingent payment guarantee by the insurance companies responsible for insuring
      interWAVE as an issuer. The settlement remains subject to certain conditions,
      including final Court approval. On April 24, 2006, the Court held a fairness
      hearing in connection with the motion for final approval of the Settlement.
      The
      Court has not yet issued a ruling on the motion for final approval. On December
      5, 2006, the Court of Appeals for the Second Circuit reversed the Court's
      October 2004 order certifying a class in six test cases that were selected
      by
      the underwriter defendants and plaintiffs in the coordinated proceeding.
      interWAVE is not one of the test cases and it is unclear what impact, if any,
      this will have on interWAVE's case. If the Settlement is not achieved, the
      Company believes that it has meritorious defenses and intends to defend the
      Action vigorously. However, the litigation results can not be predicted at
      this
      point.




On
      January 19 and February 2, 2007, purported securities class action lawsuits
      were
      filed in the United States District Court for the Northern District of
      California, and on February 13 and March 9, 2007, purported securities
      class action lawsuits were filed in the United States District Court for
      the Southern District of New York. The four complaints are substantially
      identical. Each complaint names the Company as a defendant.  The first
      three complaints also name as defendants one of the Company's officers and
      two of its directors, while the fourth complaint names two officers and
      only one director. Each complaint generally alleges violations of certain U.S.
      federal securities laws and seeks unspecified damages on behalf of a class
      of
      purchasers of Alvarion ordinary shares between November 3, 2004 and May 12,
      2006. The plaintiffs allege, among other things, that the defendants made false
      and misleading statements concerning Alvarion’s business prospects, purportedly
      violating Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
      Rule 10b-5 promulgated thereunder.  The Company anticipates that
      these four complaints will be consolidated.  The Company has not
      responded to the Complaints, and does not expect to respond until the
      Court appoints a lead plaintiff and the appointed lead plaintiff files a
      Consolidated Amended Complaint, which the Company anticipates will occur in
      the
      second or third quarter of 2007. The Company believes that is has
      meritorious defenses to the claims and intends to defend the action
      vigorously.





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.






81




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.




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




**Export
      Sales**




Export
      sales constitute a significant portion of our sales. In 2006, export sales
      were
      approximately $180.7 million constituting approximately 99% of our total sales.
      For a more detailed discussion regarding the allocation of our revenues by
      geographic regions based on the location of our customers, see “Item
      5--Operating and Financial Review and Prospects--Operating
      Results.”




**Dividend
      Policy**




We
      have
      never declared or paid any cash dividend on our ordinary shares. We do not
      anticipate paying any cash dividend on our ordinary shares in the foreseeable
      future. We currently intend to retain all future earnings to finance operations
      and expand our business.




**B.** **SIGNIFICANT
      CHANGES**




Except
      as
      otherwise disclosed in this annual report, no significant change has occurred
      since December 31, 2006.






82


**ITEM
      9.** **THE
      OFFER AND LISTING**




**A.** **OFFER
      AND LISTING DETAILS**




The
      following table sets forth the high and low sales prices for our ordinary shares
      as reported by the NASDAQ Global Market in US$ and as reported by the Tel Aviv
      Stock Exchange, in NIS, for each of the last five years.




**NASDAQ
                Global Market**
            
            **Tel
                Aviv Stock Exchange****Year**
            **High**
            **Low**
            
            **High**
            **Low**2002
            $4.05
            $
                1.64
            
            NIS
                18.04
            NIS
                8.542003
            $11.75
            $
                1.84
            
            NIS
                51.10
            NIS
                8.692004
            $17.15
            $
                8.50
            
            NIS
                74.30
            NIS
                41.472005
            $14.23
            $
                7.26
            
            NIS
                60.79
            NIS
                34.382006
            $10.96
            $
                4.92
            
            NIS
                49.71
            NIS
                22.46





The
      following table sets forth ,
      for
      each of the full financial quarters in the years indicated, the high
      and low sales price for our ordinary shares as reported by the NASDAQ Global
      Market and as reported by the Tel Aviv Stock Exchange, in NIS:




**NASDAQ
                Global Market**
            
            **Tel
                Aviv Stock Exchange****2005**
            **High**
            **Low**
            
            **High**
            **Low**First
                Quarter
            $14.23
            $
                8.90
            
            NIS
                60.79
            NIS
                39.67Second
                Quarter
            $11.82
            $
                7.87
            
            NIS
                52.39
            NIS
                36.26Third
                Quarter
            $11.82
            $
                7.90
            
            NIS
                51.88
            NIS
                36.71Fourth
                Quarter
            $9.51
            $
                7.26
            
            NIS
                44.16
            NIS
                34.38**2006**
            **High**
            **Low**
            
            **High**
            **Low**First
                Quarter
            $10.96
            $
                8.70
            
            NIS
                49.71
            NIS
                40.28Second
                Quarter
            $9.23
            $
                5.94
            
            NIS
                42.95
            NIS
                27.19Third
                Quarter
            $7.45
            $
                4.92
            
            NIS
                31.48
            NIS
                22.46Fourth
                Quarter
            $7.80
            $
                6.18
            
            NIS
                33.19
            NIS
                26.83





The
      following table sets forth the high and low sales price for our ordinary shares
      as reported by the NASDAQ Global Market and the Tel Aviv Stock Exchange, in
      NIS,
      for the most recent six months:




**NASDAQ
                Global Market**
            
            **Tel
                Aviv Stock Exchange****Month**
            **High**
            **Low**
            
            **High**
            **Low**October
                2006
            $
                7.75
            $
                6.18
            
            NIS
                33.50
            NIS
                26.60November
                2006
            $
                7.80
            $
                6.81
            
            NIS
                33.19
            NIS
                26.83December
                2006
            $
                7.29
            $
                6.50
            
            NIS
                30.43
            NIS
                27.28January
                2007
            $
                7.10
            $
                6.03
            
            NIS
                29.84
            NIS
                26.71








83




**NASDAQ
                Global Market**
            
            **Tel
                Aviv Stock Exchange****Month**
            **High**
            **Low**
            
            **High**
            **Low**


February
                2007
            $8.49
            $
                6.38
            
            NIS
                35.61
            NIS
                27.87March
                2007
            $
                8.40
            $
                7.30
            
            NIS
                33.97
            NIS
                30.77April
                2007 (through April 25, 2007)
            $8.70
            $7.80
            
            NIS
                35.22
            NIS
                32.55




As
      of
      April 26, 2007, the exchange rate of the NIS to the US$ was $1 to NIS
      4.014.




**B.** **PLAN
      OF DISTRIBUTION**




Not
      applicable.




**C.** **MARKETS**




Our
      ordinary shares began trading on the NASDAQ Global Market on March 23, 2000
      under the symbol “BRZE.” Prior to that date, there was no market for our
      ordinary shares. On August 1, 2001, upon the completion of our merger with
      Floware and the change of our name to Alvarion Ltd., our symbol was changed
      to
“ALVR.” On August 1, 2001, our ordinary shares also began to trade on the
      Tel Aviv Stock Exchange.




**D.** **SELLING
      SHAREHOLDERS**




Not
      applicable.




**E.** **DILUTION**




Not
      applicable.




**F.**  **EXPENSES
      OF THE ISSUE**




Not
      applicable.






84


**ITEM
      10.** **ADDITIONAL
      INFORMATION**




**A.** **SHARE
      CAPITAL**




Not
      applicable.




B.    MEMORANDUM
      AND ARTICLES OF ASSOCIATION




We
      are
      registered under the Israel Companies Law as a public company with the name
      Alvarion Ltd. and registration number 51-172231-6.






The
      following is a summary description of certain provisions of our memorandum
      of
      association and articles of association:




Our
      articles of association permit us to engage in any lawful business. Our purpose
      is to operate in accordance with business considerations to generate profits
      (provided, however, that we may donate reasonable amounts to worthy causes,
      as
      our board of directors may determine in its discretion, even if such donations
      are not within the framework of business considerations).




Our
      articles of association permit us to enter into a business transaction with
      any
      of the directors of our company or enter into a business transaction with a
      third party in which a director has a personal interest, subject to compliance
      with the Israeli Companies Law. See “Item 6--Directors, Senior Management and
      Employees--Board Practices.”




Directors
      who do not hold other positions in our company and who are not external
      directors may not receive any compensation from our company, unless such
      compensation is approved by our shareholders, subject to applicable
      law.




Our
      board
      of directors may, from time to time, in its discretion, cause us to borrow
      or
      secure the payment of any sum or sums of money for our purposes, on such terms
      and conditions as it deems appropriate.




Our
      authorized share capital consists of 85,080,000 ordinary shares, par value
      NIS
      0.01 per share.




Shareholders
      are entitled to receive dividends or bonus shares, upon the recommendation
      of
      our board of directors and resolution of our shareholders. The shareholders
      entitled to receive dividends or bonus shares are those who are registered
      in
      the shareholders register on the date of the resolution approving the
      distribution or allotment, or on such later date, as may be determined in such
      resolution. Any right to a declared dividend by us to our shareholders
      terminates after seven years from our declaration of the dividend if such
      dividend has not been claimed by the shareholder within such time. After seven
      years the unclaimed dividend will revert back to us.




Every
      shareholder has one vote for each share held by such shareholder of record.
      With
      certain exceptions, no shareholder is entitled to vote at any general meeting
      (or be counted as a part of the lawful quorum thereat), unless all calls and
      other sums then payable in respect of his shares have been paid.




A
      shareholder seeking to vote with respect to a resolution that requires that
      the
      majority of such resolution’s adoption include at least a certain percentage of
      all those not having a personal interest (as defined in the Israeli Companies
      Law) in it, must notify us at least two business days prior to the date of
      the
      general meeting,






85




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 favor of the
      shareholders, as deemed appropriate by the liquidator.




Rights
      attached to our ordinary shares, may be modified or abrogated by a resolution
      adopted at a general meeting of the shareholders by more than 50% of the issued
      shares of such a class, or an “ordinary majority,” other than certain rights
      relating to the election of directors that may be modified or abrogated only
      with the approval of more than 75% of the shareholders who are entitled to
      vote
      at the meeting.




An
      annual
      general meeting of our shareholders, or “annual meeting,” must be held once in
      every calendar year, within a period of not more than 15 months from the
      preceding annual meeting, either within or outside of Israel. All general
      meetings of our shareholders other than annual meetings are called
“extraordinary meetings.” Our board of directors has discretion over when to
      convene an extraordinary meeting. However, our board of directors must convene
      an extraordinary meeting upon demand by the lesser number of: (i) any two
      directors of our company; or a quarter of the directors of our company,
      whichever is lower; or (ii) upon the demand of one or more shareholders holding
      alone or together at least (A) five percent of the issued share capital of
      our
      company and one percent o f
      the
      voting rights or (B) five percent
      o f
      the
      voting rights .
      Our
      board of directors, upon demand to convene an extraordinary meeting, is required
      to announce the convening of the general meeting within 21 days from the receipt
      of the demand, provided, however, that the date fixed for the extraordinary
      meeting may not be more than 35 days from the publication date of the
      announcement of the extraordinary meeting, or such other period as may be
      permitted by the Israeli Companies Law or the regulations
      thereunder.




Directors,
      other than external directors, are elected, 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.






86




Our
      transfer agent and registrar is the American Stock Transfer & Trust Co. at
      address 59 Maiden Lane, New York, NY 10038.




**C.** **MATERIAL
      CONTRACTS**




On
      November 21, 2006, we entered into an agreement with LGC Wireless, Inc. to
      sell
      substantially all the assets comprising our CMU business to LGC Wireless, Inc.
      in exchange for promissory and convertible notes and the assumption of certain
      liabilities. The notes are due on December 31, 2007 and 2008 and are in the
      aggregate amount of $15.0 million.




Except
      as
      otherwise disclosed in this annual report, we did not enter into any other
      material contracts.


.




**D.** **EXCHANGE
      CONTROLS**




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.** **TAXATION** ****




**General**




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.






87


**Israeli
      Taxation**




The
      following is a summary of the principal tax laws applicable to companies in
      Israel, with special reference to their effect on us, and certain Israeli
      Government programs benefiting us. This section also contains a discussion
      of
      certain Israeli tax consequences to persons acquiring ordinary shares.
      This summary does not discuss all the acts of Israeli tax law that may be
      relevant to a particular investor in light of his or her personal investment
      circumstances or to certain types of investors subject to special treatment
      under Israeli law, such as traders in securities or persons that own, directly
      or indirectly, 10% or more of our outstanding voting share capital. To the
      extent that the discussion is based on new tax legislation which has not been
      subject to judicial or administrative interpretation, there can be no assurance
      that the views expressed in this discussion will be accepted by the tax
      authorities. This discussion should not be construed as legal or professional
      tax advice and is not exhaustive of all possible tax considerations.




Potential
      investors are urged to consult their own tax advisors as to the Israeli or
      other
      tax consequences of the purchase, ownership and disposition of ordinary shares,
      including, in particular, the effect of any foreign, state or local taxes.




**General
      Corporate Tax Structure**




Generally,
      Israeli companies are subject to corporate tax at the rate of 31% on taxable
      income and are subject to real capital gains tax at a rate of 25% on capital
      gains (other than gains derived from the sale of listed securities that are
      taxed at the prevailing corporate tax rates) derived after January 1, 2003.
      The
      corporate tax rate was reduced in June 2004, from 36% to 35% for the 2004 tax
      year, 34% for the 2005 tax year, 31% for the 2006 tax year, 29% for the 2007
      tax
      year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the
      2010
      tax year and thereafter. However, the effective tax rate payable by a company
      that derives income from an approved enterprise (as discussed below) may be
      considerably less.




***Tax
      Benefits under the Law for the Encouragement of Industry (Taxes),
      1969***




We
      currently qualify as an “Industrial Company” pursuant to the Law for the
      Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”).
      A
      company qualifies as an “Industrial Company” if it is resident in Israel and at
      least 90% of its income in a given tax year, determined in NIS (exclusive of
      income from certain specified sources), is derived from Industrial Enterprises
      owned by that company. An “Industrial Enterprise” is defined as an enterprise
      whose major activity in a particular tax year is industrial manufacturing
      activity. Industrial Companies are entitled to the following preferred corporate
      tax benefits, among others:




·
            Deduction
                of purchases of know-how and patents over an eight-year period for
                tax
                purposes;




·
            Right
                to elect, under specified conditions, to file a consolidated tax
                return
                with additional related Israeli Industrial Companies;




·
            Accelerated
                depreciation rates on equipment and buildings; and




·
            Deductions
                over a three-year period of expenses involved with the issuance and
                listing of shares on the Tel Aviv Stock Exchange or, on or after
                January
                1, 2003, on a recognized stock market outside of
                Israel.




Eligibility
      for benefits under the Industry Encouragement Law
      is
      not contingent upon the approval of any Government agency. No assurance can
      be
      given that we will continue to qualify as an Industrial Company, or will be
      able
      to avail us of any benefits under the Industry Encouragement Law
      in
      the future.






88





**Law
      for the Encouragement of Capital Investments, 1959**




*Tax
      benefits prior March 2005 Amendment*




The
      Law
      for Encouragement of Capital Investments, 1959, which is referred to below
      as
      the Capital Investments Law, provides that capital investments in a production
      facility or other eligible assets may, upon application to the Israeli
      Investment Center of the Ministry of Industry and Commerce, be designated as
      an
“Approved Enterprise.” Each certificate of approval for an Approved Enterprise
      relates to a specific investment program in the Approved Enterprise, delineated
      both by the financial scope of the investment and by the physical
      characteristics of the facility or the asset. An Approved Enterprise is entitled
      to certain benefits, including Israeli Government cash grants, state-guaranteed
      loans and tax benefits.




**Tax
      Benefits**




Taxable
      income derived from an Approved Enterprise under the Capital Investments Law
      grants program is subject to a reduced corporate tax rate of 25%. That income
      is
      eligible for further reductions in tax rates depending on the percentage of
      the
      foreign investment in our share capital. The tax rate is 20% if the foreign
      investment is 49% or more but less than 74%, 15% if the foreign investment
      is
      74% or more but less than 90%, and 10% if the foreign investment is 90% or
      more.
      The lowest level of foreign investment during the year will be used to determine
      the relevant tax rate for that year. These tax benefits are granted for a
      limited period not exceeding seven years, or 10 years for a company whose
      foreign investment level exceeds 25%, from the first year in which the Approved
      Enterprise has taxable income, after the year in which production commenced
      (as
      determined by the Israeli Investment Center of the Ministry of Industry and
      Commerce, or the Investment Center). The period of benefits may in no event,
      however, exceed the lesser of 12 years from the year in which the production
      commenced (as determined by the Investment Center) or 14 years from the year
      of
      receipt of Approved Enterprise status.




An
      Approved Enterprise may elect to forego any entitlement to the grants otherwise
      available under the Capital Investments Law and, in lieu of the foregoing,
      may
      participate in an Alternative Benefits Program. Under
      the Alternative
      Benefits Program ,
      a
      company's undistributed income derived from an Approved Enterprise will be
      exempt from company tax for a period of between two and ten years from the
      first
      year of taxable income, depending on the geographic location of the Approved
      Enterprise within Israel, and the company will be eligible for a reduced tax
      rate of 10%-25% for the remainder of the benefits period .
      There
      can be no assurance that the current benefit programs will continue to be
      available or that we will continue to qualify for benefits under the current
      programs.




*Tax
      benefits Subsequent to the March 2005 Amendment*




In
      March
      2005, the government of Israel passed an amendment to the Investment Law in
      which it revised the criteria for investments qualified to receive tax benefits
      as an Approved Enterprise. Among other things, companies that meet the criteria
      of the alternate package of tax benefits will receive those benefits without
      prior approval. We believe that our capital investments qualify to receive
      tax
      benefits as an Approved Enterprise, however no assurance can be given that
      such
      investments will be approved as in fact qualifying for such tax benefits by
      the
      Israeli tax authorities. Additionally, no assurance can be given that we will,
      in the future, be eligible to receive additional tax benefits under this law. See
“Risk
      Factors, and specifically - *“
if
      we fail to comply with these conditions in the future, the tax benefits received
      could be canceled and we could be required to pay increased taxes in the future.
      We could also be required to refund tax benefits, with interest and adjustments
      for inflation based on the Israeli consumer price index"* and ** *“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*






89




*be
      entitled. We cannot assure you that the Israeli tax authorities will not
      adversely modify the tax benefits that we could have enjoyed prior to these
      events.”* ****** for
      a
      discussion of the risks our business and prospects for growth face in connection
      with Tax benefits under Israeli law.




We
      currently have Approved Enterprise programs under the Capital Investments Law,
      which to our belief, entitle us to certain tax benefits. The tax benefit period
      for these programs has not yet commenced. We have elected the Alternative
      Benefits Program which provides for the waiver of grants in return for tax
      exemption. Accordingly, our income is tax exempt for a period of two years
      commencing with the year we first earn taxable income relating to each expansion
      program, and is subject to corporate taxes at the reduced rate of 10% to 25%,
      for an additional period of five years to eight
      years, depending on the percentage of the company’s ordinary shares held by
      foreign shareholders in each taxable year .
      The
      exact rate reduction is based on the percentage of foreign ownership in each
      tax
      year. See note 12 to our consolidated financial statements. A company that
      has
      elected to participate in the Alternative Benefits Program and that subsequently
      pays a dividend out of the income derived from the Approved Enterprise during
      the tax exemption period will be subject to corporate tax in respect of the
      gross amount distributed, including withholding tax thereon, at the rate that
      would have been applicable had the company not elected the Alternative Benefits
      Program, ranging from 10% to 25%. The dividend recipient is subject
      to withholding tax
      at
      the reduced rate of 15%, applicable to dividends from Approved Enterprises
      if
      the dividend is distributed within 12 years after the benefits period. The
      withholding tax rate will be 25% after such period. In the case of a company
      with over 25% foreign investment level, as defined by law, the 12-year
      limitation on reduced withholding tax on dividends does not apply. This tax
      should be withheld by the company at the source, regardless of whether the
      dividend is converted into foreign currency. See “Withholdings and Capital Gains
      Taxes Applicable to Non-Israeli Shareholders.”




From
      time
      to time, the Israeli Government has discussed reducing the benefits available
      to
      companies under the Capital Investments Law. The termination or substantial
      reduction of any of the benefits available under the Capital Investments Law
      could materially impact the cost of our future investments.




The
      benefits available to an Approved Enterprise are conditional upon the
      fulfillment of certain conditions stipulated in the Capital Investments Law
      and
      its regulations and the criteria set forth in the specific certificate of
      approval, as described above. In the event that these conditions are violated,
      in whole or in part, we would be required to refund the amount of tax benefits,
      together with linkage differences to the Israeli CPI and interest. We believe
      that our Approved Enterprise programs operate in compliance with all such
      conditions and criteria.




**Foreign
      investor’s Company (“FIC”)**




A
      company
      that has an approved enterprise program is eligible for further tax benefits
      if
      it qualifies as a foreign investors’ company. A foreign investors company is a
      company of which more than 25% of its share capital and combined share and
      loan
      capital is owned by non-Israeli residents. A company that qualifies as a foreign
      investors’ company and has an approved enterprise program is eligible for tax
      benefits for a ten-year benefit period. As specified above, depending on the
      geographic location of the approved enterprise within Israel, income derived
      from the approved enterprise program may be entitled to the
      following:




·
            Exemption
                from tax on its undistributed income up to ten
                years.






90






·
            An
                additional period of reduced corporate tax liability at rates ranging
                between 10% and 25%, depending on the level of foreign (i.e., non-Israeli)
                ownership of our shares.




·
            The
                twelve years limitation period for reduced tax rate of 15% on dividend
                from the approved enterprise does not apply to Foreign Investor’s
                Company.




Measurement
      of Taxable Income




Results
      for tax purposes are measured in real terms, in accordance with the changes
      in
      the Israeli Consumer Price Index, or changes in exchange rate of the NIS against
      the dollar, for a “foreign investors” company. Until taxable year 2002, we
      measured our results for tax purposes in accordance with changes in the Israeli
      consumer price index. Commencing with taxable year 2003, we have elected to
      measure our results for tax purposes on the basis of the changes in the exchange
      rate of NIS against the dollar.




**Tax
      Benefits of Research and Development**




Israeli
      tax law permits, under certain conditions, a tax deduction in the year incurred
      for expenditures, including capital expenditures, in scientific research and
      development projects, if the expenditures are approved by the relevant
      government ministry, determined by the field of research, and if the research
      and development is for the promotion of the enterprise and is carried out by,
      or
      on behalf of, a company seeking such deduction. Expenditures not so approved
      are
      deductible over a three year period; however, expenditures made out of proceeds
      made available to us through government grants are not deductible.




**Withholding
      and Capital Gains Taxes Applicable to Non-Israeli Shareholders**




Nonresidents
      of Israel are subject to income tax on income accrued or derived from sources
      in
      Israel. These sources of income include passive income such as dividends,
      royalties and interest, as well as non-passive income from services rendered
      in
      Israel. We are generally required to withhold income tax at the rate of 25%
      on
      all distributions of dividends, although, with respect to U.S. taxpayers, if
      the
      dividend recipient holds 10% or more of our voting stock for a certain period
      prior to the declaration and payment of the dividend, we are only required
      to
      withhold at a 12.5% rate. Notwithstanding the foregoing, with regard to
      dividends generated by an Approved Enterprise, we are required to withhold
      income tax at the rate of 15%.




Israeli
      law generally imposes a capital gains tax on the sale of publicly traded
      securities. Pursuant to changes made to the Israeli Income Tax Ordinance in
      January 2006, capital gains on the sale of our ordinary shares will be subject
      to Israeli capital gains tax, generally at a rate of 20% unless the holder
      holds
      10% or more of our voting power during the 12 months preceding the sale, in
      which case it will be subject to a 25% capital gains tax. However, as of January
      1, 2003, nonresidents of Israel are exempt from capital gains tax in relation
      to
      the sale of our ordinary shares for so long as (a) our ordinary shares are
      listed for trading on a stock exchange outside of Israel, (b) the capital gains
      are not accrued or derived by the nonresident shareholder’s permanent enterprise
      in Israel, (c) the ordinary shares in relation to which the capital gains are
      accrued or derived were acquired by the nonresident shareholder after the
      initial listing of the ordinary shares on a stock exchange outside of Israel,
      and (d) neither the shareholder nor the particular capital gain is otherwise
      subject to certain sections of the Israeli Income Tax Ordinance. As of January
      1, 2003, nonresidents of Israel are also exempt from Israeli capital gains
      tax
      resulting from the sale of securities on the Tel Aviv Stock Exchange; provided
      that the capital gains are not accrued or derived by the nonresident
      shareholder’s permanent enterprise in Israel.





In
      addition, under the income tax treaty between the United States and Israel,
      a
      United States resident holder of ordinary shares which are not listed for
      trading on a stock exchange outside of Israel will be exempt from






91




Israeli
      capital gains tax on the sale, exchange or other disposition of such ordinary
      shares unless the holder owns, directly or indirectly, 10% or more of our voting
      power during the 12 months preceding such sale, exchange or other disposition.




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




Israel
      presently has no estate or gift tax.




**United
      States Federal Income Tax Considerations with Respect to the Acquisition,
      Ownership and Disposition of Our Ordinary Shares**




The
      following is a discussion of certain 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;




·
            grantor
                trusts;




·
            certain
                expatriates or former long-term residents of the United States;
                and




·
            shareholders
                who acquired our ordinary shares pursuant to the exercise of an employee
                stock option or right or otherwise as
                compensation.




In
      addition, not discussed is the application of : (i) foreign, state or local
      tax laws on the ownership or disposition of our ordinary shares;
      (ii) United States federal and state estate and/or gift taxation; or (iii)
      the alternative minimum tax.




If
      a
      partnership (or any entity treated as a partnership for U.S. Federal Income
      Tax
      purposes) holds ordinary shares, the tax treatment of the partnership and a
      partner in such partnership will generally depend on the activities of the
      partnership. Such a partner or partnership should consult its tax advisor as
      to
      its tax consequences.






92




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;




·
            a
                corporation (or other entity treated as a corporation for United
                States
                federal income tax purposes) created or organized in the United States
                or
                under the laws of the United States, any State or political jurisdiction
                thereof, 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.




Certain
      aspects of U.S. federal income tax relevant to a holder of our ordinary shares
      that is not a U.S. Holder (a “Non-U.S. Holder”) are also discussed
      below.




**Each
      holder of our ordinary shares is advised to consult his or her own tax advisor
      with respect to the specific tax consequences to him or her of purchasing,
      holding or disposing of our ordinary shares, including the applicability and
      effect of federal, state, local and foreign income and other tax laws to his
      or
      her particular circumstances.**




*Distributions*





Subject
      to the discussion below under the heading “Passive Foreign Investment Company
      Status,” to the extent paid out of our current or accumulated earnings and
      profits, as determined under United States federal income tax principles, a
      distribution made with respect to our ordinary shares (including the amount
      of
      any non-U.S. withholding tax thereon) will be includible for 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), or PFIC, 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.






93




To
      the
      extent that a distribution exceeds our earnings and profits and provided that
      we
      were not a PFIC, such distribution will be treated as a non-taxable return
      of
      capital to the extent of the U.S. Holder’s adjusted basis in our ordinary shares
      and thereafter as taxable capital gain. Dividends paid by us generally will
      not
      be eligible for the dividends received deduction allowed to corporations under
      the Code. Dividends paid in a currency other than the U.S. dollar will be
      includible in income of a U.S. Holder in a U.S. dollar amount based on the
      spot
      rate of exchange on the date the distribution is included in income, without
      reduction for any non-U.S. taxes withheld at source, regardless of whether
      the
      payment is in fact converted into U.S. dollars on such date. A U.S. Holder
      who
      receives a foreign currency distribution and converts the foreign currency
      into
      U.S. dollars subsequent to receipt 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.




Subject
      to certain conditions and limitations set forth in the Code (including certain
      holding period requirements), U.S. Holders generally will be able to elect
      to
      claim a credit against their United States federal income tax liability for
      any
      non-U.S. withholding tax deducted from dividends received in respect of our
      ordinary shares. For purposes of calculating the foreign tax credit, dividends
      paid on our ordinary shares generally will be treated as income from sources
      outside the United States and 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.**




*Disposition
      of the Ordinary Shares*




Subject
      to the discussion below under the heading “Passive Foreign Investment Company
      Status,” upon the sale, exchange or other disposition of our ordinary shares, a
      U.S. Holder generally will recognize gain or loss for 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. Non-corporate U.S. Holders are
      currently subject to a reduced rate of taxation on long-term capital gains
      (15%
      for taxable years beginning on or before December 31, 2010). The deductibility
      of a capital loss recognized on the sale or exchange of ordinary shares is
      subject to limitations. Any gain or loss generally will be treated as United
      States source income or loss for United States foreign tax credit purposes.
      In
      addition, a U.S. Holder who receives foreign currency upon the sale or exchange
      of our ordinary shares and converts the foreign currency into U.S. dollars
      subsequent to receipt 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 non-U.S. 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 share of 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








94






·
            50%
                or more of its gross assets (including its pro rata share 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 computed on
                a
                quarterly average basis produce or are held for the production of
                passive
                income.




As
      a
      result of the combination of our substantial holdings of cash, cash equivalents
      and securities and the decline in the market price of our ordinary shares from
      its historical highs, there is a risk that we could be classified as a PFIC,
      for
      United States federal income tax purposes. Based upon our market capitalization
      during 2004, 2005 and 2006 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 United States Internal
      Revenue Service ("IRS") 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 "excess distributions"
                in respect of, our ordinary shares would be taxable as ordinary
                income;




·
            the
                U.S. Holder would be required to allocate such distribution and/or
                disposition gain ratably over such holder’s entire holding period for our
                ordinary shares; the U.S. Holder’s income for the current taxable year
                would include (as ordinary income) amounts allocated to the current
                year,
                i.e., the year of the distribution or disposition, and to any period
                prior
                to the first day of the first taxable year for which we were a
                PFIC;




·
            the
                amount allocated to each year other than (i) the year of the distribution
                or disposition and (ii) any year prior to our becoming a PFIC, would
                be
                subject to tax at the highest individual or corporate marginal tax
                rate,
                as applicable, in effect for that year, and an interest charge would
                be
                imposed with respect to the resulting tax
                liability;




·
            the
                U.S. Holder would be required to file an annual return on IRS Form
                8621
                regarding distributions received in respect of, and gain recognized
                on
                dispositions of, our ordinary shares;
                and




·
            any
                U.S. Holder who acquired our ordinary shares upon the death of a
                U.S.
                Holder would not receive a step-up of the income tax basis to fair
                market
                value for such shares. Instead, such U.S. Holder would have a tax
                basis
                equal to the decedent’s basis, if lower than the fair market
                value.




Although
      a determination as to a non-U.S. corporation’s PFIC status is made annually, an
      initial determination that a non U.S. corporation is a PFIC for any taxable
      year
      generally will cause the above-described consequences to apply for all future
      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.




Generally,
      if a U.S. Holder makes a valid QEF election with respect to our ordinary
      shares:






95




·
            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. Under
      certain circumstances, a U.S. Holder that has not made a timely QEF election
      may
      obtain treatment similar to that afforded a shareholder who has made a timely
      QEF election. A U.S. Holder, may make 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
      of its PFIC stock 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 timely
      protective statement to preserve their ability to make a retroactive QEF
      election. U.S. Holders should consult their tax advisors regarding the
      advisability of filing a protective statement.




Alternatively,
      a U.S. Holder of shares in a PFIC can elect to mark the shares to market
      annually recognizing as ordinary income or loss each year the shares are held,
      as well as on the disposition of the shares, an amount equal to the difference
      between the shareholder’s adjusted tax basis in the PFIC stock and its fair
      market value. Under current law, U.S. Holders may not mark a mark-to-market
      election with respect warrants or rights to acquire our ordinary shares.
      Ordinary loss generally is recognized only to the extent of net mark-to-market
      gains previously included in income by the U.S. Holder under the election in
      prior taxable years. As with the QEF election, a U.S. Holder who makes a
      mark-to-market election would not be subject to the deemed ratable allocations
      of gain, distributions and interest charges (described above). A mark-to-market
      election applies for so long as our ordinary shares are “marketable stock” (e.g.
      "regulatory traded" on the NASDAQ Global Market) and is irrevocable without
      obtaining the consent of the IRS 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.




The
      PFIC
      rules described above are complex. U.S. Holders of our ordinary shares (or
      warrants or rights to acquire our ordinary shares) are urged to consult their
      tax advisors about the PFIC rules, including the advisability, procedure and
      timing of making a QEF or mark-to-market election, in connection with their
      holding of our ordinary shares.






96




*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,
                or




·
            the
                Non-U.S. Holder is an individual who holds our ordinary shares as
                a
                capital asset and is present in the United States for 183 days or
                more in
                the taxable year of the disposition and certain other conditions
                are met..




*Information
      Reporting and Backup Withholding*




U.S.
      Holders generally are subject to information reporting requirements and backup
      withholding (currently at a rate of 28%) with respect to dividends paid in
      the
      United States on, and the proceeds from the disposition of, our ordinary shares,
      unless they:




·
            furnish
                a correct taxpayer identification number and certify that they are
                not
                subject to backup withholding on an IRS Form W-9;
                or




·
            provide
                proof that they are otherwise exempt from backup
                withholding.




Non-U.S.
      Holders generally are not subject to information reporting or backup withholding
      with respect to dividends paid on, or upon the disposition of, our ordinary
      shares, provided that such Non-U.S. Holder provides a taxpayer identification
      number, certifies to its foreign status, or otherwise establishes an
      exemption.




Backup
      withholding is not an additional tax. The amount of any backup withholding
      is
      allowable as a credit against the U.S. or Non-U.S. Holder’s United States
      federal income tax liability, provided that such holder provides the requisite
      information to the IRS.






97




**F. DIVIDENDS
      AND PAYING
      AGENTS**


Not
      applicable.




**G.** **STATEMENT
      BY EXPERTS**




Not
      applicable.




H. DOCUMENTS
      ON
      DISPLAY




We
      are
      subject to the informational requirements of the Securities Exchange Act of
      1934, as amended, applicable to foreign private issuers and fulfill 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. However,
      we file with the Securities and Exchange Commission an annual report on Form
      20-F containing financial statements audited by an independent accounting firm.
      We also furnish quarterly reports on Form 6-K containing unaudited financial
      information after the end of each of the first three quarters.  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 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may
      be
      obtained by mail from the Public Reference Branch of the 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
      INFORMATION**




Not
      applicable.






98


**ITEM
      11.** **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




We
      are
      exposed to financial market risk associated with changes in foreign currency
      exchange rates. To mitigate these risks, we use derivative financial
      instruments. The majority of our revenues and expenses are generated in U.S.
      dollars. A portion of our expenses, however, is denominated in NIS. In order
      to
      protect ourselves against the volatility of future cash flows caused by changes
      in foreign exchange rates, we use currency forward contracts and put and call
      options. We hedge the majority of our forecasted expenses denominated in NIS. During
      the year ended December 31, 2006 we recognized  gains
      of $879,000 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 SECURITIES**




Not
      applicable.












99






**PART
      II**




**ITEM
      13.** **DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES**




Not
      applicable.




**ITEM
      14.** **MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS**




**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, 2006 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 PROCEDURES**




**(** **a)
      Disclosure Controls and Procedures.** 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,
      2006, 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.




**(b)
      Management's Annual Report on Internal Control Over Financial
      Reporting.** **** Our
      management, under the supervision of our Chief Executive Officer and Chief
      Financial Officer, is responsible for establishing and maintaining adequate
      internal control over our financial reporting, as defined in Rules 13a-15(f)
      and
      15d-15(f) of the Exchange Act of 1934, as amended. The Company's internal
      control over financial reporting is designed to provide reasonable assurance
      to
      the Company's management and Board of Directors regarding the reliability of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles. Internal
      control over financial reporting includes policies and procedures that:




·
            pertain
                to the maintenance of our records that in reasonable detail accurately
                and
                fairly reflect our transactions and asset dispositions;






100




·
            provide
                reasonable assurance that our transactions are recorded as necessary
                to
                permit the preparation of our financial statements in accordance
                with
                generally accepted accounting principles;




·
            provide
                reasonable assurance that our receipts and expenditures are made
                only in
                accordance with authorizations of our management and Board of Directors
                (as appropriate); and




·
            provide
                reasonable assurance regarding the prevention or timely detection
                of
                unauthorized acquisition, use or disposition of our assets that could
                have
                a material effect on our financial statements.




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






Under the supervision and with the participation of our management, including
      our principal executive officer and principal financial officer, we conducted
      an
      evaluation of the effectiveness of our internal control over financial reporting
      as of December 31, 2006 based on the framework for Internal Control-Integrated
      Framework set forth by The Committee of Sponsoring Organizations of the Treadway
      Commission. Based on our assessment, our management concluded that the Company's
      internal control over financial reporting were effective as of December 31,
      2006.






This Annual Report does not include an attestation report of our registered
      public accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permit us to provide only management's report in this Annual
      Report.






**(c)
      Changes in Internal Control Over Financial Reporting.** There
      were no changes in our internal controls over financial reporting identified
      with the evaluation thereof that occurred during the period covered by this
      annual report that have materially affected, or are reasonably likely to
      materially affect, our internal control over financial
      reporting.




**ITEM
      16A.** **AUDIT
      COMMITTEE FINANCIAL EXPERT**




Our
      board
      of directors has determined that Professor Amit, a member of our audit
      committee, is qualified as an “audit committee financial expert” and is
      "independent", each as defined in the applicable regulations.




ITEM
      16B. CODE OF ETHICS AND
      CODE OF CONDUCT




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 SERVICES**




The
      following is a summary of the fees billed to us for audit, audit related and
      non-audit services provided by Kost,
      Forer, Gabbay & Kasierer to us
      for the years ended December 31, 2005 and December 31,
      2006:






101




**Fee
                Category**
            **2005
                Fees**
            **2006
                Fees**Audit
                Fees
            $191,000
            $224,000Audit-Related
                Fees
            $18,864
            $15,000Tax
                Fees
            $69,645
            $113,263Total
                Fees
            $279,509
            $352,263






*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”.




*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 2006 and
      2005.




Our
      Audit
      Committee has adopted a policy for pre--approval of audit and non--audit
      services. Under the policy, the Audit Committee Proposed services either may
      be
      pre--approved without consideration of specific case-by-case services by the
      Audit Committee (“general pre--approval”) or they may require the specific
      pre-approval of the Audit Committee (“specific pre--approval”). The Audit
      Committee employs a combination of these two approaches. Unless a type of
      service has received general pre-approval, it will require specific pre-approval
      by the Audit Committee if it is to be provided by the independent auditor.
      The
      term of any general pre-approval is 12 months from the date of pre--approval,
      unless the Audit Committee considers a different period and states otherwise.
      The Audit Committee reviews annually and pre-approves the services that may
      be
      provided by the independent auditor without obtaining specific pre-approval
      from
      the Audit Committee. The Audit Committee adds to or subtracts from the list
      of
      general pre-approved services from time to time, based on subsequent
      determinations. Pre-approval fee levels or budgeted amounts for all services
      to
      be provided by the independent auditor are to be established annually by the
      Audit Committee. Any proposed services exceeding these levels or amounts require
      specific pre-approval by the Audit Committee.




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




Not
      applicable.




ITEM
      16E .  **PURCHASES**
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS




Not
      applicable.






102







**PART
      III**




ITEM
      17. FINANCIAL
      STATEMENTS




We
      have
      responded to Item 18 in lieu of this item.




ITEM
      18.  FINANCIAL
      STATEMENTS




The
      financial statements required by this item are found at the end of this annual
      report, beginning on page F-1.










103


ITEM
      19.  EXHIBITS




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)8
            Subsidiaries
                of Alvarion Ltd.*10.1
            Consent
                of Kost, Forer, Gabay & Kasierer*11
            Code
                of Conduct (5)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, 2003






104


**SIGNATURES**




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




ALVARION
      LTD.
















/s/ Tzvika Friedman


By:  Tzvika
      Friedman


Chief Executive Officer




Date:
      April 27, 2007











105


**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)8
            Subsidiaries
                of Alvarion Ltd.*10.1
            Consent
                of Kost, Forer, Gabay & Kasierer *11
            Code
                of Conduct (5)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 Form20-F for the fiscal period
                ending
                December 31, 2003






106














**ALVARION
      LTD. AND ITS SUBSIDIARIES**








**CONSOLIDATED
      FINANCIAL STATEMENTS**








**AS
      OF DECEMBER 31, 2006**








**IN
      U.S. DOLLARS**











**INDEX**








**Page****Report
                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****Notes
                to Consolidated Financial Statements**
            **F-8
                - F-38**














**-
      - - - - - -**

















**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





**To
      the Shareholders of**





**ALVARION
      LTD. AND ITS SUBSIDIARIES**








We
      have
      audited the accompanying consolidated balance sheets of Alvarion Ltd. ("the
      Company") and its subsidiaries as of December 31, 2005 and 2006, and the related
      consolidated statements of operations, changes in shareholders' equity and
      cash
      flows for each of the three years in the period ended December 31, 2006. 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.








As
      discussed in Note 2m to the consolidated financial statement, in 2006 the
      company adopted Statement Financial Accounting Statements Standards Board No.
      123 (Revised 2004), "Share-Based Payment".








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, 2005 and 2006, and the consolidated
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 31, 2006, in conformity with accounting principles
      generally accepted in the United States.














Tel-Aviv,
                Israel
            /s/ KOST FORER GABBAY & KASIERERMarch
                29, 2007
            A
                Member of Ernst & Young Global











F-2




ALVARION
      LTD. AND ITS SUBSIDIARIES


**CONSOLIDATED
      BALANCE SHEETS**





**U.S.
      dollars in thousands**








**December
                31,****2005**
            
            **2006**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            41,372
            
            $
            40,832Short-term
                bank deposits
            
            
            5,092
            
            
            1,835Marketable
                securities (Note 3)
            
            
            47,349
            
            
            47,134Trade
                receivables (net of allowance for doubtful accounts of $ 1,256 and
                $ 1,236 at December 31, 2005 and 2006, respectively)
            
            
            35,389
            
            
            34,332Other
                accounts receivable, prepaid expenses and current maturities of long-term
                note (Note 4)
            
            
            5,856
            
            
            10,644Inventories
                (Note 5)
            
            
            30,644
            
            
            30,539Current
                assets of discontinued operations
            
            
            16,924
            
            
            3,921Totalcurrent assets
            
            
            182,626
            
            
            169,237LONG-TERM

                INVESTMENTS:Long-term
                bank deposits
            
            
            3,491
            
            
            -Marketable
                securities (Note 3)
            
            
            17,016
            
            
            28,625Severance
                pay fund
            
            
            7,685
            
            
            8,749Totallong-term investments
            
            
            28,192
            
            
            37,374LONG-TERM
                NOTE (Note 1d)
            
            
            -
            
            
            1,830PROPERTY
                AND EQUIPMENT, NET (Note 6)
            
            
            9,772
            
            
            10,379INTANGIBLE
                ASSETS, NET (Note 7)
            
            
            6,813
            
            
            4,137GOODWILL
            
            
            57,106
            
            
            57,106NON-CURRENT
                ASSETS OF DISCONTINUED OPERATIONS
            
            
            33,493
            
            
            -Totalassets
            
            $
            318,002
            
            $
            280,063







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 and per share data**





**December
                31,****2005**
            
            **2006**LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Current
                maturities of long-term debt (Note 9)
            
            $
            1,757
            
            $
            1,749Trade
                payables
            
            
            26,156
            
            
            22,418Other
                accounts payable and accrued expenses (Note 8)
            
            
            30,565
            
            
            40,546Liabilities
                - discontinued operations
            
            
            22,435
            
            
            7,355Totalcurrent liabilities
            
            
            80,913
            
            
            72,068LONG-TERM
                LIABILITIES:Long-term
                debt (Note 9)
            
            
            1,749
            
            
            -Accrued
                severance pay
            
            
            11,007
            
            
            12,694Totallong-term liabilities
            
            
            12,756
            
            
            12,694COMMITMENTS
                AND CONTINGENT LIABILITIES (Note 10)SHAREHOLDERS'
                EQUITY:Share
                capital (Note 11) -Ordinary
                shares of NIS 0.01 par value -Authorized:
                85,080,000 shares at December 31, 2005 and 2006; Issued: 63,197,765
                and
                65,425,984 shares at December 31, 2005 and 2006, respectively;
                Outstanding: 59,400,992 and 61,629,211 shares at December 31, 2005
                and 2006, respectively
            
            
            160
            
            
            165Additional
                paid-in capital
            
            
            391,797
            
            
            403,543Treasury
                shares at cost 3,796,773 shares at December 31, 2005 and
                2006
            
            
            (7,876
            )
            
            (7,876
            )Deferred
                stock compensation
            
            
            (173
            )
            
            -Other
                accumulated comprehensive income
            
            
            263
            
            
            58Accumulated
                deficit
            
            
            (159,838
            )
            
            (200,589
            )Totalshareholders' equity
            
            
            224,333
            
            
            195,301Totalliabilities and shareholders' equity
            
            $
            318,002
            
            $
            280,063







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 per share data**





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Sales
                (Note 13)
            
            $
            200,051
            
            $
            176,927
            
            $
            181,594Cost
                of sales
            
            
            101,169
            
            
            85,817
            
            
            80,410Write-off
                of excess inventory and provision for inventory purchase commitments
                (Note
                2g)
            
            
            11,412
            
            
            7,338
            
            
            9,472Gross
                profit
            
            
            87,470
            
            
            83,772
            
            
            91,712Operating
                costs and expenses:Research
                and development, net (Note 14a)
            
            
            27,334
            
            
            29,710
            
            
            38,807Selling
                and marketing
            
            
            38,748
            
            
            39,900
            
            
            44,929General
                and administrative
            
            
            9,385
            
            
            9,602
            
            
            13,680Amortization
                of intangible assets
            
            
            2,676
            
            
            2,685
            
            
            2,676Totaloperating costs and expenses
            
            
            78,143
            
            
            81,897
            
            
            100,092Operating
                income (loss)
            
            
            9,327
            
            
            1,875
            
            
            (8,380
            )Financial
                income, net (Note 14c)
            
            
            3,821
            
            
            2,551
            
            
            3,796Income
                (loss) from continuing operations (Note 1d)
            
            
            13,148
            
            
            4,426
            
            
            (4,584
            )Loss
                from discontinued operations, net
            
            
            (12,297
            )
            
            (17,044
            )
            
            (36,167
            )Net
                income (loss)
            
            $
            851
            
            $
            (12,618
            )
            $
            (40,751
            )Net
                earnings (loss) per share (Note 14d):Basic:Continuing
                operations
            
            $
            0.23
            
            $
            0.08
            
            $
            (0.08
            )Discontinued
                operations
            
            
            (0.21
            )
            
            (0.30
            )
            
            (0.59
            )$
            0.02
            
            $
            (0.22
            )
            $
            (0.67
            )Diluted:Continuing
                operations
            
            $
            0.20
            
            $
            0.08
            
            $
            (0.08
            )Discontinued
                operations
            
            
            (0.19
            )
            
            (0.30
            )
            
            (0.59
            )$
            0.01
            
            $
            (0.22
            )
            $
            (0.67
            )







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****Number**
            
            **Amount**
            
            **Additional
                  paid-in**
                  **capital**
            
            **Treasury**
                **shares**
            
            **Deferred**
                **stock**
                **compensation**
            
            **Other
                  accumulated comprehensive**
                **income**
            
            **Accumulated**
                **deficit**
            
            **Total
                  comprehensive**
                **Income
                    (loss)**
            
            **Total
                  shareholders'**
                **equity**Balance
                at January 1, 2004
            
            
            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
            
            
            -
            
            
            -
            
            
            
            
            
            60Unrealized
                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
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            44
            
            
            -
            
            
            -
            
            
            
            
            
            44Amortization
                of deferred stock compensation related to discontinued
                operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            519
            
            
            -
            
            
            -
            
            
            
            
            
            519Unrealized
                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
            )
            
            
            
            
            224,333Reclassification
                of other deferred stock compensation due to implementation of SFAS
                123R
            
            
            -
            
            
            -
            
            
            (173
            )
            
            -
            
            
            173
            
            
            -
            
            
            -
            
            
            
            
            
            -Exercise
                of employee stock options
            
            
            2,228,219
            
            
            5
            
            
            5,021
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            5,026Stock
                based compensation expenses related to SFAS 123R
            
            
            -
            
            
            -
            
            
            6,450
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            6,450Stock
                based compensation expenses related to SFAS 123R , relating to
                discontinued operations
            
            
            -
            
            
            -
            
            
            448
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            448Unrealized
                losses on foreign currency cash flow hedges
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (205
            )
            
            -
            
            $
            (205
            )
            
            (205
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (40,751
            )
            
            (40,751
            )
            
            (40,751
            )Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (40,956
            )Balance
                at December 31, 2006
            
            
            61,629,211
            
            $
            165
            
            $
            403,543
            
            $
            (7,876
            )
            $
            -
            
            $
            58
            
            $
            (200,589
            )
            
            
            
            $
            195,301





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,****2004**
            
            **2005**
            
            **2006**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            851
            
            $
            (12,618
            )
            $
            (40,751
            )Adjustments
                required to reconcile net income (loss) to net cash provided by (used
                in)
                operating activities:Loss
                from discontinued operations
            
            
            12,297
            
            
            17,044
            
            
            36,167Depreciation
            
            
            4,718
            
            
            4,094
            
            
            4,926Stock
                based compensation expenses related to SFAS 123(R)
            
            
            60
            
            
            44
            
            
            6,450Interest,
                amortization of premium and accretion of discounts on held-to-maturity
                marketable securities, bank deposits and other long-term
                liabilities
            
            
            626
            
            
            876
            
            
            (247
            )Amortization
                of other intangible assets
            
            
            2,676
            
            
            2,676
            
            
            2,676Decrease
                (increase) in trade receivables
            
            
            (3,767
            )
            
            (11,512
            )
            
            1,057Decrease
                in long-term receivables
            
            
            1,131
            
            
            792
            
            
            -Decrease
                (increase) in other accounts receivable and prepaid expenses
            
            
            (896
            )
            
            (198
            )
            
            45Decrease
                (increase) in inventories
            
            
            (718
            )
            
            7,055
            
            
            105Increase
                (decrease) in trade payables
            
            
            (2,038
            )
            
            4,542
            
            
            (4,470
            )Increase
                (decrease) in other accounts payable and accrued expenses
            
            
            10,189
            
            
            (5,828
            )
            
            9,981Accrued
                severance pay, net
            
            
            826
            
            
            221
            
            
            623Net
                cash provided by continuing operating activities
            
            
            25,955
            
            
            7,188
            
            
            16,562Net
                cash used in discontinued operating activities
            
            
            (2,965
            )
            
            (22,402
            )
            
            (10,946
            )Net
                cash provided by (used in) operating activities
            
            
            22,990
            
            
            (15,214
            )
            
            5,616Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (3,442
            )
            
            (3,331
            )
            
            (4,801
            )Proceeds
                from bank deposits
            
            
            132,767
            
            
            30,375
            
            
            6,725Investment
                in bank deposits
            
            
            (109,097
            )
            
            (13,200
            )
            
            (34
            )Goodwill
                related to continuing operations
            
            
            (18,875
            )
            
            -
            
            
            -Investment
                in held-to-maturity
                marketable securities
            
            
            (63,398
            )
            
            (58,778
            )
            
            (170,044
            )Proceeds
                from maturity of held-to-maturity marketable securities
            
            
            56,416
            
            
            81,766
            
            
            158,946Net
                cash provided by (used in) continuing investing activities
            
            
            (5,629
            )
            
            36,832
            
            
            (9,208
            )Net
                cash used in discontinued investing activities
            
            
            (29,032
            )
            
            (753
            )
            
            (225
            )Net
                cash provided by (used in) investing activities
            
            
            (34,661
            )
            
            36,079
            
            
            (9,433
            )Cash
                flows from financing activities:Proceeds
                from exercise of warrants and employee stock options
            
            
            9,822
            
            
            3,539
            
            
            5,026Repayment
                of long term debt
            
            
            (1,764
            )
            
            (1,742
            )
            
            (1,749
            )Net
                cash provided by financing activities
            
            
            8,058
            
            
            1,797
            
            
            3,277Increase
                in cash and cash equivalents from continuing operations
            
            
            28,384
            
            
            45,817
            
            
            10,631Decrease
                in cash and cash equivalents from discontinued operations
            
            
            (31,997
            )
            
            (23,155
            )
            
            (11,171
            )Increase
                (decrease) in cash and cash equivalents
            
            
            (3,613
            )
            
            22,662
            
            
            (540
            )Cash
                and cash equivalents at the beginning of the year
            
            
            22,323
            
            
            18,710
            
            
            41,372Cash
                and cash equivalents at the end of the year
            
            $
            18,710
            
            $
            41,372
            
            $
            40,832Supplemental
                disclosure of cash flows activities:Cash
                paid during the year for interest
            
            $
            120
            
            $
            90
            
            $
            130Non-cash
                transactions:Notes
                received in connection with the CMU net assets sale
            
            $
            -
            
            $
            -
            
            $
            6,868Purchase
                of property and equipment accrued in trade payables
            
            $
            -
            
            $
            -
            
            $
            732





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








F-7
 
 **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 mainly focused
                on
                solutions based on the WiMAX standard for primary wireless broadband
                access (high-speed wireless "last mile" connection to the internet
                for
                homes and businesses) in both developed and emerging regions. The
                Company
                supplies top tier carriers, ISPs and private network operators with
                solutions based on the WiMAX standard as well as other wireless broadband
                solutions.





As
      for
      geographic markets and major customers, see Note 13.





b.
            Alvarion
                Ltd. has wholly-owned active subsidiaries: in the United States,
                France,
                Romania, Brazil, Hong-Kong, Singapore, Japan, Mexico, Poland, Israel,
                Uruguay, 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.





d. Acquisition
      of interWAVE Communications International, Ltd. and discontinued
      operations:





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.





On
      November 21, 2006, the Company signed an agreement to sell substantially all
      of
      the assets and certain liabilities related to the Cellular Mobile Unit ("CMU"),
      representing the majority of former interWAVE business, to LGC Wireless Inc
      ("LGC"), a privately held U.S. company, pursuant to the terms of which LGC
      issued to Alvarion Promissory Notes ("the Promissory Notes") in the amount
      of
      $ 7,920 and a Convertible Note ("the Convertible Note", and together with
      the Promissory Note, "the Notes")  at
      the
      amount of $ 6,930.





The
      Promissory Notes bear simple interest at the rate of 8% per annum, payable
      annually. 50% of the principal amounts and any accrued but unpaid interest
      thereon will be due and payable on December 31, 2007 and the remaining principal
      and any and all accrued but unpaid interest will be due and payable on December
      31, 2008. The Promissory Notes are secured by the assets sold in the
      transaction.








F-8
 
 **ALVARION
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
              dollars in thousands**







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





The
      Convertible Note bears simple interest at the rate of 8% per annum, payable
      annually. The principal and any accrued but unpaid interest will be due and
      payable on December 31, 2007. The parties shall have the right to convert the
      outstanding principal on the Convertible Note, at any date beginning six months
      following the closing and ending on the date of maturity, into LGC’s Common
      shares; the outstanding principal on the Convertible Note would automatically
      convert into LGC’s Common shares upon an LGC Initial Public Offering or a change
      of control in LGC.





At
      closing, 10%
      of
      the principal amount of the Notes ("the Escrow Amount") is held in an Escrow
      account ("the Escrow Account"). The Escrow Account shall exist
      until the termination of the 24-month period following the Closing
      Date.





The
      transaction was treated as a non-monetary transaction and the consideration
      was
      recorded at its fair value, valued at $ 6,868.





The
      transaction was accounted for as discontinued operation in accordance with
      Statement of Financial Accounting Standard No 144, "Accounting for the
      Impairment or Disposal of Long Lived Assets" (SFAS 144) and EITF No. 03-13
      "Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in
      Determining Whether to Report Discontinued Operations".





The
      assets and liabilities of the CMU as of December 31, 2005 and 2006 are presented
      separately in the Company's balance sheets as assets and liabilities from
      discontinued operations, respectively. The results of the CMU operations are
      presented as discontinued operations for all periods presented. The cash flow
      of
      the CMU was also disclosed separately in the statement of cash flows for 2004,
      2005, and 2006. The Company expects to collect over 2007 and 2008 certain
      amounts in reference to the former sale of CMU equipment and services, which
      occurred before the sale of the CMU.





Assets and liabilities of the discontinued segment:





**December
                31,****2005**
            
            **2006**Assets
                relating to discontinued segment:Trade
                and other receivables
            
            $
            4,205
            
            $
            61Inventories
            
            
            12,719
            
            
            3,860Property,
                plant and equipment, net
            
            
            1,300
            
            
            -Goodwill
                and other intangible assets, net
            
            
            32,193
            
            
            -$
            50,417
            
            $
            3,921





**December
                31,****2005**
            
            **2006**Liabilities
                relating to discontinued segment:Trade
                payables
            
            $
            2,937
            
            $
            58Other
                payables and accrued liabilities
            
            
            19,498
            
            
            7,297$
            22,435
            
            $
            7,355





F-9
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**











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





Results of operations of the discontinued segment:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Revenues
            
            $
            1,456
            
            $
            18,788
            
            $
            24,840Operating
                expenses
            
            
            2,760
            
            
            35,832
            
            
            32,491Impairment
                of goodwill (Note 2k)
            
            
            -
            
            
            -
            
            
            23,378In
                process research & development write-off
            
            
            10,993
            
            
            -
            
            
            -Loss
                from disposal of discontinued operation
            
            
            -
            
            
            -
            
            
            5,138Net
                results
            
            $
            (12,297
            )
            $
            (17,044
            )
            $
            (36,167
            )








**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES**





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





a. Use
      of
      estimates:





The
      preparation of financial statements in conformity with 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 currency
      in
      the primary economic environment in which the Company operates. Thus, the
      functional and reporting currency of the Company is the dollar.





Accordingly,
      monetary accounts maintained in currencies other than the dollar are remeasured
      into dollars in accordance with Statement of the Financial Accounting Standard
      No. 52, "Foreign Currency Translation" ("SFAS No. 52"). All transaction gains
      and losses from the remeasurement of monetary balance sheet items are reflected
      in the statement of operations as appropriate.





c.
            Principles
                of consolidation:





The
      consolidated financial statements include the accounts of Alvarion Ltd. and
      its
      wholly-owned subsidiaries. Intercompany transactions and balances, including
      profits from intercompany sales not yet realized outside the Company, have
      been
      eliminated in consolidation.





F-10
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**







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





d.
            Cash
                equivalents:





Cash
      equivalents are short-term highly liquid investments that are readily
      convertible to cash, with maturities of three months or less at the date
      acquired.





e.
            Short-term
                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, 2005 and
      2006, most of the bank deposits are in U.S. dollars and bear interest at a
      weighted average interest rate of 2.63% and 5.45% respectively. The deposits
      are
      presented at their cost, including accrued interest.





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, 2005 and 2006, 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





F-11
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**











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





During
      2004, 2005 and 2006, the Company recorded inventories write-offs for inventory
      no longer required and provision for inventory purchase commitments in a total
      amount of $ 11,412, $ 7,338 and $ 9,472, respectively.





The
      purchase commitment liability is related to on-order inventory that is in excess
      of the Company's future demand forecasts, and amounted to approximately $ 2,410
      and $ 2,587 as of December 31, 2005 and 2006,
      respectively.





In
      2004,
      2005 and 2006, approximately $5,595, $4,218 and $3,594 respectively, of
      inventory previously written-off was used as product 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 an additional charge to the cost of sales in the period in
      which the inventory was utilized.





h.
            Long-term
                receivables:





The
      long-term promissory notes received in consideration with the CMU net assets
      sale are carrying extended payment terms. Accordingly, the promissory notes
      were
      recorded at estimated present values determined based on appropriate interest
      rates and reported at their net amount in the accompanying financial statements.





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 2004, 2005
      and 2006, no impairment losses have been identified.





F-12
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**











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





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"):





*Current
      technology* - (i)
      the 2001 acquired Floware current technology is being amortized over a period
      of
      seven years on a straight-line basis and, (ii) the amount allocated to the
      InnoWave current technologies are being amortized on a straight-line basis
      over
      4.75 years and 7.75 years respectively reflecting different product amortization
      schedules.





*Customer
      relations* - 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.





*Goodwill* -
      Goodwill represents the excess of the cost of businesses acquired over the
      fair
      value of the net assets acquired in the acquisition of Floware, Innowave, and
      the portion of goodwill resulted from the acquisition of interWAVE that was
      allocated to Alvarion’s continuing operations.





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





During
      the second quarter of 2006, the Company identified circumstances that required
      the reassessment of the recoverability of the various assets associated with
      its
      CMU unit, as required in SFAS 142. Management conducted an impairment analysis
      of goodwill and other intangibles. As a result, an impairment charge of goodwill
      in the amount of $ 23,378 was recorded.





On
      the
      date that the Company performed its annual impairment test, September 30, 2006,
      based on management projections, expected future discounted operating cash
      flows
      and market multiples, no impairment losses have been identified for the reminder
      of the Company’s operations reporting unit.





See
      also
      Note 1d.





F-13
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**











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





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 if it is more likely than not that
      some portion or all of the deferred tax asset will not be realized.





m.
            Accounting
                for stock-based compensation:





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





Effective
      January 1, 2006, the Company adopted SFAS No. 123(R) using the modified
      prospective transition method. Under that transition method, compensation cost
      recognized in the year ended December 31, 2006, includes: (a) compensation
      cost
      for all share-based payments granted prior to, but not yet vested as of January
      1, 2006, based on the grant date fair value estimated in accordance with the
      original provisions of SFAS No. 123, and (b) compensation cost for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS No.
      123(R). Results for prior periods have not been restated, in accordance with
      the
      modified prospective transition method.





As
      a
      result of adopting SFAS No. 123(R) on January 1, 2006, the Company's net loss
      for the year ended December 31, 2006, is $ 6,816 higher, than if it had
      continued to account for share-based compensation under APB 25. Basic and
      diluted net loss per share for the year ended December 31, 2006, are $ 0.11
      higher, than if the Company had continue to account for share based compensation
      under APB 25.





SFAS
      No.
      123(R) requires companies to estimate the fair value of equity-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as an
      expense over the requisite service periods in the Company's consolidated income
      statements. Prior to the adoption of SFAS No. 123(R), the Company accounted
      for
      equity-based awards to employees and directors using the intrinsic value method
      in accordance with APB No. 25 as allowed under Statement of Financial Accounting
      Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
      The Company recognized compensation expenses, over the requisite service period
      of each of the awards. Forfeitures were accounted for as occurred.








F-14
 
 **ALVARION
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
                dollars in thousands, except share and per
                share**







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





The
      following table illustrates the effect on net income and earnings per share
      if
      the Company had applied the fair value recognition provisions of SFAS No. 123
      to
      options granted under the Company’s stock option plans in all periods presented.
      For purposes of this pro forma disclosure, the value of the options is estimated
      using a Black-Scholes option-pricing formula and amortized to expense over
      the
      options’ vesting periods.




**Year
                  ended December 31,****2004**
              
              **2005**Net
                  income (loss) as reported
              
              $
              851
              
              $(12,618)Add:
                  stock-based compensation expenses included in the reported net
                  income
                  (loss)
              
              
              60
              
              563Deduct:
                  Total stock-based compensation expenses determined under fair value
                  based
                  method for all awards
              
              
              (6,541
              )
              *)
                  (15,749)Pro
                  forma net loss
              
              $
              (5,630
              )
              $(27,804)Earnings
                  (loss) per shareBasic
                  net earnings (loss) per share- as reported
              
              $
              0.02
              
              $(0.22)Basic
                  net loss per share - pro forma
              
              $
              (0.10
              )
              $(0.47)Diluted
                  net earning (loss) per share- as reported
              
              $
              0.01
              
              $(0.22)Diluted
                  net loss per share- pro forma
              
              $
              (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
                11d.





The
      fair
      value for these options was estimated at the date of grant using the
      Black-Scholes option pricing model based on the following weighted-average
      assumptions:





**Year
                ended December 31,****2004**
            
            **2005**Dividend
                yield
            
            0%
            
            0%Expected
                volatility
            
            61%
            
            55%Risk-free
                interest rate
            
            3.32%
            
            4.4%Expected
                life (years)
            
            3
            
            3




The
      Company estimates the fair value of stock options granted under SFAS
      No.
      123(R) using
      the
      Black-Scholes option- pricing model that uses the assumption noted in the
      following table.





Expected
      volatility is based on historical volatility that is representative of future
      volatility over the expected term of the options. The expected term of options
      granted represent the period of time that options granted are expected to be
      outstanding and was determined based on the simplified method in accordance
      with
      SAB 107. The risk free interest rate is based on the yield of U.S. treasury
      bonds with equivalent terms. The dividend yield is based on the Company’s
      historical and future expectation of dividends payouts. Historically, the
      Company has not paid cash dividends and has no foreseeable plans to pay cash
      dividends in the future.





F-15
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share and per share
            data**







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





The
      Company recognizes compensation expense based on awards ultimately expected
      to
      vest, net of estimated forfeitures at the time of grant. Estimated forfeitures
      are based on historical pre-vesting forfeitures. SFAS 123(R) requires
      forfeitures to be estimated and revised, if necessary, in subsequent periods
      if
      actual forfeitures differ from those estimates.





**Year
                ended**
              **December
                31,**
              **2006**Volatility
            
            54%Risk-free interest rate
            
            4.9%Dividend yield
            
            0%Forfeiture rate
            
            12%Expected life
            
            4
                years





The
      Company's aggregate compensation cost for the year ended December 31, 2006
      totaled $ 6,898 ($ 6,450 related to continued
      operations).





The
      total
      equity-based compensation expense related to all of the Company's equity-based
      awards, recognized for 12 months ended December 31, 2006, was comprised as
      follows:





**Year
                ended**
              **December
                31,****2006**Cost of goods sold
            
            $486Research and development
            
            1,408Sales and marketing
            
            1,418General and administrative
            
            3,138Equity-based compensation expense related to continuing
                operations
            
            $6,450Equity-based compensation expense related to discontinued
                operations
            
            $448Total equity-based compensation expense
            
            $6,898Net equity-based compensation expense, per share of Common
                stock:Basic
            
            $0.11Diluted
            
            $0.11





F-16
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share and per share
            data**





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





A
      summary
      of option activity under the Company's Stock Option Plans as of December 31,
      2006 and changes during year than ended are as follows:





**Number
                of options**
            
            **Weighted-average
                exercise price**
            
            **Weighted-
                average remaining contractual term (in years)**
            
            **Aggregate
                intrinsic value**Outstanding at January 1, 2006
            
            
            12,099,033
            
            $
            7.69Granted
            
            
            1,748,767
            
            $
            7.02Exercised
            
            
            (2,228,219
            )
            $
            2.25Forfeited or cancelled
            
            
            (1,198,884
            )
            $
            11.80Outstanding at December 31, 2006
            
            
            10,420,697
            
            $
            8.27
            
            
            6.48
            
            $
            15,941Exercisable at December 31, 2006
            
            
            6,174,178
            
            $
            7.53
            
            
            3.02
            
            $
            13,902





The
      weighted-average grant-date fair value of options granted during the year ended
      December 31, 2006 was $ 3.93. The aggregate intrinsic value in the table above
      represents the total intrinsic value (the difference between the Company's
      closing stock price on the last trading day of fiscal 2006 and the exercise
      price, multiplied by the number of in-the-money options) that would have been
      received by the option holders had all option holders exercised their options
      on
      December 31, 2006. This amount changes, based on the fair market value of the
      Company's shares. Total intrinsic value of options exercised during the year
      ended December 31, 2006 was $ 13,827. As of December 31, 2006, there was $13,371
      of total unrecognized compensation cost related to non-vested share-based
      compensation arrangements granted under the Company's stock option plans. That
      cost is expected to be recognized over a weighted-average period of 2.5 years.





n.
            Revenue
                recognition:





The
      Company generates revenues by selling its products indirectly through
      distributors and OEMs and directly to end-users.





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





The
      Company generally does not grant a right of return. However, the Company has
      granted to certain distributors limited rights of return on unsold products.
      Product revenues on shipments to these distributors are deferred until the
      distributors resell the Company's products to their customers provided that
      all
      other revenue recognition criteria are met.








F-17
 
 **ALVARION
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
              dollars in thousands**







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





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 a 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.





Changes in the Company's warranty allowance during the period are as
      follows:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Balance at the beginning of the year
            
            $
            4,070
            
            $
            6,173
            
            $
            5,330Warranties issued during the year
            
            
            5,726
            
            
            3,900
            
            
            4,734Settlements made during the year
            
            
            (3,623
            )
            
            (4,743
            )
            
            (5,958
            )$
            6,173
            
            $
            5,330
            
            $
            4,106





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:





Grants
      from the Government of Israel and other jurisdictions for funding approved
      research and development projects are recognized at the time the Company is
      entitled to such grants, on the basis of the costs incurred and included as
      a
      deduction from research and development costs.











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.)**





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
      Israeli's employees is fully provided by monthly deposits with severance pay
      funds, insurance policies and by an accrual. The value of these deposits is
      recorded as an asset in the Company's balance sheet.





The
      deposited funds include profits accumulated up to the balance sheet date. The
      deposited funds may be withdrawn only upon the fulfillment of the obligation
      pursuant to Israel's Severance Pay Law or labor agreements.





Severance
      pay expenses for the years ended December 31, 2004, 2005 and 2006, were
      $ 3,016, $ 2,886 and $ 3,162, respectively.





s.
            Advertising
                expenses:





Advertising
      expenses are carried to the statement of operations as incurred. Advertising
      expenses for the years ended December 31, 2004, 2005 and 2006, were $ 466,
      $ 680 and $ 1,188, 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 555,000, 12,122,000 and 11,244,000 for
      the
      years ended December 31, 2004, 2005 and 2006, 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.











F-19
 
 **ALVARION
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
              dollars in thousands**







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





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 and U.S. government agencies. 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 of the Company and its subsidiaries are derived from sales to
      customers located primarily in North and South America, Asia Pacific, Africa
      and
      Europe. However, under certain circumstances, the Company and its subsidiaries
      may require letters of credit, other collateral, additional guarantees or
      advance payments. Regarding certain credit balances, the Company is covered
      by
      foreign trade risk insurance. The Company and its subsidiaries perform ongoing
      credit evaluations of their customers and, 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.





During
      the year 2005, the Company recognized transactions on the 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"). No sales of trade
      receivables occurred during 2006.





The
      allowance for doubtful accounts expenses (income) for the years ended December
      31, 2004, 2005 and 2006, was $ 727, $ (1,921) and $ 56,
      respectively.





The
      promissory notes in connection with the CMU sale transaction are recorded based
      on their fair value (see Note 1d.).





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.








F-20
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**




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





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.





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. G20, "Cash Flow Hedges: Assessing and Measuring the
      Effectiveness of a Purchased option Used in a Cash Flow Hedge" ("DIG 20") and
      are all effective.





F-21
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**











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





As
      of
      December 31, 2006, the Company recorded accumulated other comprehensive income
      in the amount of $ 58 from its zero cost collar with respect to anticipated
      payroll expenses expected to be incurred during 2007. Such amount will be
      recorded into earnings during 2007.





*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, and 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.





y.
            Reclassification:





Certain
      amounts in prior years’ financial statements have been reclassified to conform
      with the current year’s presentation.





z.
            Impact
                of recently issued Accounting
                Standards:





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





FIN
      48
      applies to all tax positions related to income taxes subject to the Financial
      Accounting Standard Board Statement No. 109, "Accounting for Income Taxes"
      ("FAS
      109"). This includes tax positions considered to be "routine" as well as those
      with a high degree of uncertainty.





F-22
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**











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





FIN
      48
      has expanded disclosure requirements, which include a tabular roll forward
      of
      the beginning and ending aggregate unrecognized tax benefits as well as specific
      detail related to tax uncertainties for which it is reasonably possible the
      amount of unrecognized tax benefit will significantly increase or decrease
      within twelve months. These disclosures are required at each annual reporting
      period unless a significant change occurs in an interim period.





FIN
      48 is
      effective for fiscal years beginning after December 15, 2006. The cumulative
      effect of applying FIN 48 will be reported as an adjustment to the opening
      balance of retained earnings. We are currently assessing the impact FIN 48
      will
      have on our financial statements.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
      No. 157"). This statement provides a single definition of fair value,
      establishes a framework for measuring fair value, and expands disclosures
      concerning fair value. Previously, different definitions of fair value were
      contained in various accounting pronouncements creating inconsistencies in
      measurement and disclosures. SFAS No. 157 applies under those previously issued
      pronouncements that prescribe fair value as the relevant measure of value,
      except SFAS No. 123(R) and related interpretations.





The
      statement does not apply to accounting standards that require or permit
      measurement similar to fair value but are not intended to measure fair value.
      This pronouncement is effective for fiscal years beginning after November 15,
      2007. The Company does not anticipate any material impact on its consolidated
      financial statements upon the adoption of this standard.





In
      February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
      permits entities to choose to measure many financial assets and financial
      liabilities at fair value. Unrealized gains and losses on items for which the
      fair value option has been elected are reported in earnings. SFAS No. 159 is
      effective for fiscal years beginning after November 15, 2007. The Company is
      currently assessing the impact of SFAS No. 159 on its consolidated financial
      position and results of operations.












F-23
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**







**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, 2005:Maturing
                within one year:US
                Government agencies
            
            $
            31,312
            
            $
            16
            
            $
            (188
            )
            $
            31,140Corporate
                bonds
            
            
            16,037
            
            
            55
            
            
            (60
            )
            
            16,03247,349
            
            
            71
            
            
            (248
            )
            
            47,172Maturing
                over one year:US
                Government agencies
            
            
            15,490
            
            
            -
            
            
            (77
            )
            
            15,413Corporate
                bonds
            
            
            1,526
            
            
            -
            
            
            (28
            )
            
            1,49817,016
            
            
            -
            
            
            (105
            )
            
            16,911$
            64,365
            
            $
            71
            
            $
            (353
            )
            $
            64,083December
                31, 2006:Maturing
                within one year:US
                Government agencies
            
            $
            17,255
            
            $
            -
            
            $
            (141
            )
            $
            17,114Corporate
                bonds
            
            
            29,879
            
            
            3
            
            
            (28
            )
            
            29,85447,134
            
            
            3
            
            
            (169
            )
            
            46,968Maturing
                over one year:US
                Government agencies
            
            
            13,018
            
            
            4
            
            
            (14
            )
            
            13,008Corporate
                bonds
            
            
            15,607
            
            
            3
            
            
            (24
            )
            
            15,58628,625
            
            
            7
            
            
            (38
            )
            
            28,594$
            75,759
            
            $
            10
            
            $
            (207
            )
            $
            75,562





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, 2006.





Out
      of
      the unrealized loss as of December 31, 2006, $ 153 of the losses are outstanding
      over the 12 months period.





F-24
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**











**NOTE
      4:-** **OTHER
      ACCOUNTS RECEIVABLE AND PREPAID EXPENSES**





**December
                31,****2005**
            
            **2006**Government
                authorities
            
            $
            1,847
            
            $
            3,226Deposits
                and options
            
            
            948
            
            
            616Prepaid
                expenses
            
            
            1,377
            
            
            730Employees
                and others
            
            
            1,684
            
            
            1,034Notes
                (see also Note 1d)
            
            
            -
            
            
            5,038$
            5,856
            
            $
            10,644





**NOTE
      5:-** **INVENTORIES**





Raw
                materials and components
            
            $
            8,316
            
            $
            6,603Work
                in progress
            
            
            13,648
            
            
            8,853Finished
                products
            
            
            8,680
            
            
            15,083$
            30,644
            
            $
            30,539





See
      also
      Note 2g.








**NOTE
                6: -**
            **PROPERTY
                AND EQUIPMENT**





**December
                31,****2005**
            
            **2006**Cost:Office
                furniture and equipment
            
            $
            1,848
            
            $2,098Computers
                and manufacturing equipment
            
            
            27,162
            
            32,100Motor
                vehicles
            
            
            272
            
            377Leasehold
                improvements
            
            
            2,902
            
            3,14232,184Accumulated
                depreciation:Office
                furniture and equipment
            
            
            878
            
            1,044Computers
                and manufacturing equipment
            
            
            19,964
            
            24,339Motor
                vehicles
            
            
            103
            
            207Leasehold
                improvements
            
            
            1,467
            
            1,74822,412
            
            27,338Depreciated
                cost
            
            $
            9,772
            
            $10,379





Depreciation
      expenses for the years ended December 31, 2004, 2005 and 2006 amounted to $
      4,718, $ 4,094 and $ 4,926 respectively.





F-25
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**




**NOTE
      7:-** **INTANGIBLE
      ASSETS, NET**





**December
                31,****2005**
            
            **2006**Cost:Current
                technology
            
            $
            17,871
            
            $
            17,871Customer
                relations
            
            
            500
            
            
            50018,371
            
            
            18,371Accumulated
                amortization:Current
                technology
            
            
            11,191
            
            
            13,734Customer
                relations
            
            
            367
            
            
            50011,558
            
            
            14,234Amortized
                cost
            
            $
            6,813
            
            $
            4,137





Current
      technology amortization expenses amounted to $ 2,543 for each of the years
      ended
      December 31, 2004, 2005 and 2006.





Customer
      relations amortization expenses amounted to $ 133 for each of the years ended
      December 31, 2004, 2005 and 2006.





Estimated
      amortization expenses for the years ended:





**Amortization****Year
                ended December 31,**
            
            **expenses**2007
            
            $
            2,5432008
            
            $
            1,3322009
            
            $
            1312010
            
            $
            131








**NOTE
                8:-**
            **OTHER
                ACCOUNTS PAYABLE AND ACCRUED
                EXPENSES**





**December
                31,****2005**
            
            **2006**Employees
                and payroll accruals
            
            $
            9,722
            
            $
            11,545Service
                providers and consultants
            
            
            5,142
            
            
            5,359Accrued
                expenses
            
            
            879
            
            
            971Royalties
            
            
            836
            
            
            1,071Warranty
                provision *)
            
            
            5,330
            
            
            4,106Advances
                from customers
            
            
            3,584
            
            
            10,759Provision
                for agent commissions
            
            
            3,482
            
            
            4,496Others
            
            
            1,590
            
            
            2,239$
            30,565
            
            $
            $40,546





*)
            See
                Note 2o.





F-26
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**






**NOTE
                9:-**
            **LONG-TERM
                DEBT**


**December
                31,****2005**
            
            **2006**Long-term loan (1)
            
            $
            3,506
            
            $
            1,749Less - current maturities
            
            
            1,757
            
            
            1,749$
            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.





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, 2006, amounted to $ 81.





**NOTE
      10:-** **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 2009.





Future
      minimum rental payments under such leases for the year ending December 31,
      2006 are as follows:





**Rental**
            
            **Lease
                of****of
                 premises**
            
            **motor
                vehicles**2007
            
            $
            3,936
            
            $
            2,4792008
            
            
            3,338
            
            
            1,4472009
            
            
            3,169
            
            
            5672010
            
            
            3,008
            
            
            -2011
            
            
            752
            
            
            -$
            14,203
            
            $
            4,493





Total
      rental expenses for the years ended December 31, 2004, 2005 and 2006, were
      $ 4,537, $ 4,590 and $ 5,129, respectively. Motor vehicle leasing
      expenses for the years ended December 31, 2004, 2005 and 2006, were
      $ 2,079, $ 2,170 and $ 2,295, respectively.







F-27
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**











**NOTE
      10:-** **COMMITMENTS
      AND CONTINGENT LIABILITIES (Cont.)**





b.
            Litigation:





During
      2001, a purported Class Action (" the Action") lawsuit was filed against
      interWAVE, which was acquired by the Company in 2004, 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
      ("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 a 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 the event the
      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.





See
      also
      Note 15.





c.
            As
                of December 31, 2006, the Company obtained bank guarantees in the
                total
                amount of approximately $ 18,313, 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 2006, the Company had
      not
      been granted royalty-bearing grants from the Office of the Chief Scientist
      of
      Israel's Ministry of Industry, Trade, and Labor ("the OCS") (in 2005 - $ 52).
      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 certain research
      and development 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
      2005 and 2006, the Company has paid or accrued royalties to the OCS in the
      amount of $ 1,129 and $ 693, respectively that were recorded in the cost of
      revenues. As of December 31, 2005 and 2006, the aggregate contingent
      liability to the OCS amounted to $ 6,080 and $ 5,560,
      respectively.














F-28
 
 **ALVARION
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
              dollars in thousands**





**NOTE
                11:-**
            **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, 2006, 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 (under the 2006 option plan, the options are expired after 6 years),
      and
      are non-transferable, except under the laws of succession. Each option may
      be
      exercised to purchase one Ordinary share for an exercise price that is generally
      equal to the fair market value of the underlying share on the date of grant.
      Options that are cancelled or forfeited before expiration become available
      for
      future grants.





F-29
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands, except share and per share
            data**






**NOTE
                11:-**
            **SHARE
                CAPITAL (Cont.)**





The
      Company has six stock option plans under which 26,498,651 Ordinary shares were
      reserved for issuance. As of December 31, 2006, 1,917,214 Ordinary shares of
      the
      Company are still available for future grants under the various option
      plans.





In
      2006,
      the Board of Directors, based on the recommendation of the Compensation
      Nominating and Corporate Governance Committee, adopted the 2006 Plan. Under
      the
      2006 Plan, the Company may grant restricted share units, restricted shares,
      options and other equity awards to employees, directors, consultants, advisers
      and service providers of the Company and its subsidiaries. Pursuant to the
      2006
      plan, 1,500,000 Ordinary shares were initially reserved for issuance upon the
      exercise of awards granted under the 2006 Plan. The number of Ordinary shares
      available for issuance under the 2006 Plan shall be reset annually on April
      1 of
      each year to equal 4% of the total outstanding shares as of such reset date.
      As
      of December 31, 2006, options to purchase 1,313,567 of the Ordinary shares
      were
      outstanding under the 2006 Plan.





The
      options outstanding as of December 31, 2006, have been separated into ranges
      of
      exercise prices, as follows:




**Exercise
                price**
              **(range)**
            
            **Options
                outstanding**
              **as
                of**
              **December
                31, 2006**
            
            **Weighted**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Options
                exercisable**
              **as
                of**
              **December
                31, 2006**
            
            **Weighted**
              **average**
              **exercise**
              **price**$0.0024
            
            
            32,185
            
            
            1.81
            
            $
            0.0024
            
            
            32,185
            
            $
            0.0024$0.01
            
            
            128,717
            
            
            5.36
            
            $
            0.01
            
            
            -
            
            $
            -$1.0584-1.2692
            
            
            112,033
            
            
            3.20
            
            $
            1.24
            
            
            112,033
            
            $
            1.24$1.9-2.74
            
            
            2,875,385
            
            
            5.63
            
            $
            2.14
            
            
            2,715,992
            
            $
            2.13$2.992
            
            
            20,000
            
            
            -
            
            $
            2.992
            
            
            20,000
            
            $
            2.992$4.6023-6.63
            
            
            988,261
            
            
            5.72
            
            $
            5.52
            
            
            510,311
            
            $
            5.69$7  
                7.25-10.75
            
            
            3,107,958
            
            
            7.31
            
            $
            9.38
            
            
            798,409
            
            $
            10.54$11.22-16.83
            
            
            3,118,140
            
            
            7.02
            
            $
            13.41
            
            
            1,947,493
            
            $
            13.35$16.93-24.52
            
            
            12,414
            
            
            2.47
            
            $
            20.99
            
            
            12,151
            
            $
            21.07$  
                27.2-866.78
            
            
            25,604
            
            
            2.58
            
            $
            114.9
            
            
            25,604
            
            $
            114.910,420,697
            
            
            
            
            
            
            
            
            6,174,178





As
      of
      December 28, 2005, the vesting of 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 under SFAS
      123(R). Because at that time, the Company has accounted for stock based
      compensation using the intrinsic value method prescribed in Accounting
      Principles Board (APB) No. 25, and since these options were priced above current
      market value, 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).





In
      connection with interWAVE's acquisition, the Company issued to interWAVE's
      former CEO 20,850 options to purchase the 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.








F-30
 
 **ALVARION
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
              dollars in thousands**





**NOTE
                11:-**
            **SHARE
                CAPITAL (Cont.)**





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.








**NOTE
                12:-**
            **TAXES
                ON INCOME**





Income
      derived by Alvarion Ltd. is generally subject to the regular Israeli corporate
      tax rate of 31%. However, as detailed below, income derived in Israel
      attributable to certain "Approved Enterprises" may enjoy certain tax benefits
      for a specific definitive period. The allocation of income derived from
      "Approved Enterprises" is dependent upon compliance with certain requirements
      of
      the Investment Law.





a.
            Tax
                benefits under the Law for the Encouragement of Capital Investments,
                1959:





Alvarion
      Ltd. has been granted status as an "Approved Enterprise" under the Law for
      the
      Encouragement of Capital Investments, 1959 ("the investment law"). According
      to
      the provisions of the law, Alvarion Ltd. has elected the "alternative benefits"
      track provisions of the investment law, pursuant to which Alvarion 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
      duration of tax benefits is subject to limits of the earlier of 12 years from
      the commencement of production, or 14 years from receiving the approval. The
      period of benefits for the first, second and third plans have not yet commenced,
      and will expire in 2007, 2009 and 2012, respectively.





F-31
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**











**NOTE
                12:-**
            **TAXES
                ON INCOME (Cont.)**





In
      connection with its merger with Floware in 2001, Alvarion Ltd. assumed the
      following Floware Ltd. "Approved Enterprise" agreement:





Floware
      Ltd. was granted "Approved Enterprise" status for its 1997 plan regarding the
      production facility in Or-Yehuda. After the merger, the operations were
      relocated to 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.





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 with
                Floware.





The
      period of benefits for this plan have not yet commenced, and will expire in
      2011.





InnoWave
      was granted "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 InnoWave's former "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 10%-25% for an "Approved
      Enterprise". As of December 31, 2006, the accumulated deficit of the Company
      does not include tax-exempt profits earned by the Company's "Approved
      Enterprise".





On
      April
      1, 2005, an amendment to the investment law came into effect ("the Amendment")
      and, has significantly changed the provisions of the Investment Law. The
      Amendment limits the scope of enterprises, which may be approved by the
      Investment Center by setting criteria for the approval of a facility as a
      Privileged Enterprise such as provision generally requiring that at least 25%
      of
      the Privileged Enterprise's income will be derived from export. Additionally,
      the Amendment enacted major changes in the manner in which tax benefits are
      awarded under the Investment Law so that companies no longer require Investment
      Center approval in order to qualify for tax benefits.





F-32
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**






**NOTE
                12:-**
            **TAXES
                ON INCOME (Cont.)**





However,
      the Amendment provides that terms and benefits included in any letter of
      approval already granted will remain subject to the provisions of the law as
      they were on the date of such approval.





Under
      the
      Amendment, in 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. A portion of the income derived
      from
      this "Approved Enterprise" will be tax-exempt for a period of 10 years and
      the
      rest will be taxed at a reduced rate of 10% to 25% (depending on the percentage
      of foreign investment in the Company). The 10-year period of benefits will
      commence with the first year in which Alvarion Ltd. earns taxable income.
      Alvarion Ltd.'s expansion request has not yet been approved.


Alvarion
      Ltd. has had no taxable income since inception.





b.
            Tax
                benefits under the Law for the Encouragement of Industry (Taxation),
                1969:





Alvarion
                Ltd. is an "industrial company" under the above law and, as such,
                is
                entitled to certain tax benefits, mainly accelerated depreciation
                of
                machinery and equipment. For tax purposes only, the Company may also
                be
                entitled to deduct over a three-year period expenses incurred in
                connection with a public share offering and to amortize know-how
                acquired
                from third parties.





c.
            Income
                (loss) from continuing operations:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Domestic
            
            $1,472
            
            $(6,632)
            
            $4,693Foreign
            
            11,676
            
            11,058
            
            (9,277)$13,148
            
            $4,426
            
            $(4,584)





The
      loss
      from discontinued operations for the years ended 2004, 2005 and 2006
      substantially attributable to foreign sources.





d.
            Carryforward
                losses:





As
      of
      December 31, 2006, Alvarion Ltd. had an available tax loss carryforward
      amounting to approximately $ 84,000, 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





F-33
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**






**NOTE
                12:-**
            **TAXES
                ON INCOME (Cont.)**





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.





As
      of
      December 31, 2006, the state and the federal tax losses carryforward of the
      U.S.
      subsidiaries amounted to approximately $ 39,000 and $ 47,500, respectively.
      Such
      losses are available to be offset against any future U.S. taxable income of
      the
      U.S. subsidiary and will expire in 2011 and 2026, 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.





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 corporate
      tax rate in the following manner: in 2006 the tax rate is 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 corporate 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,****2005**
            
            **2006**Tax
                assets in respect of:Allowance
                for doubtful accounts
            
            $
            162
            
            $
            159Accrued
                severance pay and accrued vacation pay
            
            
            1,156
            
            
            694Other
                deductions for tax purposes
            
            
            4,825
            
            
            8,729Net
                loss carryforward
            
            
            52,133
            
            
            42,540Total
                deferred tax assets before valuation allowance
            
            
            58,276
            
            
            52,122Valuation
                allowance
            
            
            (58,276
            )
            
            (52,122
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -





F-34
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**






**NOTE
                12:-**
            **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 net accumulated 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 resulting 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
                13:-**
            **GEOGRAPHIC
                AND MAJOR CUSTOMERS
                INFORMATION**





a.
            Following
                the disposal of the CMU activity, the Company manages its business
                on a
                basis of one reportable segment (see Note 1a for a brief description
                of
                the Company's business and Note 1d) and follows the requirements
                of
                Statement of Financial Accounting Standard No. 131, "Disclosures
                About
                Segments of an Enterprise and Related Information" ("SFAS No.
                131").





b.
            Information
                on sales by geographic distribution





The
      following presents total revenues for the years ended December 31, 2004, 2005
      and 2006:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006****Total
                revenues**
            
            **Total
                revenues**
            
            **Total
                revenues**Israel
            
            $
            2,268
            
            $
            1,271
            
            $
            863United
                States (including Canada)
            
            
            33,316
            
            
            29,564
            
            
            25,047Europe
                (without Russia, Romania, Italy and Spain)
            
            
            24,845
            
            
            40,341
            
            
            39,903Russia
            
            
            13,794
            
            
            11,278
            
            
            9,517Mexico
            
            
            64,005
            
            
            14,790
            
            
            8,023Africa
            
            
            18,285
            
            
            25,924
            
            
            22,904Spain
            
            
            8,678
            
            
            10,678
            
            
            14,563Asia
            
            
            9,150
            
            
            11,732
            
            
            13,731Latin
                America (without Mexico)
            
            
            13,742
            
            
            18,156
            
            
            22,834Italy
            
            
            4,998
            
            
            6,565
            
            
            10,771Romania
            
            
            6,970
            
            
            6,628
            
            
            13,438$
            200,051
            
            $
            176,927
            
            $
            181,594








F-35
 
 **ALVARION
            LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
            dollars in thousands**






**NOTE
                13:-**
            **GEOGRAPHIC
                AND MAJOR CUSTOMERS INFORMATION
                (Cont.)**





c.
            Major
                customers' data as a percentage of total sales:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Customer A
            
            
            30.8
            %
            
            5.7
            %
            
            2.0
            %








**NOTE
                14:-**
            **SELECTED
                STATEMENTS OF OPERATIONS
                DATA**





a.
            Research
                and development:





**Year
                ended December 31****2004**
            
            **2005**
            
            **2006**Research and development costs
            
            $
            31,231
            
            $
            32,772
            
            $
            42,042Less - grants
            
            
            3,897
            
            
            3,062
            
            
            3,235$
            27,334
            
            $
            29,710
            
            $
            38,807





b.
            Stock
                based compensation for continuing operations (related to SFAS 123R
                in
                2006):





Cost of sales
            
            $
            -
            
            $
            -
            
            $
            486Research and development, net
            
            
            -
            
            
            -
            
            
            1,408Selling and marketing
            
            
            -
            
            
            -
            
            
            1,418General and administrative
            
            
            60
            
            
            44
            
            
            3,138$
            60
            
            $
            44
            
            $
            6,450





c.
            Financial
                income, net:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Financial income:Interest and others
            
            $
            4,072
            
            $
            3,161
            
            $
            4,026Foreign currency transaction differences
            
            
            187
            
            
            (42
            )
            
            3094,259
            
            
            3,119
            
            
            4,335Financial expenses:Interest and bank expenses
            
            
            (438
            )
            
            (568
            )
            
            (539
            )$
            3,821
            
            $
            2,551
            
            $
            3,796








F-36
 
 **ALVARION
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
              dollars in thousands, except share and per share
              data**







**NOTE
                14:-**
            **SELECTED
                STATEMENTS OF OPERATIONS DATA
                (Cont.)**





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,****2004**
            
            **2005**
            
            **2006**Numerator:Numerator
                for basic and diluted net earnings
              (loss)
                per share- income (loss) from continuing
              operations
                available  to shareholders of Ordinary shares
            
            $
            13,148
            
            $
            4,426
            
            $
            (4,584
            )Numerator
                for basic and diluted net loss per
              share-
                loss from discontinued operation available to shareholders of Ordinary
                shares
            
            
            (12,297
            )
            
            (17,044
            )
            
            (36,167
            )Numerator
                for basic and diluted net earnings
              (loss)
                per share- income (loss) available to shareholders of Ordinary
                shares
            
            $
            851
            
            $
            (12,618
            )
            $
            (40,751
            )Denominator:Denominator
                for basic net earnings (loss) per
              share-
                weighted average number of Ordinary shares
            
            
            56,549,169
            
            
            58,687,658
            
            
            60,841,424Effect
                of dilutive securities:Employee
                stock options
            
            
            7,205,148
            
            
            *)
                -
            
            
            *)
                -Denominator
                for diluted net earnings (loss) per
              share
                - adjusted weighted average number of shares
            
            
            63,754,317
            
            
            58,687,658
            
            
            60,841,424








*)
            Antidilutive.








F-37
 
 **ALVARION
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **U.S.
              dollars**









**NOTE
                15:-**
            **SUBSEQUENT
                EVENT**





Litigation:





During
      the first quarter of 2007 four purported securities class action lawsuits were
      filed against the Company and certain of its officers and directors in United
      States district courts. The four complaints are substantially identical.
      Each complaint generally alleges violations of certain U.S. federal securities
      laws and seeks unspecified damages on behalf of a class of purchasers of
      Alvarion's Ordinary shares between November 3, 2004 and May 12, 2006. The
      plaintiffs allege, among other things, that the defendants made false and
      misleading statements concerning Alvarion's business prospects . The
      Company  anticipates
      that these four complaints will be consolidated . The
      Company has not responded to the complaints, and does not expect to respond
      until the court appoints a lead plaintiff and the appointed lead plaintiff
      files a Consolidated Amended Complaint, which the Company anticipates will
      occur
      in the
      second quarter of 2007.





The
      Company believes that it has meritorious defenses to the claim and intends
      to
      defend the action vigorously.








-
      - - - - **-
      - - - - - - - - - - - - - - - - - -**














F-38