**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,
                2007




**OR**




o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**  **For the transition period from __________
              to
              __________**




**OR**




o
            **SHELL
                COMPANY REPORT PURSUANT TO SECTION 13 OR 15(****d****)
                OF THE SECURITIES EXCHANGE ACT OF
                1934**  **Date of event requiring this shell company
              report
              _____________**




**Commission
      file number 0-30628**




**Alvarion
      Ltd.**


(Exact
      name of Registrant as specified in its charter)




**Israel**


(Jurisdiction
      of incorporation or organization)




**21A
      HaBarzel Street, Tel Aviv 69710, Israel**


(Address
      of principal executive offices)




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




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




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




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




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




**As
      of December 31, 2007, there were 63,049,257 Ordinary Shares, NIS 0.01 par value
      per share, outstanding.**




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


o
      Yes x No




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


o Yes x No




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


x Yes o No




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


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









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





U.S.
      GAAP x





International
      Financial Reporting Standards as issued by the International Accounting
      Standards




Board o




Other o




Indicate
      by check mark which financial statement item the registrant has elected to
      follow.


o Item
      17 x Item
      18




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


oItem
      17xItem
      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









**INTRODUCTION**




Alvarion
      Ltd. (the “Company,” “we,” “our” or “us”) concentrates resources on a single
      line of business - w ireless
      broadband . We
      supply
      top-tier carriers, Internet Service Providers (“ISPs”) and private network
      operators with solutions based on the Worldwide Interoperability for Microwave
      Access (“WiMAX”) standard as well as other w ireless
      broadband solutions. We are a leading provider of WiMAX and non-WiMAX wireless broadband
      systems having launched over 200 commercial WiMAX deployments worldwide. Our
      solutions are designed to cover the full range of frequency bands with fixed,
      portable and mobile applications, to enable the delivery of Personal Broadband
      services, business and residential broadband access, corporate
      virtual private
      network (“VPN”) ,
      toll
      quality telephony, mobile base station feeding, hotspot coverage extension,
      community interconnection and public safety communications. Currently, our
      business is mainly focused on solutions based on the WiMAX standard that are
      used for primary w ireless
      broadband access.
      In addition, we continue to sell our non-WiMAX products. Most of our solutions
      provide high-speed wireless “last mile” connection to the Internet for homes and
      businesses in both developed and emerging markets. When we refer in this annual
      report to “emerging markets”, we mean markets in newly industrialized countries whose
      economies have not yet reached first world status but have, in a macroeconomic
      sense, outpaced their developing counterparts. In 2007, we shipped our first
      mobile WiMAX solutions for personal broadband applications, mainly for trials.




Our
      strategy is to leverage our experience and leadership in both non-standard
      broadband wireless access (“BWA”) and current WiMAX markets, together with our
      brand strength, broad customer base and innovative technology, in order to
      play
      an important role in the WiMAX-based personal 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 (“Floware”), merged with and into us. As a result of the
      merger, we continued as the surviving company, and Floware’s separate existence
      ceased. Upon the closing of the merger, we changed our name from BreezeCOM
      Ltd.
      to Alvarion Ltd. On April 1, 2003, we acquired most of the assets and assumed
      the related liabilities of InnoWave Wireless Systems Ltd. (“InnoWave”). In
      December 2004, we completed the amalgamation of interWAVE Communications
      International Ltd. (“interWAVE”), and most of the interWAVE operations became
      our Cellular Mobile business unit. In
      November 2006, we sold our Cellular Mobile business unit (“CMU”) to LGC
      Wireless, Inc. (“LGC”), a privately-held supplier of wireless networking
      solutions in
      exchange for promissory notes and convertible notes of LGC . In
      September 2007, LGC converted our convertible notes into LGC shares and thus
      we
      became a shareholder of LGC. In November 2007, ADC Telecommunication Inc.
      (“ADC”) acquired all of LGC shares in a cash transaction. For
      more
      information, see
      "Item
      5—Operating and Financial Review and Prospects—Operating Results".




This
      annual report contains forward-looking statements, within the meaning of the
      Private Securities Litigation Reform Act of 1995 with respect to our business,
      financial condition and results of operations. Actual results could differ
      materially from those anticipated in these forward-looking statements as a
      result of various factors, including all or any of the risks discussed in “Item
      3—Key Information—Risk Factors” and elsewhere in this annual
      report.




i




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




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




As
      used
      in this annual report, the terms “we,” “us,” “our,” “our Company,” and
“Alvarion” mean Alvarion Ltd. and its subsidiaries, unless otherwise indicated.
      ALVARION, ALVARION & Design, WE’RE ON YOUR WAVELENGTH, BreezeCOM,
      BreezeLINK, BreezeMAX, BreezeACCESS, BreezeNET, BreezeLITE, BreezePHONE,
      WALKair, WALKnet, EASYBRIDGE, 4Motion, OPEN, SentieM, InnoWave Wireless Systems
      (Design), INTERWAVE, INTERWAVE & Design, INTERWAVE COMMUNICATIONS, WaveGain
      and INTERWAVE THE MICROCELLULAR NETWORKS COMPANY are trademarks or registered
      trademarks of Alvarion. All other trademarks and trade names appearing in this
      annual report are owned by their respective holders.




ii




**TABLE
      OF CONTENTS**




**Page**PART
                  I
              
              
              
              
              
              1ITEM
                  1.
              
              
              IDENTITY
                  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
              
              
              1ITEM
                  2.
              
              
              OFFER
                  STATISTICS AND EXPECTED TIMETABLE
              
              
              1ITEM
                  3.
              
              
              KEY
                  INFORMATION
              
              
              1A.
              
              
              SELECTED
                  FINANCIAL DATA
              
              
              1B.
              
              
              CAPITALIZATION
                  AND INDEBTEDNESS
              
              
              2C.
              
              
              REASONS
                  FOR THE OFFER AND USE OF PROCEEDS
              
              
              2D.
              
              
              RISK
                  FACTORS
              
              
              3ITEM
                  4.
              
              
              INFORMATION
                  ON THE COMPANY
              
              
              24A.
              
              
              HISTORY
                  AND DEVELOPMENT OF THE COMPANY
              
              
              24B.
              
              
              BUSINESS
                  OVERVIEW
              
              
              24C.
              
              
              ORGANIZATIONAL
                  STRUCTURE
              
              
              46D.
              
              
              PROPERTY,
                  PLANTS AND EQUIPMENT
              
              
              47ITEM
                  4A.
              
              
              UNRESOLVED
                  STAFF COMMENTS
              
              
              47ITEM
                  5.
              
              
              OPERATING
                  AND FINANCIAL REVIEW AND PROSPECTS
              
              
              47A.
              
              
              OPERATING
                  RESULTS
              
              
              47B.
              
              
              LIQUIDITY
                  AND CAPITAL RESOURCES
              
              
              61C.
              
              
              RESEARCH
                  AND DEVELOPMENT, PATENTS AND LICENSES
              
              
              68D.
              
              
              TREND
                  INFORMATION
              
              
              68E.
              
              
              OFF-BALANCE
                  SHEET ARRANGEMENTS
              
              
              68F.
              
              
              TABULAR
                  DISCLOSURE OF CONTRACTUAL OBLIGATIONS
              
              
              68ITEM
                  6.
              
              
              DIRECTORS,
                  SENIOR MANAGEMENT AND EMPLOYEES
              
              
              69A.
              
              
              DIRECTORS
                  AND SENIOR MANAGEMENT
              
              
              69
  iii
  B.
              
              
              COMPENSATION
                  OF DIRECTORS AND OFFICERS
              
              
              73C.
              
              
              BOARD
                  PRACTICES
              
              
              74D.
              
              
              EMPLOYEES
              
              
              81E.
              
              
              SHARE
                  OWNERSHIP
              
              
              82ITEM
                  7.
              
              
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              
              
              85A.
              
              
              MAJOR
                  SHAREHOLDERS
              
              
              85B.
              
              
              RELATED
                  PARTY TRANSACTIONS
              
              
              85C.
              
              
              INTERESTS
                  OF EXPERTS AND COUNSEL
              
              
              85ITEM
                  8.
              
              
              FINANCIAL
                  INFORMATION
              
              
              86A.
              
              
              CONSOLIDATED
                  STATEMENTS AND OTHER FINANCIAL INFORMATION
              
              
              86B.
              
              
              SIGNIFICANT
                  CHANGES
              
              
              87ITEM
                  9.
              
              
              THE
                  OFFER AND LISTING
              
              
              88A.
              
              
              OFFER
                  AND LISTING DETAILS
              
              
              88B.
              
              
              PLAN
                  OF DISTRIBUTION
              
              
              89C.
              
              
              MARKETS
              
              
              89D.
              
              
              SELLING
                  SHAREHOLDERS
              
              
              89E.
              
              
              DILUTION
              
              
              89F.
              
              
              EXPENSES
                  OF THE ISSUE
              
              
              89ITEM
                  10.
              
              
              ADDITIONAL
                  INFORMATION
              
              
              90A.
              
              
              SHARE
                  CAPITAL
              
              
              90B.
              
              
              MEMORANDUM
                  AND ARTICLES OF ASSOCIATION
              
              
              90C.
              
              
              MATERIAL
                  CONTRACTS
              
              
              92D.
              
              
              EXCHANGE
                  CONTROLS
              
              
              92E.
              
              
              TAXATION
              
              
              92F.
              
              
              DIVIDENDS
                  AND PAYING AGENTS
              
              
              102G.
              
              
              STATEMENT
                  BY EXPERTS
              
              
              102
  iv
  H.
              
              
              DOCUMENTS
                  ON DISPLAY
              
              
              102I.
              
              
              SUBSIDIARY
                  INFORMATION
              
              
              103ITEM
                  11.
              
              
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              
              
              103ITEM
                  12.
              
              
              DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY SECURITIES
              
              
              103PART
                  II
              
              
              
              
              
              104ITEM
                  13.
              
              
              DEFAULTS,
                  DIVIDEND ARREARAGES AND DELINQUENCIES
              
              
              104ITEM
                  14.
              
              
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                  PROCEEDS
              
              
              104ITEM
                  15.
              
              
              CONTROLS
                  AND PROCEDURES
              
              
              104ITEM
                  16A.
              
              
              AUDIT
                  COMMITTEE FINANCIAL EXPERT
              
              
              106ITEM
                  16B.
              
              
              CODE
                  OF ETHICS
              
              
              106ITEM
                  16C.
              
              
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              
              
              106ITEM
                  16D.
              
              
              EXEMPTIONS
                  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
              
              
              107ITEM
                  16E.
              
              
              PURCHASES
                  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                  PURCHASERS
              
              
              107PART
                  III
              
              
              
              
              
              107ITEM
                  17.
              
              
              FINANCIAL
                  STATEMENTS
              
              
              107ITEM
                  18.
              
              
              FINANCIAL
                  STATEMENTS
              
              
              107ITEM
                  19.
              
              
              EXHIBITS
              
              
              108




v


**PART
      I**




**ITEM
      1.**  **IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**




Not
      applicable.




**ITEM
      2.**  **OFFER
      STATISTICS AND EXPECTED TIMETABLE**




Not
      applicable.




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




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




We
      have
      derived the following selected consolidated financial data presented below
      as of
      December 31, 2006 and 2007 and for each of the years ended December 31,
      2005, 2006 and 2007 from our audited consolidated financial statements and
      related notes included in this annual report. We have derived the selected
      consolidated financial data as of December 31, 2003, 2004 and 2005 and for
      each
      of the years ended December 31, 2003 and 2004 from our audited consolidated
      financial statements and related notes not 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 CMU on November
      21,
      2006, the
      results of the CMU activities for the
      years
      ended December 31, 2004, 2005, 2006 and 2007
      were reclassified to one line item in the statement of operations as “Income
      (loss) from discontinued operations” below the results from continuing
      operations. We
      prepare our consolidated financial statements in accordance with accounting
      principles generally accepted in the United States (“U.S. GAAP”). You should
      read the selected consolidated financial data together with the section of
      this
      annual report entitled, “Item 5—Operating and Financial Review and Prospects”
and our consolidated financial statements and related notes included elsewhere
      in this annual report.




**Year
                Ended December 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**(*)****
            
            **2007**(*)****(in
                thousands except per share data)**Statement
                of Operations Data:**Sales
            
            $
            127,208
            
            $
            200,051
            
            $
            176,927
            
            $
            181,594
            
            $
            236,573Cost
                of sales
            
            
            68,595
            
            
            101,169
            
            
            85,817
            
            
            80,410
            
            
            114,099Write-off
                of excess inventory and provision for inventory purchase commitments
            
            
            6,562
            
            
            11,412
            
            
            7,338
            
            
            9,472
            
            
            4,762Gross
                profit
            
            
            52,051
            
            
            87,470
            
            
            83,772
            
            
            91,712
            
            
            117,712**Operating
                costs and expenses:**Research
                and development, gross
            
            
            27,612
            
            
            31,231
            
            
            32,772
            
            
            42,042
            
            
            54,967Less
                grants
            
            
            3,846
            
            
            3,897
            
            
            3,062
            
            
            3,235
            
            
            3,578Research
                and development, net
            
            
            23,766
            
            
            27,334
            
            
            29,710
            
            
            38,807
            
            
            51,389Selling
                and marketing
            
            
            33,000
            
            
            38,748
            
            
            39,900
            
            
            44,929
            
            
            55,943General
                and administrative
            
            
            6,417
            
            
            9,385
            
            
            9,602
            
            
            13,680
            
            
            15,426Merger
                and acquisition related
              expenses
            
            
            2,201
            
            
            -
            
            
            -
            
            
            -
            
            
            -Amortization
                of intangible assets
            
            
            2,606
            
            
            2,676
            
            
            2,685
            
            
            2,676
            
            
            2,544Total
                operating costs and expenses
            
            
            67,990
            
            
            78,143
            
            
            81,897
            
            
            100,092
            
            
            125,302Operating
                profit (loss)
            
            
            (15,939
            )
            
            9,327
            
            
            1,875
            
            
            (8,380
            )
            
            (7,590
            )Other
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,265Financial
                income, net
            
            
            4,127
            
            
            3,821
            
            
            2,551
            
            
            3,796
            
            
            6,453Income
                (loss) from continuing operations
            
            
            (11,812
            )
            
            13,148
            
            
            4,426
            
            
            (4,584
            )
            
            7,128Income
                (loss) from discontinued operations, net
            
            
            -
            
            
            (12,297
            )
            
            (17,044
            )
            
            (36,167
            )
            
            5,413Net
                income (loss)
            
            $
            (11,812
            )
            $
            851
            
            $
            (12,618
            )
            $
            (40,751
            )
            $
            12,541**Net
                earnings (loss) per share:**Basic:Continuing
                operations
            
            $
            (0.23
            )
            $
            0.23
            
            $
            0.08
            
            $
            (0.08
            )
            $
            0.11Discontinued
                operations
            
            
            -
            
            
            (0.21
            )
            
            (0.30
            )
            
            (0.59
            )
            
            0.09Total
            
            $
            (0.23
            )
            $
            0.02
            
            $
            (0.22
            )
            $
            (0.67
            )
            $
            0.20Weighted
                average number of shares used in computing basic net earnings (loss)
                per
                share
            
            
            52,127
            
            
            56,549
            
            
            58,688
            
            
            60,841
            
            
            62,345Diluted:Continuing
                operations
            
            $
            (0.23
            )
            $
            0.20
            
            $
            0.07
            
            $
            (0.08
            )
            $
            0.11Discontinued
                operations
            
            
            -
            
            
            (0.19
            )
            
            (0.27
            )
            
            (0.59
            )
            
            0.08Total
            
            $
            (0.23
            )
            $
            0.01
            
            $
            (0.20
            )
            $
            (0.67
            )
            $
            0.19Weighted
                average number of shares used in computing diluted net earnings (loss)
                per
                share
            
            
            52,127
            
            
            63,754
            
            
            63,561
            
            
            60,841
            
            
            64,626





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




1





**As
                of December 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007**Working
                capital
            
            $
            90,359
            
            $
            53,341
            
            $
            101,713
            
            $
            97,169
            
            $
            109,290Total
                assets
            
            $
            284,957
            
            $
            328,535
            
            $
            318,002
            
            $
            280,063
            
            $
            313,143Shareholders’
                equity
            
            $
            220,202
            
            $
            232,812
            
            $
            224,333
            
            $
            195,301
            
            $
            220,553Capital
                Stock
            
            $
            376,309
            
            $
            388,418
            
            $
            391,957
            
            $
            403,708
            
            $
            415,213




**B.**  **CAPITALIZATION
      AND INDEBTEDNESS**




Not
      applicable.




**C.**  **REASONS
      FOR THE OFFER AND USE OF PROCEEDS**




Not
      applicable.




2






**D.**  **RISK
      FACTORS**




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




**Risks
      Related to Our Business and Our Industry**




We
      have
      incurred losses in the past. We may incur losses in the near term, and we maycontinue
      toincur
      losses in the future.




In
      2007,
      our operating loss from continuing operations and net income was approximately
      $(7.6) million and $12.5 million, respectively. In 2006, our operating loss
      from
      continuing operations and net loss was approximately $(8.4) million and $(40.8)
      million, respectively. In 2005, our operating profit from continuing operations
      and net loss was approximately $1.9 million and $(12.6) million, respectively.
      We may continue to incur operating losses and incur net losses in the future.
      Continuing losses could have a material adverse effect on our business,
      financial condition and results of operations, and on the value and market
      price
      of our ordinary shares.




Adverseconditionsin the
      telecommunications industry and in the telecommunications equipment market
      maydecrease **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. Our systems
      are
      also used in vertical market applications (such as surveillance, monitoring
      and
      connectivity) by private network operators such as government, municipalities
      and large enterprises. Our products are integrated in a complete solution,
      which
      provide an answer to specific application requirements. The demand for our
      systems in such vertical market applications could be less than expected and
      the
      alternative technologies may strongly compete against us. As a result, our
      revenues may decline and 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
      Personal Broadband market and any other new markets we attempt to penetrate
      may
      not become substantial commercial markets or may not evolve in a manner that
      will enable our products to achieve market acceptance. Mobile WiMAX technology
      targets fourth generation ("4G"), type of services and therefore directly
      competes with other technologies such as Long Term Evolution ("LTE"), and Ultra
      Mobile Broadband ("UMB"). WiMAX technology may not be adopted by communication
      operators as their chosen 4G technology. For example, WiMAX market acceptance
      may be hampered by competing technologies or intellectual property rights (IPR)
      disputes.




3




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




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




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




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




**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 Alcatel-Lucent, Cisco Systems (specifically after acquiring
      Navini Networks), Huawei Technologies, Motorola, NEC Corporation, Nokia Siemens
      Networks, Nortel Networks, Samsung and ZTE Corporation and we expect this
      competition to grow, especially with respect to the mobile WiMAX-based products.
      Tier One 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 merger of Alcatel and Lucent, Cisco's
      acquisition of Navini and the
      merger of Nokia and Siemens limits and may further reduce the potential variety
      of our customers and
      partners .




In
      addition, as the market grows, we may face competition from aggressive
      start- ups
      in
      different markets. We expect that we will also face competition from alternative
      wireline and wireless technologies including copper wires, fiber-optic cable,
      digital subscriber lines (“DSL”), cable modems, satellite, Wi-Fi and other
      broadband access technologies, such as long-term
      evolution (“LTE”) and Ultra
      Mobile Broadband ("UMB") 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. 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.




4




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




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




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. Since the WiMAX
      industry is currently at early stages, we are requested to invest significant
      resources in interoperability testing ("IOT") with other significant WiMAX manufacturers.
      The broad demand of manufacturers and operators for IOT, as well as the length
      of the IOT process and its success may have a significant impact on our
      relationships with our customers and on our revenues and expenses.




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




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




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




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




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




·
            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;




·
            standardization
                of product features may increase the number of competitive product
                offerings;




5




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




·
            standardization
                may also result in lower average selling prices.




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




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




**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 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.




Rapidtechnological change may have an adverse effect on the market acceptance for
      our
      products andmay
      adversely affect our results of operations.




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




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




6




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




·
            acceptance
                of new and innovative technologies;




·
            acceptance
                of standards for wireless broadband
                products;




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




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




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




·
            reliability
                and security;




·
            Acceptance
                of new WiMAX ecosystem;




·
            suitability
                for a sufficient number of geographic
                regions;




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




·
            safety
                and environmental concerns regarding wireless broadband
                transmissions.




**We
      may experience difficulties or delays in the introduction of new or enhanced
      products, which could result in reduced sales, 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 due to delays in our
      development and/or due to delays by third party vendors 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.




**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.**




In
      January 2007, we began to collaborate with AWB to develop mass market
      cost-effective WiMAX consumer electronic devices. These devices are intended
      to
      complement our WiMAX offerings while facilitating the availability of
      WiMAX-based Personal Broadband services. These efforts may not result in the
      achievement of market acceptance or in the anticipation of product capabilities
      in a timely fashion or at all, and may prevent us from maintaining or expanding
      our position in the WiMAX 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, without limitation, in the
      following, any of which could seriously harm our results of operations or the
      price of our ordinary shares:




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




7




·
            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.




**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 in
                the
                first and third quarters of each
                year;




·
            disruption
                in, or changes in the quality of, our sources of
                supply;




·
            changes
                in the mix of products sold by us;




8




·
            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 New Israeli Shekel (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 historically does not have a significant
      backlog of accepted orders. Consequently, revenues in any quarter depend
      primarily on orders received and accepted in that quarter. The deferral of
      the
      placing and acceptance of any large order from one quarter to another could
      materially adversely affect our results of operations for the previous quarter.
      If revenues from our business in any quarter remain in the same level or decline
      in comparison to any previous quarter, our results of operations could be
      harmed.




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




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




The
      sales
      cycle for most of our products encompasses significant technical evaluation
      and
      testing by each potential purchaser and a commitment of significant cash and
      other resources. The sales cycle can extend for as long as one year or more
      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 will to ensure that the
      systems works for a long period with increased number of subscribers’ coverage
      and capacity, a carrier’s need to obtain financing to purchase systems
      incorporating our products, the regulatory authorization of competition in
      local
      services, delays in the licensing of spectrum for these services and other
      regulatory hurdles.




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




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




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




9




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




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




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




Direct
      sales accounted for a t otal
      of
      approximately 41% of our sales in 2007, 40% of our sales in 2006 and 48% of
      our
      sales in 2005.  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 ("OEM") 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 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.




10




If
      ourdays-
      sales-outstanding (“DSO”)increase
      and our revenues decrease, we may suffer from a cash
      shortfall.




Recently
      we have experienced a shortening of our DSOs. However we expect that over time,
      our DSOs may increase and will range between 60 to 70 days. 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 several market developments have caused, and may continue to cause,
      a decline in our gross margin. Such developments include the following:
      (i) increased competition in the regions in which we currently operate; (ii) the
      mix
      of our products, such as an increase in the volume of sale of lower-margin
      Customer Premise Equipment (“CPEs”); (iii) the entry of new, large operators
      into our markets; and (iv) changes in the market demand of some of our existing
      and potential products. We expect this decline in
      gross
      margin to
      continue over time. If our revenues do not increase and our operating expenses
      remain the same or increase, the decline in gross margin will have a negative
      impact on our results of operations.




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




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




·
            costs
                associated with the remediation of any
                problems;




·
            loss
                of or delay in revenues;




·
            loss
                of customers;




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




·
            diversion
                of deployment resources;




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




·
            increased
                service and warranty costs;




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




·
            increased
                insurance costs.




In
      addition, our products are often integrated with other network components.
      There
      may be incompatibilities between these components and our products that could
      significantly harm 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.




11




**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 and for related claims arising
      therefrom. A successful product liability claim could result in substantial
      cost
      and divert management’s attention and resources, which would have a negative
      impact on our financial condition and results of operations .




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




To
      ensure
      that we are able to meet customer demand
      for our products, we place orders with our subcontractors and suppliers based
      on
      our estimates of future sales. If actual sales differ materially from these
      estimates, our inventory levels may
      be
      too high, and inventory may become obsolete and/or over-stated on our balance
      sheet. This result would require us to write off inventory, which could
      adversely affect our results of operations. In
      2005, 2006
      and
      2007, we wrote
      off inventory in
      the
      amounts of $7.3 million, $9.5 million and $4.8 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;




12




·
            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.




In
      addition, we are required to place manufacturing orders well in advance of
      the
      time we expect to sell products, and this may result in us ordering greater
      or
      lesser amount of these products than required. In the event that we order the
      manufacture of a greater or lesser amount of these products, then we may be
      required to purchase the surplus products or to forego or delay the sale or
      delivery of the products that we did not order in advance. In either case,
      our
      business and results of operations may be adversely affected. Any of these
      risks
      could result in manufacturing delays or increases in manufacturing costs and
      expenses. For example, in 2005, 2006 and 2007, 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, $2.6 million and $0.9 million, respectively. If we experience
      manufacturing delays, we could lose orders for our products and, as a result,
      lose customers. There may be an adverse affect on our profitability and
      consequently, on our results of operations if we incur increased
      costs.




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




We
      currently obtain key components for our products from a limited number of
      suppliers, and in some instances from a single supplier. In addition, some
      of
      the components that we purchase from single suppliers are custom-made. 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.
      Our dependency presents the following potential risks:




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




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




·
            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.




13




**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
      (“FCC”) rules and regulations. The 700MHz spectrum was regulated during the
      beginning of 2008 by the FCC for Broadband Wireless applications; however the
      spectrum may not be technology exclusive and therefore if and to the extent
      it
      is allocated, it may be used for technologies other than WiMAX. In other
      countries, our products are subject to national or regional radio authority
      rules and regulations. Current FCC regulations permit license-free operation
      in
      FCC-certified bands in the radio spectrum in the United States. In other
      countries the situation varies as to the spectrum, if any, that may be used
      without a license and as to the permitted purposes of such use. **** Some
      of
      our products operate in license-free bands, while others operate in licensed
      bands. The regulatory environment in which we operate is subject to significant
      change, the results and timing of which are uncertain.




In
      many
      countries the unavailability of radio frequencies for two-way broadband
      communications has inhibited the growth of these networks. The process of
      establishing new regulations for wireless broadband frequencies and allocating
      these frequencies to operators is complex and lengthy. The 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 (when required) 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, to other than WiMAX technology,
      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 that 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.




14




·
            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.




·
            Spectrum
                allocation may specify a particular technology, such as 3G, LTE or
                WiMAX
                rather than enabling the spectrum owner to determine the
                technology.




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).




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




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




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




From
      time
      to time, the Company receives letters alleging it has infringed upon a
      patent, trademark or other proprietary right. As the Broadband Wireless Access
      market transitions toward standardization, we are more exposed to intellectual
      property litigation by third parties who claim to hold intellectual property
      rights related to such standards. In addition, based on the size and
      sophistication of our competitors and the history of rapid technological change
      in our industry, 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. We have no assurance that any such allegation will not have a
      material adverse effect on our business, financial condition or results of
      operations.




15




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




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




**Our
      failure to manage growth effectively, both through our core products and through
      acquisitions, could impair our business, financial condition and results of
      operations.**




Our
      acquisitions in the past 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 experienced changes in several senior management personnel positions.
      We
      believe we were able to retain qualified replacements 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.




16




**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. Substantially
      all of 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. 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 (“PFIC”) for United States federal income tax
      purposes. Based upon our market capitalization during 2004, 2005, 2006 and
      2007
      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 (the “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 2008 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. For more information, see “Taxation—United States Federal Income Tax
      Considerations with Respect to the Acquisition, Ownership and Disposition of
      our
      Ordinary Shares—Passive Foreign Investment Company Status".




**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
      (the
“Sarbanes Oxley Act”), Securities and Exchange Commission (the “SEC”)
      regulations and the National Association of Securities Dealers Automated
      Quotations (“NASDAQ”) Global 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. 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
      December 31, 2007 and March 11, 2008, the closing sale price of our ordinary
      shares on the NASDAQ Global Market was $9.50 and $6.25. We may continue to
      experience significant volatility in the future, based on the following factors,
      among others:




·
            our
                prospects;




17




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




We
      were a
      defendant in a securities class action litigation that was recently dismissed
      as
      described in "Item 8—Financial Information—Legal Proceedings". We may be named
      in the future as a defendant in other securities class action lawsuits or in
      other time consuming and expensive litigation. Legal proceedings can be
      expensive, lengthy and disruptive to normal business operations, and can require
      extensive management attention and resources, regardless of their merit.
      Moreover, we cannot predict the results of legal proceedings, and an unfavorable
      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 sufferand
      which
      could expose usto
      various legal, business, political and economic risks.




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




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




·
            adverse
                tax consequences;




·
            greater
                difficulty in safeguarding intellectual property;




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




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




18




·
            political
                and economic instability, particularly in markets such as Africa
                and Latin
                America and other emerging markets;




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




·
            laws
                and business practices favoring local
                companies;




·
            differing
                labor standards;




·
            costs
                of localizing our products for foreign countries and the lack of
                acceptance of localized products in foreign countries;
                and




·
            fluctuations
                in currency exchange rates and the implications on our financial
                statements.




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




**Downturns
      in general economic conditions could adversely affect our revenues, operating
      results and financial condition.**




Periods
      of economic slowdown or recession in the United States or other relevant regions
      or countries, such as the current global slowdown, or the public perception
      that
      these periods of economic slowdown or recession may occur, may reduce corporate
      and consumer spending and decrease the demand for our products. Furthermore,
      periods of economic slowdown or recession adversely affect the financial health
      of our subcontractors, partners, distributors and resellers. If
      general economic conditions fail to improve, or if they deteriorate, our
      revenues, operating results and financial condition could be adversely affected.




**A
      continuing decline in interest rates and the recent capital market developments
      will reduce our interest-income, may decrease the value of assets and adversely
      affect our profitability.** ****




Our
      investment portfolio consists of held-to-maturity marketable securities. Our
      investments are exposed to market risk due to fluctuation in interest rates,
      which may affect our interest income.




Additionally,
      the performance of the capital markets affects the values of funds that are
      held
      in marketable securities. These assets are subject to market fluctuations and
      will yield uncertain returns, which may fall below our projected return rates
      and will affect the fair market value of our investment portfolio. Due to recent
      credit crises and other market developments, including a series of rating agency
      downgrades the fair value of these marketable securities may decline which
      may
      adversely affect our profitability.




**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.




19




**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.




20




**Risks
      Relating to Our Location in Israel**




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




We
      are
      incorporated under Israeli law and our principal offices and the majority of
      our
      manufacturing and research and development facilities are located in the State
      of Israel. Political, economic and military conditions in Israel directly affect
      our operations. We could be harmed by any major hostilities involving Israel,
      the interruption or curtailment of trade between Israel and its trading partners
      or a significant downturn in the economic or financial condition of Israel.
      In
      the event of war, we and our Israeli subcontractors and suppliers may cease
      operations which may cause delays in the development, manufacturing or shipment
      of our products. Additionally, several countries still restrict business with
      Israel and with Israeli companies. Since
      October 2000, terrorist violence in Israel has increased significantly.
      Recently, there was an escalation in violence among Israel, Hamas, the
      Palestinian Authority and other groups, as well as extensive hostilities along
      Israel's northern border with Lebanon in the summer of 2006, and extensive
      hostilities along Israel's border with the Gaza Strip since June 2007 when
      the
      Hamas effectively took control of the Gaza Strip. Further
      escalation has occurred during 2008.




Furthermore,
      there are a number of countries, primarily in the Middle East, as well as
      Malaysia and Indonesia, that restrict business with Israel or Israeli companies,
      and we are precluded from marketing our products to these countries.




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.




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




Many
      of
      our officers and employees in Israel are obligated to perform annual military
      reserve duty until they reach age 45 and, in the event of a military conflict,
      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 (“OCS”) for the financing
      of a portion of our research and development expenditures in Israel, pursuant
      to
      the provisions of The Encouragement of Industrial Research and Development
      Law,
      1984, referred to as the “Research and Development Law.” Pursuant
      to our current arrangement with the OCS, the OCS will finance up to 20% of
      our
      research and development expenses by reimbursing us for up to 50% of the
      approved expenses
      related to our generic research and development projects. In addition, we obtain
      other grants from the OCS to partially fund certain other research and
      development projects. These programs currently restrict our ability to
      manufacture particular products or transfer particular technology outside of
      Israel. The Research and Development Law and related regulations permit the
      OCS
      to approve the transfer of manufacturing rights outside Israel subject to an
      approval of the research committee and in exchange for payment of higher
      royalties, for royalty—bearing
      programs.
      Under 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.




21




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




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




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




Because
      exchange rates between the NIS and the dollar fluctuate continuously, exchange
      rate fluctuations have an impact on our profitability and period-to-period
      comparisons of our results of operations. In 2007, the value of the dollar
      decreased in relation to the NIS by (9.0%), and the inflation rate in Israel
      was
      3.4% and as such affected our results of operations in 2007. If this trend
      continues, it will continue to 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.




22




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




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




23




**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 in exchange for promissory and convertible notes of LGC. In September
      2007, LGC converted our convertible notes into LGC shares and thus we became
      a
      shareholder of LGC. In November 2007, ADC Telecommunication Inc. (“ADC”)
      acquired LGC and we sold our LGC shares to ADC for approximately $7.3 million.
      See “Item 5—Operating and Financial Review and Prospects—Operating
      Results.”




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




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




**B.**  **BUSINESS
      OVERVIEW**




**General**




We
      concentrate our resources on a single line of business - wireless broadband.
      As
      a wireless broadband pioneer, we have been driving and delivering innovations
      for more than 10 years, from developing core technology to creating and
      promoting industry standards. Leveraging our key roles in the IEEE and HiperMAN
      standards committees and having experience in the deployment of 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 business is to provide solutions based on the WiMAX standard and other
      broadband wireless technologies for three different market segments:




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




24




·
            *Personal
                Broadband:*Personal Broadband services enable subscribers to take their broadband
                connection with them anywhere and extend their mobile services to
                broadband speeds above 1 megabit per second (“Mbps”). We expect that
                Personal Broadband services based on WiMAX technology will be gradually
                introduced to the market by operators during the second half of 2008.
                Personal Broadband exists at the intersection of the fixed, mobile
                and
                multimedia broadband worlds, offering subscribers a unique combination
                of
                high-speed broadband and mobile services that are available anywhere.
                Personal Broadband is 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. Solutions for Personal Broadband
                services are entirely based on the WiMAX standard and provide anytime,
                anywhere broadband services access to individuals on personalized
                devices,
                such as notebook personal computers, personal digital assistants
                (“PDAs”)
                and smart handsets (which are hand-held devices providing multiple
                services such as telephony, data and digital services based on information
                technology ). Our solutions enable communication operators to offer
                broadband services of more than 1Mbps to their subscribers while
                connecting a number of consumer electronic devices, such as smart
                handsets, PDAs, PC's, cameras, media players and more to a radio
                access
                network. The Personal Broadband market realizes the broad vision
                of mobile
                broadband service consumption that changes consumers’ lifestyle and
                increases productivity and entertainment. Personal Broadband networks
                are
                converging several distinct services, such as mobile telephony,
                multi-media services and broadband data access that are provided
                with
                different access infrastructure into a single, all-IP network in
                a unified
                user device and/or in special purpose devices (such as consumer electronic
                devices).




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




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




Our
      strategy is to leverage our business leadership, experience, market presence,
      leading brand in our industry, innovative technologies and broad customer base
      in Fixed and Mobile WiMAX technologies, as well as in other broadband wireless
      technologies, in order to grow our Company in each of the three markets
      discussed above: (i) the Primary
      Broadband market;
      (ii) the Personal Broadband market, based on mobile WiMAX standard and
      technologies; and (iii) the vertical markets.




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.




25




**INDUSTRY
      DYNAMICS**




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




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




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




***The
      Evolution of Wireless Broadband***




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




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




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




***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, multimedia and other data
      services. Usually, governments allocate a specific range of that spectrum,
      either licensed or license-exempt (“unlicensed”) bands, to incumbent and
      Innovative Challengers, alternative carriers, as well as to cellular operators,
      ISPs and other service providers, enabling such carriers and operators to launch
      a variety of broadband initiatives based exclusively on wireless networking
      solutions. During 2007, additional licensed and unlicensed spectrums were
      allocated in many regions around the world. Increased availability of licensed
      and unlicensed spectrums enables operators to address increasing demand for
      wireless broadband.




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




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




26




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




·
            growing
                trend of public access providers to build infrastructures owned by
                municipalities;




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




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




·
            convergence
                of fixed and mobile services; and




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




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




WiMAX
      is
      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 (“ARPU”) services. WiMAX
      technology has the capacity to deliver sufficient bandwidth to enable
      value-added applications, including live video broadcasting, high-speed data,
      toll-quality voice and multimedia content. Most importantly, the WiMAX (IEEE
      802.16) standards were developed based on the concept of an "all IP Network".
      A
      complete set of IP-based functions and interfaces allow for high quality service
      delivery, while keeping end-to-end Quality of Service (“QoS”) and minimizes
      investment and operating costs for operators with its distributed architecture
      and efficient, packet-based air interface.




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




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




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




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




27




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, namely the IEEE 802.16d-2004 standard and IEEE 802.16e-2005.
      These
      standards fully support 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, allowing the user to change
                locations between sessions;




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




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




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




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




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




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




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




28




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




We
      believe that WiMAX is currently the technology that is the most advanced and
      best suited to cost-effectively meet the requirements of Personal Broadband.
      WiMAX solutions, in addition to being standards-based, benefit from the open
      architecture of an all-IP network. Legacy wireline and wireless technologies
      are
      indeed standard but not entirely IP-based with an open architecture, as is
      WiMAX. The WiMAX industry, in contrast to other telecom standards and
      technologies, leverages the consumer electronics market capabilities, such
      as IP
      innovation, creativity, low cost and advanced services. Alvarion is aiming
      to be
      at the center of this dynamics 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 15 years, our primary business activity has been focused on fulfilling
      the
      growing demand for IP wireless broadband in the telecom industry by providing
      solutions and services to build wireless broadband networks. In addition, we
      have deployed through our customers fixed wireless broadband solutions for
      applications, such as toll quality telephony service, mobile base station
      feeding, hotspot coverage extension, municipal and community interconnection,
      utility company metering and monitoring applications, as well as public safety
      communications. The Company’s key strengths include:




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




·
            *Customer
                Base:*We
                have a broad customer base, with over 200 WiMAX commercial deployments
                and
                over 30 WiMAX trials (as of December 31, 2007) targeted to mobile
                applications. We believe our product offerings are the most extensive
                in
                the market.




·
            *Technology*:
                We have 15 years of broadband wireless IP experience and have been
                the
                leader in broadband wireless access market for more than a decade.
                In
                addition, we have continued our leadership in the relevant standardization
                organizations (IEEE 802.16, WiMAX
                ForumTM).




·
            *Execution
                Capabilities*:




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




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




·
            *Partnerships:*We
                are actively partnering with industry and market leaders to create
                go-to-market partnerships and best-of-breed end-to-end wireless broadband
                network solutions.




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




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




29




***Single
      Evolving WiMAX Platform***




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




**STRATEGY
      FOR GROWTH**




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




***Opportunities
      for Providing Personal Broadband Solutions Based on OPEN
      Architecture***




The
      developing demand for Personal Broadband services has caused us to expand our
      focus to include a new set of users, both in terms of socioeconomic groups
      and
      geographic markets. The developing demand has also led us to target a different
      type of telecom operators. With our experience and knowledge of wireless
      technologies, we believe that WiMAX technology will be 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,
      thus encouraging service adoption for Personal Broadband services.




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




**The
      WiMAX Transformation to OPEN Architecture**




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




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




OPEN
      WiMAX is open to innovation and is intended to enable an offering of mass-market
      consumer electronics combined with low cost and economies-of-scale. OPEN WiMAX
      is highly scalable and suitable for large, medium or small deployments that
      assist operators to optimize WiMAX network deployment costs, 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.




30




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




·
            superior
                performance combination (i.e., “best-of-breed”) of network equipment to
                meet service providers’ requirements;


·
            wide
                variety of subscriber service and openness to enable future services
                and
                applications;


·
            increased
                purchasing power to promote service providers business model;
                and


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




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




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




**PRODUCTS**




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




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




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




31




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 BreezeMAX
      Si, a
      self-installable ("Si"), indoor WiMAX CPE based on the IEEE 802.16-2004 standard
      and using the Intel® PRO/Wireless 5116 broadband interface (WiMAX chip). The
      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.




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




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




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




*4Motion*TMSolution




Our
      mob i le
      WiMAX
      solution, called 4Motion, was introduced to the market during the second half
      of
      2006 and is expected to be commercially available during 2008. This timeframe
      target is planned to coincide with the availability of mobile OPEN
      WiMAX, our Personal Broadband-enabled devices, which utilize chips currently
      at
      the end of the development phase.
      4MotionTM is an end-to-end mobile WiMAX solution designed to comply with the IEEE 802.16e-2005
      standard. The solution portfolio is developed in conjunction with leading
      providers of core network and IP technology, devices and integration services.
      4MotionTM is expected to offer an open, end-to-end, carrier-class, scalable and
      cost-effective mobile broadband data solution that delivers Personal Broadband
      services of several Mbps per subscriber or more. Offering the benefits of the
      OPEN WiMAX approach to network strategy, our 4MotionTM solution is expected to
      provide operators with the flexibility to choose best-of-breed multi-vendor
      partners to add third -party
      IP
      services, while controlling costs.




32




The
      4MotionTM solution includes Radio Access Network ("RAN"), which is based on
      Alvarion’s BreezeMAX WiMAX base- station platform
      and includes third parties’ core network, radio and IP networking elements,
      end-user devices and subscriber applications .




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




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




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




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




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




We
      offer
      applications in which access to the end user is provided by wireless broadband
      systems. These access applications can be utilized by telecom operators, service
      providers and regional carriers based on the needs of their regions of
      operation. Fixed wireless broadband solutions are implemented in a modular
      infrastructure, enabling swift, cost-effective roll-out as needed. Sectorized
      base stations are deployed to provide radio coverage to the targeted area,
      and
      frequency channels are reused in non-adjacent base station sectors, making
      the
      most efficient use of the available spectrum. Base stations are connected to
      the
      operator’s central office, or point-of-presence, using wired or wireless
      point-to-point solutions. End users are provided with customer premises
      equipment, or CPE, typically consisting of an outdoor unit with a radio and
      an
      antenna connected to an indoor unit or indoor self-installed unit, who 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,
      controllers and subscriber units, the latter of 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 they provide gross data rates of
      up
      to 12 Mbps.




33




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




OFDM
      technology, on which BreezeACCESS OFDM and BreezeACCESS VL are based, enables
      higher data rates, 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.




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




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




***BreezeNET
      B Product***




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




BreezeNET
      B products function as a wireless bridge system that provides high-capacity,
      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 (“VLANs”), which enable
      secure operation, and VPN services, which allow tele-workers or remote offices
      to conveniently access their enterprise network.




***eMGW
      Products***




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




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




34




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




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




***WALKair
      Products***




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




Our *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 3.5, 10.5, 26 and 28 GHz bands.




*WALKair* products
      are based on time division multiplexing (TDM) technology. *WALKair* systems
      support a complement of value-added classes of services including VPN, VLAN
      and
      QoS, based on per-user allocation of committed data rate and maximum data
      rate.




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




***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 TM ,
      BreezeACCESS VL and BreezeNET B.




35




Our
      full
      portfolio of network management products include:




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




*WALKnet* ,
      which
      configures, monitors and manages our *WALKair* products; and




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




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




***Accessories
      Offered by Alvarion***




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




***Our
      Geographic Markets***




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




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




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




In
      2007,
      the industry continued to show additional WiMAX penetration and a growing
      interest primarily in emerging markets and developing regions within developed
      countries. In addition, the WiMAX industry began to provide cost-effective
      infrastructure that can compete with broadband DSL and cable operators in the
      developed countries. In 2007, the industry showed signs of adoption of WiMAX
      for
      Personal Broadband services. We are increasing our sales and marketing efforts
      in certain regions in developed countries by offering our nomadic and portable
      solutions and our Personal Broadband and mobile applications in highly populated
      areas.




36




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




*Geographic
      Breakdown of Our Revenue*




2005
            
            2006
            
            2007In
                thousandsNorth
                America
            
            $
            29,564
            
            
            16.7
            %
            $
            25,047
            
            
            13.8
            %
            $
            32,767
            
            
            13.8
            %Latin
                America
            
            
            32,946
            
            
            18.6
            %
            
            30,857
            
            
            17.0
            %
            
            50,982
            
            
            21.5
            %Europe,
                Middle East and Africa
            
            
            102,685
            
            
            58.0
            %
            
            111,959
            
            
            61.6
            %
            
            132,883
            
            
            56.2
            %Asia
                Pacific
            
            
            11,732
            
            
            6.7
            %
            
            13,731
            
            
            7.6
            %
            
            19,941
            
            
            8.5
            %$
            176,927
            
            
            100.0
            %
            $
            181,594
            
            
            100.0
            %
            $
            236,573
            
            
            100.0
            %




**General
      - Industry Market Segments and Players**




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




*(i)
      Communications Service Providers: Tier One and Tier Two
      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 these carriers have
      a
      strong, strategic interest in deploying WiMAX in their network. Tier One and
      Tier Two carriers are looking for the technology to keep them at the front
      line
      of communications business within their home countries, as well as to quickly
      expand their business by providing telecommunications services in neighboring
      countries. Examples of Tier One and Tier Two carriers that have publicly
      indicated their strategy include: Telkom South Africa Ltd., Cable & Wireless
      International, Telenor, Sviaz Invest ,Nippon Telegraph and Telephone West
      Corporation (NTT West), AT&T, France Telecom, Eircom, Bharti Tele-Ventures
      Limited (Airtel Enterprise Services) and Telefonos de Mexico S.A. de C.V.
      Historically, such operators have shifted slowly to new technologies, although
      many of them are involved in trials with our WiMAX equipment.




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




*Innovative
      Challengers*




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




37




*CLECs
      & Regional Carriers*




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




CLECs
      have constituted an important part of our focus in our fixed wireless access
      product line and have increasingly exhibited an interest in WiMAX. The reduced
      installation costs, rapid roll-out potential and modular architecture, coupled
      with high network capacity and coverage and enhanced service options, present
      an
      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 (Spain), Finnet (Finland), TDS
      (USA), Czech on line, Altitude (France), KDN (Kenya), Millicom and Peterstar
      (Russia).




*Government,
      Municipalities, Communities and Private Network Operators*




Private
      and government sectors that operate private networks for business management
      and
      operations are in constant need of deploying technologies to support their
      operational requirements. Examples of such requirements are enterprises that
      require leased line replacement for cost-effective connectivity to provide
      VoIP
      and data services; metropolitan area networks for broadband connectivity;
      metering and monitoring applications used by utility companies to collect
      information and supervise operations; and cost-effective access within
      communities, municipalities and educational institutions. Another area that
      has
      leveraged broadband wireless very effectively has been surveillance, public
      safety and municipal applications. Government authorities and private 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 such
      as
      Lenexa, Kansas and Corpus Christi, Texas, and many others in the Silicon Valley.




*2007
      Partial Customer List for WiMAX and Other Fixed Wireless Broadband
      Systems*




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




·  AIRCEL,
      INDIA




·  ALLEGRO
      NETWORKS, AUSTRALIA




·  ALLTEL,
      USA




·  ALTITUDE
      TELECOM, FRANCE




·  ASIA
      PACIFIC TELECOM GROUP (APTG), TAIWAN




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




·  BUTLERNETWORKS,
      DENMARK




·  CABLE
      & WIRELESS, Worldwide




·  CENTER
      TELECOM ,
      RUSSIA




·  CHUNGWA
      TELECOM, TAIWAN




·  DIGICEL , CARIBBEAN




·  DIGITAL
      BRIDGE COMMUNICATIONS, USA




·  EMTEL,
      MAURITIUS




·  ENFORTA,
      RUSSIA




·  ENTEL
      CHILE SA, CHILE




38




·  ERTACH
      SA
      (formerly MILLICOM), ARGENTINA




·  FINNET
      GROUP, FINLAND




·  GHANA
      TELECOM, GHANA




·  IBERBANDA,
      S.A., SPAIN




·  IRISH
      BROADBAND INTERNET, IRELAND




·  JSC
      COMSTAR - UNITED TELESYSTEMS, RUSSIA




·  MEGAFONE,
      RUSSIA




·  MONACO
      TELECOM , MONACO




·  MONARCH
      COMMUNICATIONS , NIGERIA




·  MTN
      UGANDA, UGANDA




·  NETIA
      S.A., POLAND




·  NGI, ITALY




·  NTT
      WEST,
      JAPAN




·  RACSA,
      COSTA RICA




·  SOVINTEL,
      RUSSIA




·  TELECOM
      NAMIBIA, NAMIBIA




·  TELEFONICA
      CELULAR DEL PARAGUAY




·  TELEKOM
      SERBIA, SERBIA




·  TELKOM
      SOUTH AFRICA LTD., SOUTH AFRICA




·  TPSA
      POLAND, POLAND




·  TRANS
      TELEKOMUNIKACJA POLSKA S.A., BULGARY




·  UKRANIAN
      HIGH TECHNOLOGIES, UKRAIN




·  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
      (“DSP”) modem technologies. We also participate as active members in
      international standards committees.




***Networking
      Technology***




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




The
      PSTN
      FWA MGW system was extended to provide additional data services to wireless
      subscribers. The eMGW system was specially designed to support the modern
      wholesale network model for carriers. PPPoE, remote and local Dynamic Host
      Configuration Protocol ("DHCP") network tools give the network access provider
      the ability for fast and inexpensive IP network configuration and interfacing
      to
      the billing systems.




39




***Radio
      Technology***




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




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




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




***Digital
      Signal Processing ("DSP") Modem Technology***




We
      maintain strong expertise in DSP and in modem design. Our capabilities include
      a
      hardware oriented design, as well as programmable DSP oriented design. Our
      modem
      design hinges on the Software Defined Radio paradigm. The extensive
      configurability of our base station modems, through Field Programmable
      Gate-Array (FPGA) and DSP reprogramming, allows us to readily introduce advanced
      features to our products and to follow amendments to emerging standards,
      including capability to upgrade deployed networks by downloading only software.
      Similarly, our CPE designs allow for upgradeability through over the air 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 are closely aligned
      and synchronized with the CPE application-specific
      integrated circuit (“ASIC”)
      and reference design developed by Intel resulting from our collaboration, which
      began in 2003, to ensure optimum performance in future WiMAX
      deployments.




To
      support the SentieMTM
      technologies embedded
      in our 4Motion TM solution, as well as our BreezeMAX and other products, we have developed or
      otherwise acquired, and continue to invest in MIMO and beam forming, SDMA and
      radio resource management technologies.




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




40




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




***Participation
      in International Standards Committees***




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




We
      are a
      principal founder of the WiMAX 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, Corporate Vice President
      of Marketing 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 “—Industry Dynamics—Our Existing Market: WiMAX
      and Wireless Broadband for Primary Broadband Access Services—WiMAX Technology,
      Applications and Industry Advantages.”




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




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




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




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




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




41




**SALES,
      MARKETING AND SUPPORT OF OUR PRODUCTS**




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




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




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




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




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




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




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




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




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




42




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




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




**MANUFACTURING
      OPERATIONS AND SUPPLIERS**




We
      currently subcontract most of the manufacturing of our products. We have a
      pre-qualification process for our contract manufacturers, which includes the
      examination of the technological skills, production capacity and quality
      assurance ability of each contract manufacturer. Our manufacturing capacity
      planning is based on rolling 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.




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 ISO9001, ISO 14000 and ISO18000  certified.




**PROPRIETARY
      RIGHTS**




In
      order
      to protect our proprietary rights in our products and technologies, we rely
      primarily upon a combination of patents, trademarks, trade secrets, and
      copyrights, as well as confidentiality, non-disclosure and assignment of
      inventions agreements. We have 47 patents issued by patent offices in several
      countries, with 56 pending patent applications. The proprietary rights described
      above are material to our business and profitability. Because our proprietary
      rights are diversified and independence of each other, we believe that we are
      not dependent on any one patent.




We
      have
      trademark registrations in Israel, the United States, the European Union and
      many other countries. In addition, we have typically entered into nondisclosure,
      confidentiality and assignment of inventions agreements with our employees,
      consultants and with some of our suppliers and customers who have access to
      sensitive information. We cannot assure you that the steps taken by us to
      protect our proprietary rights will be 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.




43




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, from
      time
      to time, we receive letters alleging we have infringed upon a patent, trademark,
      license or other proprietary right. We have no assurance that any such
      allegation will not have
      a material adverse effect on our
      business, financial condition or results of operations.




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




**THE
      COMPETITIVE ENVIRONMENT IN WHICH WE OPERATE**




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




·
            price
                andprice/performance
                ratio;


·
            technology;


·
            service
                and spectrum regulation and product
                certifications;


·
            ability
                to support new industry standards;


·
            product
                time to market;


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


·
            systems
                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, Cisco Systems, Ericsson, Huawei Technologies,
      Motorola, Nextwave Wireless, Nokia-Siemens Networks, Nortel Networks, Redline
      Communications, Samsung, , SR Telecom, and ZTE. Other vendor members of the
      WiMAX ForumTM may become our competitors in the future.




Our
      products use wireless media, which also compete with alternative
      telecommunications transmission media, including leased lines, copper wire,
      fiber-optic cable, cable modems and television modems. Our products compete
      with
      other wireless media technologies, including (i) 3rd Generation cellular
      technologies (3G) and (ii) 4th generation cellular technologies ("4G"), such
      as
      3G Long Term Evolution ("3G-LTE") and UMB ; our products also compete with
      satellite technologies.




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




44




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




**GOVERNMENT
      REGULATION**




Our
      business is premised on the availability of certain radio frequencies for
      two-way broadband communications. Radio frequencies are subject to extensive
      regulation under the laws of each country and international treaties. Each
      country has different regulation and regulatory processes for wireless
      communications equipment and uses of radio frequencies. In the United States,
      our products are subject to FCC rules and regulations. In other countries,
      our
      products are subject to national or regional radio authority rules and
      regulations. Current FCC regulations permit license-free operation in
      FCC-certified bands in the radio spectrum in the United States. 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. In Europe, the European Civil Code (the
      “ECC”) has recently assigned the spectrum in 3.4-3.8GHz to broadband
      applications, in a flexible and technology-neutral mode. However the
      implementation of the ECC decisions in individual countries may suffer delays
      or
      may be limited to relatively small amounts of spectrum. In addition to the
      above, in some countries, particular frequency bands were allocated for
      licensing; for example, in 2007, the AWS band was auctioned by the FCC in the
      United States. Our current customers that commercially deploy our licensed
      band
      products have already been granted appropriate frequency licenses for their
      network operation. In some cases, the continued validity of these licenses
      may
      be conditional on the licensee complying with various conditions. In October
      2007, the Radio-communication Sector of the International Telecommunication
      Union (ITU-R) made a decision that effectively includes WiMAX technology in
      the
      IMT-2000 set of standards. There are some that interpret this inclusion of
      WiMAX
      in IMT-2000 as placing WiMAX on equal footing with the legacy-based technologies
      ITU-R already endorses. We note though that establishing new regulations in
      individual countries for wireless broadband frequencies and allocating
      frequencies to operators is complex and lengthy. The European Commission started
      a process to revise the 2.5-2.69GHz regime to provide more flexibility in the
      spectrum usage and a more balanced protection of the TDD operation. A change
      in
      the European regulation may imply a need for revised type approval norms; such
      revisions would be a lengthy process.




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




45




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




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




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




**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.;




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




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




·
            Alvarion
                SRL, incorporated under the laws of
                Romania;




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




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




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




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




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




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




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




·
            Alvarion
                Telsiz Sistemleri Ticaret A.Ş.**, incorporated under the laws of
                Turkey;




·
            Alvarion
                de Mexico S.A. de C.V., incorporated under the laws of
                Mexico;




·
            interWAVE
                Communications International SA, incorporated under the laws of
                France;




·
            Alvarion
                Philippines incorporated under the laws of
                Philippines;




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




·
            Alvarion
                South Africa (Pty) Ltd., incorporated under the laws of South
                Africa;




·
            Alvarion
                Italy SRL incorporated under the laws of
                Italy;




·
            Alvarion
                GmbH incorporated under the laws of Germany;
                and




·
            Alvarion
                Singapore PTE LTD., incorporated under the laws of
                Singapore.




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




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




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




46





**D.**  **PROPERTY,
      PLANTS AND EQUIPMENT**




We
      do not
      own any real estate. As of December 31, 2007, we leased an aggregate of
      approximately 270,000 square feet in Israel for annual lease payments (including
      management fees) of approximately $4.1 million and incurred annual parking
      expenses in connection with these leases of approximately $0.4 million. These
      premises consist mainly of our corporate headquarters in Tel-Aviv, Israel,
      and
      two separate warehouses located in Israel as well as at our subcontractors’
facilities in Israel. We have been occupying our main premises since April
      2001,
      these premises serve as our corporate headquarters, as well as the site at
      which
      we conduct our main research and development activities and some quality
      assurance, final assembly and testing operations. Our main lease expires in
      the
      year 2011. We also lease approximately 17,250 square feet of office facilities
      in Mountain View, California, at an annual rent of approximately $0.2 million.
      These premises serve as the corporate headquarters of our U.S. subsidiary,
      Alvarion Inc, and as our principal sales and marketing office in North America.
      In addition, we lease office space for the operation of our facilities in
      France, Romania, China, Uruguay, Japan, Brazil, Mexico, Philippines, Poland,
      Russia, Singapore, Italy, South-Africa and Spain.




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




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




Not
      applicable.




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




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




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




**Overview**




We
      are a
      leading provider of WiMAX and non-WiMAX wireless broadband systems. We supply
      carriers, ISPs and private network operators with WiMAX and other wireless
      broadband solutions. Our solutions are designed to cover the full range of
      frequency bands with fixed, portable and mobile applications, to enable the
      delivery of Personal Broadband services and Primary Broadband services such
      as
      business and residential broadband access, corporate VPNs, toll quality
      telephony, mobile base station feeding, hotspot coverage extension, community
      interconnection 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.




47




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 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.




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




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




On
      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 , a privately held U.S. company, in
      exchange for promissory notes and convertible notes of LGC . In
      September 2007, LGC converted our convertible notes into LGC shares and thus
      we
      became a shareholder of LGC. In November 2007, ADC acquired all of LGC shares
      in
      a cash transaction. The
      CMU
      business is classified as discontinued operations.




**2007
      Highlights**




In
      2007,
      we continued to focus strategically on our main businesses, broadband wireless
      access and WiMAX solutions and exceeded
      our expectations regarding revenues and net income.





During
      2007, our r evenues
      grew 30% over 2006 to $236.6 million primarily due to strong execution by our
      team. Our BreezeMAX revenues reached $124 million .
      This
      revenue strength allowed us to continue to invest in our Open WiMAX initiatives,
      remain profitable and cash flow positive, and to meet our objective of balancing
      the need for investment with the need to remain profitable.




48





We
      experienced strong growth from our Primary Broadband access business in emerging
      markets, such as Central and Eastern Europe and Latin America, and in rural
      areas of developed countries such as Western Europe. This wireless DSL market
      is
      and is expected to continue to be an important growing market for us, in
      addition to Personal Broadband. Both Primary and Personal Broadband applications
      will continue to be important strategic markets for us, and we expect to serve
      both with our evolving IEEE 802.16e platform.





During
      2007 we collected cash proceeds from the following sources: (i) our customers;
      (ii) proceeds from the acquisition of LGC by ADC and; (iii) proceeds from an
      agreement we reached with our former CMU customer to accelerate the payments
      due
      from such customer to us with respect to equipment sold up until the effective
      date of the sale of the CMU to LGC in November 2006. As a result of all of
      these
      activities, we generated over
      $20
      million in cash, cash equivalents and
      marketable securities and decreased our DSOs to 48 days.





During
      2007, we continued to grow mainly due to our existing customer base. In
      addition, we were successful in the following areas:




·
            We
                built an ecosystem with strategic
                partners.





·
            We
                continued converting operators from trials and smaller scale deployments
                to larger scale commercial deployments.





·
            Our
                4MotionTMsolution achieved initial interoperability with numerous devices
                using
                embedded chipsets from third-party vendors (such as Intel).





·
            We
                demonstrated the MIMO Matrix B, an essential element in the IEEE
                802.16e
                Wave 2 system compliance with the new Intel chip embedded into an
                ultra-light laptop prototype. The end-result of this MIMO technology
                is to
                increase the throughput and capacity of a WiMAX network to support
                high-speed services such as video and online
                gaming.





·
            We
                continued to develop relationships with strong local partners in
                key
                geographies andexpandedour already extensive network of distributors both geographically
                and
                within key vertical markets.




We
      believe that our achievements in 2007 will enable us to continue to improve
      our
      long-term performance and to meet our Broadband Wireless and WiMAX technical,
      financial and strategic objectives.




In
      the
      past two years and going
      forward ,
      one of
      our key challenges has been and will be to
      successfully manage the transition from our non-WiMAX to WiMAX products and
      from
      one WiMAX solution to the other. During 2007, we increased our revenues by
      approximately 30% in comparison to 2006; although we experienced low revenue
      growth of our non-WiMAX products (approximately 2% over 2006) due primarily
      to
      the continuing market transition to WiMAX-based products. This trend may
      continue as customers may delay orders for our products until the release of
      our
      additional new WiMAX products.




In
      addition, during 2007, we continued to increase our investments in our WiMAX
      solutions, in particular mobile WiMAX products, and as a result, we increased
      our overall operating expenses by approximately 25% while keeping our gross
      margin level at approximately 50% of our revenues. We maintained the level
      of
      our gross margins mainly due to the continued implementation of operational efficiency measures and cost reduction
      programs, including improvement in manufacturing processes and in the
      contractual terms with our subcontractors, due to the utilization of previously
      written-off inventory, as well as the mix of products in our
      revenues.




Periods
      of economic slowdown or recession in the United States or other relevant regions
      or countries or the public perception that these periods of economic slowdown
      or
      recession may occur, may reduce corporate and consumer spending and that may
      create new challenges for us if these general
      economic conditions fail to improve or worsen.




49




We
      became
      profitable in 2007, as our net income amounted to $12.5 million compared with
      a
      net loss of $(40.8) million in 2006. This net
      income was primarily a result of our growth in revenue from $181.6 million
      in
      2006 to $236.6 million in 2007, together with an increase in our financial
      and
      other income from $3.8 million in 2006 to $14.7 million in 2007, and our income
      from discontinued operations, which was $5.4 million, compared to a loss of
      $(36.2) million in 2006, partially offset by the increase of our operating
      expenses, which were $125.3 million in 2007, compared to $100.1 million in
      2006.




**Critical
      Accounting Principles**




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




The
      following is a summary of certain critical principles, which have a substantial
      impact upon our financial statements and which we believe are most important
      to
      keep in mind in assessing our financial condition and operating
      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”) reporting unit. At closing in 2006, 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 "Income (loss) from
      discontinued operations". The assets and liabilities related to the CMU as
      at
      December 31, 2006 were reclassified in our balance sheet as assets and
      liabilities from discontinued operations. As of December 31, 2007 we had no
      assets and liabilities from discontinued operations.




In
      addition, the cash flow of the CMU was also disclosed separately in our
      statements of cash flows for 2005, 2006 and 2007.




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




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




We
      generally do not grant a right of return on our products. However, we have
      granted to certain distributors limited rights of return on unsold products.
      Product revenues on shipments to these distributors are deferred until the
      distributors resell our products to their customers, provided that all other
      revenue recognition criteria are met.




50




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 that we
      made
      and recorded in 2005, 2006 and 2007 to reflect the decline from our expectations
      in the value of inventory, which had become excessive, unmarketable or otherwise
      obsolete or the inventory of new materials and components that we had purchased
      or committed to purchase in anticipation of forecasted sales which we did not
      consummate. In addition, changes in demand, which result in increased demand
      for
      our products, may lead to utilization of our previously written-off products.
      Note 2g to our financial statements describes the effect of the utilization
      of
      the related products of our prior years’ written-off components, which are
      reflected in our revenues without additional cost in the cost of sales in the
      period the inventory was utilized.




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




51




*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, 2007 and 2006
      includes acquired intangible assets, such as goodwill and current technology,
      which totaled approximately $58.7 million and $61.2 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 prior to its sale.




*Goodwill.* In
      accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
      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, 2007, 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.




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




*Stock-Based
      Compensation Expense.* **** On
      January 1, 2006, we adopted FASB Statement No. 123 (Revised 2004),
      Share-Based Payment (“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 and 2007 was $6.9 million and $7.4 million, respectively. For
      fiscal 2005, stock-based compensation expense of $563,000 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 Accounting Principles
      Board Opinion No. 25, "Accounting for Stock Issued to Employees" (“APB 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 No.
      123, "Accounting for Stock-Based Compensation" (“SFAS 123”).




52




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, exercise price, 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. 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. In June 2006, the FASB issued
      FIN 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB
      Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for
      uncertainty in income taxes recognized under SFAS No. 109. FIN 48
      prescribes a recognition threshold and measurement attribute for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return and also provides guidance on various related matters
      such
      as de-recognition, interest and penalties, and disclosure. On January 1,
      2007, we adopted FIN 48. The initial application of FIN 48 to our tax positions
      had no effect on our Shareholders’ Equity.




Contingencies
      and Other Accrued Expenses





We
      are
      from time to time involved in legal proceedings and other claims. We are
      required to assess the likelihood of any adverse judgments or outcomes to these
      matters, as well as potential ranges of probable losses. We have not made any
      material changes in the accounting methodology used to establish our
      self-insured liabilities during the past three fiscal years. A determination
      of
      the amount of reserves required, if any, for any contingencies and accruals
      is
      made after careful analysis of each individual issue. The required reserves
      may
      change due to future developments, such as a change in the settlement strategy
      in dealing with any contingencies, which may result in higher net loss. If
      actual results are not consistent with our assumptions and judgments, we may
      be
      exposed to gains or losses that could be material.




**Results
      of Operations**




The
      following tables present our total revenues attributed to the geographical
      regions based on the location of our customers for the years ended
      December 31, 2005, 2006 and 2007:




**2005**
            
            **2006**
            
            **2007****Total**
            
            
            
            **Total**
            
            
            
            **Total****revenues**
            
            **Percentage**
            
            **revenues**
            
            **Percentage**
            
            **revenues**
            
            **Percentage**Inthousands
            
            Of
                sales
            
            Inthousands
            
            Of
                sales
            
            Inthousands
            
            Of
                salesIsrael
            
            $
            1,271
            
            
            0.7%
            
            $
            863
            
            
            0.5%
            
            $
            861
            
            
            0.4%North
                America (including the United States and Canada)
            
            
            29,564
            
            
            16.7%
            
            
            25,047
            
            
            13.8%
            
            
            32,767
            
            
            13.9%Europe
                (excluding Russia, Romania, Italy and Spain)(1)
            
            
            40,341
            
            
            22.8%
            
            
            39,903
            
            
            22.0%
            
            
            57,985
            
            
            24.5%Russia
            
            
            11,278
            
            
            6.4%
            
            
            9,517
            
            
            5.2%
            
            
            10,277
            
            
            4.3%Romania
            
            
            6,628
            
            
            3.7%
            
            
            13,438
            
            
            7.4%
            
            
            10,114
            
            
            4.3%Italy
            
            
            6,565
            
            
            3.7%
            
            
            10,771
            
            
            5.9%
            
            
            13,269
            
            
            5.6%Spain
            
            
            10,678
            
            
            6.0%
            
            
            14,563
            
            
            8.0%
            
            
            13,767
            
            
            5.8%Africa
            
            
            25,924
            
            
            14.7%
            
            
            22,904
            
            
            12.6%
            
            
            26,609
            
            
            11.3%Asia
            
            
            11,732
            
            
            6.6%
            
            
            13,731
            
            
            7.6%
            
            
            19,942
            
            
            8.4%Latin
                America (excluding Mexico)(1)
            
            
            18,156
            
            
            10.3%
            
            
            22,834
            
            
            12.6%
            
            
            42,325
            
            
            17.9%Mexico
            
            
            14,790
            
            
            8.4%
            
            
            8,023
            
            
            4.4%
            
            
            8,657
            
            
            3.6%$
            176,927
            
            
            100.0%
            
            $
            181,594
            
            
            100%
            
            $
            236,573
            
            
            100%




53


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





**Year
                Ended December 31,****2005**
            
            **2006**
            
            **2007**(In
                thousands)Sales
            
            $
            176,927
            
            $
            181,594
            
            $
            236,573Cost
                of sales
            
            
            85,817
            
            
            80,410
            
            
            114,099Write-off
                of excess inventory and provision for inventory purchase
                commitments
            
            
            7,338
            
            
            9,472
            
            
            4,762Gross
                profit
            
            
            83,772
            
            
            91,712
            
            
            117,712Operating
                costs and expenses:Research
                and development, gross
            
            
            32,772
            
            
            42,042
            
            
            54,967Less
                - grants
            
            
            3,062
            
            
            3,235
            
            
            3,578Research
                and development, net
            
            
            29,710
            
            
            38,807
            
            
            51,389Selling
                and marketing
            
            
            39,900
            
            
            44,929
            
            
            55,943General
                and administrative
            
            
            9,602
            
            
            13,680
            
            
            15,426Amortization
                of intangible assets
            
            
            2,685
            
            
            2,676
            
            
            2,544Total
                operating expenses
            
            
            81,897
            
            
            100,092
            
            
            125,302Operating
                profit (loss)
            
            
            1,875
            
            
            (8,380
            )
            
            (7,590
            )Other
                income
            
            
            -
            
            
            -
            
            
            8,265




54




**Year
                Ended December 31,****2005**
            
            
            **2006**
            
            
            **2007**(In
                thousands)Financial
                income, net
            
            
            2,551
            
            
            3,796
            
            
            6,453Income(loss)
                from continuing operations
            
            
            4,426
            
            
            (4,584)
            
            
            7,128Income
                (loss) from discontinued operations, net
            
            
            (17,044)
            
            
            (36,167)
            
            
            5,413Net
                income (loss)
            
            $
            (12,618)
            
            $
            (40,751)
            
            $
            12,541




**Year
                Ended December 31,****2005**
            
            **2006**
            
            **2007**(As
                a percentage of sales)**Statement
                of Operations Data:**Sales
            
            
            100.0%
            
            
            100.0%
            
            
            100.0%Cost
                of sales
            
            
            48.5
            
            
            44.3
            
            
            48.2Write-off
                of excess inventory and provision for inventory purchase
                commitments
            
            
            4.1
            
            
            5.2
            
            
            2.0Gross
                margin
            
            
            47.4
            
            
            50.5
            
            
            49.8**Operating
                costs and expenses:**Research
                and development, gross
            
            
            18.5
            
            
            23.2
            
            
            23.2Less
                - grants
            
            
            1.7
            
            
            1.8
            
            
            1.5Research
                and development, net
            
            
            16.8
            
            
            21.4
            
            
            21.7Selling
                and marketing
            
            
            22.6
            
            
            24.7
            
            
            23.6General
                and administrative
            
            
            5.4
            
            
            7.5
            
            
            6.6Amortization
                of intangible assets
            
            
            1.5
            
            
            1.5
            
            
            1.1Total
                operating expenses
            
            
            46.3
            
            
            55.1
            
            
            53.0Operating
                profit (loss)
            
            
            1.1
            
            
            (4.6)
            
            
            (3.3)Other
                income
            
            
            -
            
            
            -
            
            
            3.5Financial
                income, net
            
            
            1.4
            
            
            2.1
            
            
            2.8Income
                (loss) from continuing operations
            
            
            2.5
            
            
            (2.5)
            
            
            3.0Income
                (loss) from discontinued operations, net
            
            
            (9.6)
            
            
            (19.9)
            
            
            2.3Net
                income (loss)
            
            
            (7.1%)
            
            
            (22.4%)
            
            
            5.3%





55




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




*On
      November 21, 2006, we sold substantially all of the assets and certain
      liabilities related to the CMU, a separate reporting unit, representing the
      majority of former interWAVE business, to LGC. Pursuant to the terms of the
      sale
      agreement, LGC issued to us promissory notes and a convertible note. At closing,
      we recognized such* *transaction as a divestiture of operations* *and
      therefore the results of the CMU activities for all reported periods were
      presented in one line item in the statement of operations below the results
      from
      continuing operations under the "Income (loss) from* *discontinued
      operations".*  *The
      assets and liabilities of the CMU business as of December 31, 2006 are presented
      separately in our balance sheet as assets and liabilities from discontinued
      operations. 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 2005, 2006 and
      2007. Note 1c to our financial statements further describes this
      transaction.*




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





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





*Cost
      of sales* .
      Cost of
      sales 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 $114 million in 2007, an increase of approximately
      42.5%
      compared with cost of sales of approximately $80.4 million in 2006. Cost of
      sales as a percentage of sales increased to approximately 48.3% in 2007 from
      approximately 44.2%
      in
      2006. This increase is primarily attributable to the change in the mix of
      products that comprise our revenues. As the market moves towards standardization
      and more and more players enter into this market making the market more
      competitive for us, along with the possible
      shift in the mix of products that comprise our revenues ,
      such as
      an increase in the volume of lower-margin CPE, we
      expect
      our gross margin to gradually  decrease
      and stabilize around 45% .




*Write-off
      of excess inventory and provision for inventory purchase
      commitments* .
      We periodically
      assess our inventories valuation in accordance with obsolete and slow-moving
      items based on revenue forecasts and technological obsolescence. Should
      inventories on-hand exceed our estimates or become obsolete, for example, due
      to
      the transition in demand from non-WiMAX to WiMAX products, it would be written
      down or written off. This would result in a charge to our statement of
      operations and a corresponding reduction in our inventory and shareholders’
equity. Changes in demand for our products and in our estimates for demand
      create changes in provisions for obsolete inventory. As part of our ordinary
      course of business we evaluate, on a quarterly basis, our actual inventory
      needs
      versus our sales projections and write-off excess inventory and un-cancelable
      purchase commitments from our suppliers and subcontractors. As a result, we
      recorded charges related to the write-off of excess inventory and accrued a
      provision for inventory purchase commitments of new materials and components
      that we had purchased or committed to purchase in anticipation of forecasted
      sales that we did not consummate. In 2007, primarily as a result of the increase
      of our sales and due to efficiency steps taken within our operations, our
      write-off of excess inventory and our accrual of a provision for inventory
      purchase commitments amounted in the aggregate to approximately $4.8 million
      in
      2007 compared to approximately $9.5 million in 2006.




56




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




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




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




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




*General
      and administrative expenses* .
      General
      and administrative expenses consist primarily of compensation costs for
      administration, finance and general management personnel, office maintenance,
      insurance costs, professional fees and other administrative costs. General
      and
      administrative expenses were approximately $15.4 million in 2007, an increase
      of
      approximately 12.4% compared with general and administrative expenses of
      approximately $13.7 million in 2006. This increase is related primarily to
      labor
      costs and legal expenses. General and administrative expenses as a percentage
      of
      sales decreased to 6.6% in 2007 from 7.5% in 2006.




57




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




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




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




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




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




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




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




*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 relative to 2005 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. 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.




58




*Cost
      of sales* . 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.




*Write-off
      of excess inventory and provision for inventory purchase
      commitments* . 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
      that we had purchased or committed to purchase in anticipation of forecasted
      sales that we did not consummate in the aggregate amount of approximately $9.5
      million, compared to approximately $7.3 million in 2005.




*Inventory
      utilization* *.
      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 product components in our regular production course
      and were sold as finished goods to end users. The sales of these related
      manufactured products were reflected in our revenues without additional cost
      in
      the cost of sales in the period the inventory was utilized. This inventory
      utilization increased our gross margin by 2.0% in 2006 and by 2.4 % in 2005




*Research
      and development expenses, net* .
      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 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 research and
      development 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.




*Selling
      and marketing 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 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 in 2006 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* .
      Amortization charges of approximately $2.7 million for all of the
      acquisition-related intangibles were recorded in both 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 in 2006 is attributed mainly
      to the increase in the dollar interest rate leading to higher yields on
      investments compared to 2005.




59




*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 primarily resulted from: (i) the impairment of goodwill, which amounted
      to $(23.4) million, (ii) the 2006 loss of the discontinued operations, which
      amounted to $(7.6) million, and (iii) the loss from the sale of CMU operations,
      which amounted to $(5.2) million.




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





**Impact
      of Inflation and Currency Fluctuations**




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




Because
      exchange rates between the NIS and the dollar fluctuate continuously, exchange
      rate fluctuations as recently experienced in Israel and especially larger
      periodic devaluations or revaluations, will have an impact on our profitability
      and period-to-period comparisons of our results of operations. In
      2007,
      the devaluation of the dollar against the NIS exceeded the rate of inflation
      in
      Israel, and we have experienced an increase in the dollar cost of our operations
      in Israel. The
      effects of foreign currency re-measurements are reported in our consolidated
      financial statements in the statement of operations.




To
      protect against exchange rate fluctuations, we have instituted several foreign
      currency hedging programs. These hedging activities consist of cash flow hedges
      of anticipated NIS payroll and forward exchange contracts to hedge certain
      trade
      payables payments in NIS. In 2007, the cash flow hedges were all effective.
      For
      more information, see "Item 11—Qualitative and Quantitative Market
      Risks".




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




Year
                ended
              December
                31,
            
            Israeli
              inflation
              rate
                %
            
            Israeli
                devaluation (appreciation)
              rate
                %
            
            Israeli
                inflation adjusted for
              devaluation
                %2003
            
            
            (1.9)
            
            
            (7.6)
            
            
            5.82004
            
            
            1.2
            
            
            (1.6)
            
            
            2.82005
            
            
            2.4
            
            
            6.8
            
            
            (4.3)2006
            
            
            (0.1)
            
            
            (8.2)
            
            
            8.12007
            
            
            3.4
            
            
            (9.0)
            
            
            12.4




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




60




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




**B.**
            **LIQUIDITY
                AND CAPITAL RESOURCES**




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




**Balance
      Sheet and Cash Flows**




Total
      cash, cash equivalents, short-term and long-term marketable securities and
      deposits were $138.9 million as of December 31, 2007, an increase of
      approximately $20.0 million or 17% from $118.4 million at December 31, 2006.




The
      increase resulted mainly from collecting cash proceeds from the following
      sources: (i) our customers; (ii) proceeds from the sale of our LGC shares as
      a
      result of the acquisition of LGC by ADC and; (iii) proceeds from an agreement
      we
      reached with our former CMU customer to accelerate the payments due from such
      customer to us with respect to equipment sold up until the effective date of
      the
      sale of the CMU to LGC in November 2006. Total cash, cash equivalents,
      short-term and long-term marketable securities and deposits as of December
      31,
      2006 reflect 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 $13.5 million,
      $16.6 million and $7.2 million in 2007, 2006 and 2005, respectively. The
      positive cash flow in 2007 resulted from improvement in our operational results
      and an increase in other accounts payable partially offset by the increase
      in
      inventory, which was higher than the accounts payable increase. The cash flows
      provided in 2006 resulted from an increase in other accounts payable and a
      decrease in trade receivables partially offset by our net loss in this period
      together with a decrease in trade payables. The cash flows provided in 2005
      resulted from our net income from continuing operations, together with an
      increase in trade payable s
      and
      with a
      decrease in inventories that were partially offset by the increase of trade
      receivables and a decrease in other account payables.




Our
      continuing investing activities result mainly from investments in bank deposits,
      marketable securities and fixed assets. In 2007, these investments were
      partially offset by cash proceeds from the sale of investment in LGC. Our
      continuing investing activities used cash of approximately $9.0 million in
      2007,
      used cash of approximately $9.2 million in 2006 and provided cash of
      approximately $36.8 million in 2005. Capital expenditures were approximately
      $6.9 million, $4.8 million and $3.3 million in 2007, 2006 and 2005,
      respectively. These expenditures principally financed the purchase of research
      and development equipment and manufacturing equipment.




Net
      cash
      provided by continuing financing activities totaled approximately $2.3 million,
      $3.3 million and $1.8 million in 2007, 2006 and 2005, respectively. In 2007,
      the
      amount of cash provided was attributable primarily to issuance of shares in
      connection with the exercise of employees’ options in the amount of
      approximately $4.0 million, partially offset by repayment of maturities of
      a
      long-term loan of $1.7 million. In 2006, the amount of cash provided was
      attributable primarily to proceeds from the issuance of shares in connection
      with the exercise of 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.




61




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.




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 $43 million was received
      and
      accrued as financial income from 2000 through 2007.




*Accounts
      Receivable, Net.* Accounts
      receivable, net was $31.2 million and $34.3 million as of December 31, 2007
      and
      2006, respectively. DSOs in receivables as of December 31, 2007, December 31,
      2006 and December 31, 2005 were 48 days, 69 days and 73 days, respectively.
      The
      decrease in DSOs in 2007 and 2006 is primarily a result of intense collection
      of
      accounts receivables.




*Inventories.* Inventories
      were $42.7 million as of December 31, 2007 compared to $30.5 million at December
      31, 2006. Inventories consist of raw materials, work in process and finished
      goods and inventories at customer sites that are not recognized as revenues
      yet. As
      a
      result of the foregoing, inventory
      turns were approximately 2.7 times in fiscal 2007 and 2.6 times in 2006.
      Inventory management remains an area of focus as we balance the need to maintain
      strategic inventory levels
      to ensure competitive lead times against the risk of inventory obsolescence
      because of rapidly changing technology and customer requirements. We are
      focusing our operational efforts to increase inventory turns in order to enhance
      our responsiveness to future customers’ needs and market changes.




**WORKING
      CAPITAL**




Our
      working capital from continuing operations was approximately $109.3 million
      as
      of December 31, 2007 compared to $100.6 million as of December 31, 2006 and
      $107.2 million as of December 31, 2005. 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.




**Commitments**




*Leases.* We
      lease
      office space in several worldwide locations. Rent expense totaled $5.4 million,
      $5.1 million and $4.6 million in 2007, 2006 and 2005, respectively. We also
      lease various motor vehicles under operating lease agreements, which expire
      in
      2010. Motor vehicles leasing expenses for the year ended December 31, 2007
      were
      $2.8 million, for the year ended December 31, 2006 were $2.3 million and for
      the
      year ended December 31, 2005 were $2.2 million.




62




Future
      annual minimum lease payments under all non-cancelable operating leases as
      of
      December 31, 2007 were as follows (in thousands):




**Rental
                of**
              **premises**
            
            **Lease
                of motor****vehicles**2008
            
            $
            5,314
            
            $
            2,2862009
            
            
            4,614
            
            
            1,2852010
            
            
            4,310
            
            
            3582011
            
            
            1,047
            
            
            -$
            15,285
            
            $
            3,929




*Royalties.* During
      2005, we recorded royalty-bearing grants from the OCS for the support of
      research and development activities aggregating to $52 thousands 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
      and
      2007.




During
      2007, we paid or accrued royalties to the OCS in the amount of $0.4 million.
      As
      of December 31, 2007, the aggregate contingent liability to the OCS amounted
      to
      $5.3 million.




The
      following table of our material contractual obligations as of December 31,
      2007
      summarizes the aggregate effect that these obligations are expected to have
      on
      our cash flows in the periods indicated:




Contractual
                Obligations
            
            Payments
                due by periodTotal
            
            Less
                than 1 year
            
            1-3
                years
            
            3-5
                years
            
            More
                than 5 yearsRental
                Lease
            
            $
            15,285,000
            
            $
            5,314,000
            
            $
            8,924,000
            
            $
            1,047,000
            
            $
            -Motor
                Vehicle Lease
            
            
            3,929,000
            
            
            2,286,000
            
            
            1,643,000
            
            
            -
            
            
            -Severance
                pay*
            
            
            16,242,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            35,456,000
            
            $
            7,600,000
            
            $
            10,567,000
            
            $
            1,047,000
            
            $
            -




*
      Severance pay relates to accrued severance obligations mainly to our Israeli
      employees as required under Israeli labor law. These obligations are payable
      only upon termination, retirement or death of the respective employee. Of this
      amount, only $4.6 million is unfunded.




*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 would not exceed $9 million
      dollars. As of December 31, 2007, 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 2006 or 2007.




63




**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 29% in 2007 and is progressively being reduced to a rate
      of
      25% in 2010. However, as detailed below, income derived in Israel from certain
      “Approved Enterprises” will enjoy certain tax benefits for a specific definitive
      period. The allocation of income derived from approved enterprises is dependent
      upon compliance of certain requirements with the Investment Law.




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




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




Several
      of our facilities have been granted Approved Enterprise status:




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




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




(ii) *Or
      Yehuda / Tel Aviv Facilities:* In 1997,
      Floware submitted a request for Approved Enterprise status of its production
      facility in Or Yehuda. This request was approved. After the merger, Floware’s
      enterprise was relocated into our facilities in Tel Aviv. The income derived
      from this Approved Enterprise 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 (depending on the percentage of foreign investment in the
      Company) .
      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.




64




(iii) *Status Expansion of Nazareth and Migdal Ha-emek:* In 2000,
      we received approval of our application for an expansion of our Approved
      Enterprise status with respect to our Nazareth facility. This expansion 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 10 years. The relative portion of taxable
      income that should be exempt for a 10-year period is subject to final covenants
      with the tax authorities. The 10-year period of benefits will commence with
      the
      first year in which we earn taxable income.




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




If
      these
      retained tax-exempt profits are distributed they would be taxed at the corporate
      tax rate applicable to such profits as if we had not elected the alternative
      system of benefits, currently between 10% - 25% for an “Approved Enterprise.” As
      of December 31, 2007, our accumulated deficit does not include tax-exempt
      profits earned by our “Approved Enterprise.”




On
      April
      1, 2005, an amendment to the Investment Law came into effect (the "Amendment”)
      and has significantly changed the provisions of the Investment Law. The
      Amendment limits the scope of enterprises that may be approved by the Investment
      Center, which is a statutory body in Israel responsible for providing certain
      grants and/or tax benefits subject to certain criteria and limitations, by
      setting criteria for the approval of a facility as a “Privileged Enterprise,”
including a provision generally requiring that at least 25% of the Privileged
      Enterprise’s income must be derived from export. Additionally, the Amendment
      enacted major changes concerning the manner in which tax benefits are awarded
      under the Investment Law so that companies no longer require 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.




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




As
      of
      December 31, 2007, in our Israeli company we had available tax loss carry
      forwards amounting to approximately $140 million (including the incurred net
      tax
      operating loss carry forwards in a total amount of $69 million of BreezeCOM
      and
      Floware), which may be carried forward, in order to offset taxable income in
      the
      future, for an indefinite period.




As
      of
      December 31, 2007, the state and the U.S. federal tax losses carry forward
      of
      our U.S. subsidiary amounted to approximately $29 million and $38 million,
      respectively. These losses are available to be offset against any future U.S.
      taxable income of our U.S. subsidiary and will expire in the years 2017 and
      2027, respectively. The state and federal tax loss carry forwards per income
      tax
      returns filed included uncertain tax positions that were taken in prior
      years.  Due to the application of FIN 48, the filed net operating losses
      are greater than the net operating loss deferred tax asset which was recognized
      for financial statement purposes.




65





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




**Reduction
      in Corporate Tax Rate**




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




The
      Amendment provides for a gradual reduction in the statutory company tax rate
      in
      the following manner: in 2007, the tax rate was 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, beginning in 2010, upon reduction of the company
      tax
      rate to 25%, real capital gains will be subject to tax of 25%.




Because
      we have more than one “Approved Enterprise,” 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 with the tax
      authorities the status of our tax benefits following the Floware merger and
      the
      InnoWave acquisition, we cannot assure you that the tax authorities will not
      modify the tax benefits that we enjoyed prior to these
      transactions.




Our
      effective corporate tax rate may substantially exceed the Israeli tax rate.
      Our
      Brazilian, French, German, Singapore, Hong Kong, Japanese, Romanian, U.K.,
      Uruguayan, Polish, Dutch, Turkish, Mexican, Ireland, China, Philippines, Spanish
      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.




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. The
      MAGNET Program, in the Office of the Chief Scientist of the Ministry of
      Industry, Trade & Labor of Israel, sponsors innovative generic
      industry-oriented technologies to strengthen the country's technological
      expertise and enhance competitiveness.




66


**Recently
      Issued Accounting Standards**




In
      September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
      No. 157, "Fair Value Measurements" ("SFAS No. 157"). This Standard defines
      fair value, establishes a framework for measuring fair value in generally
      accepted accounting principles and expands disclosures about fair value
      measurements. The provisions of SFAS No. 157 are effective for the
      Company beginning January 1, 2008. The FASB issued a FASB Staff Position
      (FSP 157-2) to defer the effective date of SFAS No. 157 for one year for all
      non-financial assets and non-financial liabilities, except for those items
      that
      are recognized or disclosed at fair value in the financial statements on a
      recurring basis. We do not expect the adoption of SFAS No. 157 will
      have material impact on our consolidated financial statements.




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 companies to choose to measure certain financial
      instruments and other items at fair value. The standard requires that unrealized
      gains and losses are reported in earnings for items chosen to be measured using
      the fair value option. SFAS No. 159 is effective for the Company
      beginning in the first quarter of fiscal year 2008. We do not expect the
      adoption of SFAS No. 159 will have an impact on our consolidated
      financial statements.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
      Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
      requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, any
      non-controlling interest in the acquiree and the goodwill acquired.
      SFAS 141R also establishes disclosure requirements to enable the evaluation
      of the nature and financial effects of the business combination. SFAS 141R
      is effective for fiscal years beginning after December 15, 2008. Earlier
      adoption is prohibited. We will evaluate the impact of SFAS 141R on our
      consolidated financial statements when and if applicable.




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




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




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




67




**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, 2007, our research and development staff consisted of 444 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 $32.8 million or 18.5%
      of
      sales in 2005, $42 million or 23% of sales in 2006, and $55.0 million or 23%
      of
      sales in 2007. T he
      Government of Israel and other jurisdictions for funding-approved research
      and
      development projects reimbursed
      us for approximately $3.1 million in 2005, $3.2 million in 2006 and $3.6 million
      in 2007.




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




See
      “—Operating Results- 2007 Highlights” above.




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




None.




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




See
      “—Liquidity and Capital Resources—Working Capital—Commitments.”




68




**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
            
            62
            
            Chairman
                of the Board of Directors (1)(4)(5)Dr. Meir
                Barel
            
            57
            
            Director
                (1)(4)Oded
                Eran
            
            56
            
            Director
                (1)(3)Benny
                Hanigal
            
            57
            
            Director
                (1)(5)Professor
                Raphael Amit
            
            60
            
            Director(1)(2)(3)(4)Robin
                Hacke
            
            48
            
            Director
                (1)(2)(3)(5)Amnon
                Yacoby
            
            58
            
            Director
                (1)(3)Dr.
                David Kettler
            
            65
            
            Director
                (1)(4)(5)Zvi
                Slonimsky
            
            58
            
            DirectorTzvi
                Friedman
            
            46
            
            Chief
                Executive Officer, President and DirectorEfrat
                Makov
            
            40
            
            Chief
                Financial OfficerUzi
                Brier
            
            49
            
            President,
                Broadband Mobile unitRudy
                Leser
            
            43
            
            Corporate
                Vice President, Strategy & MarketingMohammad
                Shakouri
            
            45
            
            Corporate
                Vice President of MarketingAvi
                Mazaltov
            
            46
            
            President,
                Operations and Infrastructure DivisionAvi
                Wellingstein
            
            47
            
            President,
                Customers’ Business DivisionAvinoam
                Barak
            
            45
            
            President,
                Broadband Wireless Access DivisionHaim
                Srur
            
            43
            
            Corporate
                Vice President, Human ResourcesAmir
                Tirosh
            
            39
            
            Corporate
                Vice President of Strategy & Corporate DevelopmentGreg
                Daily
            
            44
            
            President,
                Alvarion, Inc.




(1)
            “Independent
                Director” under rules of the SEC and NASDAQ Marketplace Rules (see
                explanation below).




(2)
            “External
                Director” within the meaning of the Israeli Companies Law (see explanation
                below).




(3)
            Member
                of our audit committee.




(4)
            Member
                of our compensation committee.




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




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




**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 served as our director, since the merger.
      Dr.
      Barel also served as vice chairman of our board of directors from August 2001
      until February 2008. 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.




69




**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. Since December 2007 Mr. Hanigal serves
      as
      the Chairman of the Board of Directors of LanOptics Ltd. Mr. Hanigal has a
      B.Sc.
      degree in Electrical Engineering from the Technion Israel Institute for
      Technology.




**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). 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 1990
      to 2002, Ms. Hacke served as the Chief Executive Officer of HK Catalyst Strategy
      and Finance Ltd., a company that Ms. Hacke founded that provided advisory
      services to investment companies and high-tech enterprises. From 1986 to 1990,
      Ms. Hacke held various management positions at Aitech Ltd., an Israeli start-up
      company. Prior to that, Ms. Hacke was an investment banker at Shearson Lehman
      Brothers in New York. Ms. Hacke is a member of the board of directors of several
      privately held companies, including Aternity Inc. Ms. Hacke holds an A.B. magna
      cum laude degree from Harvard-Radcliffe College and an MBA degree from Harvard
      Business School.




70




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




**Mr.
      Tzvi Friedman** was
      appointed Alvarion’s Chief Executive Officer and President in October 2005 and
      has been a 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.




71




**Ms.
      Efrat Makov** Joined
      Alvarion on March 1, 2007 and has served as our Chief Financial Officer since
      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 held 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.




**Dr.
      Mo Shakouri** was
      appointed as our Corporate VP Marketing in March 2008 and will assume his new
      role as of April 1, 2008.  Dr. Shakouri joined us in February 2001 and has
      extensive experience in wireless communication systems and fiber optic networks.
      Previously, he spent four years at Lucent, where he was responsible for
      managing, building and developing network solutions for European and South
      American broadband wireless markets. Shakouri also spent 14 years in technical
      and management positions with Hewlett Packard developing microwave and fiber
      optic communication components and systems. He co-founded the wireless systems
      division, where he was responsible for the engineering team developing low-cost
      residential digital wireless systems for U.S. and Asian markets. Mr. Shakouri
      is
      a board member and Chairman of marketing in the WiMAX ForumTM and is also a
      member on the advisory board for the Wireless Communication Alliance. He earned
      his BSEE from the University of San Jose and his MSEE and Ph.D.EE from Stanford
      University and is a former Chairman of the IEEE MTT-SVC Association.




**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.




72




**Mr.
      Avinoam Barak** joined
      Alvarion at the end of 2005 and was appointed President of the Broadband
      Wireless Access Division in January 2006. In the 5 years prior to joining
      Alvarion, Mr. Barak served as General Manager of the Networking Business Unit
      in
      Radvision. Prior to joining Radvision, he served as a Communication Systems
      Business Unit Manager at MLM, a division of Israel Aircraft Industries, as
      well
      as various senior engineering and project management positions. Mr. Barak earned
      a B.Sc. degree in Computer Engineering from the Technion Israel Institute for
      Technology and an MBA in Information Systems and Finance from Bar Ilan
      University.




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




**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 10 years at ADC Telecommunications, serving
      in
      various positions including General Manager of Transport Products division,
      General Manager of its Optical Networking Group, Group Vice-President of North
      American Sales and other sales management positions. Mr. Daily holds both Master
      and Bachelor of Science degrees in Engineering Management and Electrical
      Engineering from the University of Missouri at Rolla and is a graduate of the
      executive development program at the J.L. Kellogg Graduate School of Management
      at Northwestern University.




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




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




The
      aggregate direct labor costs associated with all of our directors and executive
      officers as a group (19 persons) for the year ended December 31, 2007 (including
      persons who served as directors or executive officers for only a portion of
      2007, and whether or not serving as such as of December 31, 2007) was
      approximately $3,709,000. This amount includes approximately $331,000 that
      was
      set aside or accrued to provide pension, retirement, social security or similar
      benefits. The amount does not include amounts expended by us for vehicles made
      available to our officers; expenses, including business travel, professional
      and
      business association dues and expenses; reimbursements to directors and
      officers; and other fringe benefits commonly reimbursed or paid by companies
      in
      Israel. Our directors who are not officers received an aggregate of
      approximately $320,000 in compensation in 2007.




73




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




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




During
      2007, we granted all of our directors and executive officers as a group (19
      persons) options to purchase an aggregate of 1,305,000 of our ordinary shares at
      exercise prices ranging from $7.02 to $10.24, with expiration dates ranging
      from
      February 2013 to July 2017 .




As
      of
      December 31, 2007, our directors and executive officers held outstanding options
      to purchase an aggregate of 5,186,356 ordinary shares, at exercise prices
      ranging from $1.27 to $15.4, with expiration dates ranging from April 2008
      to
      July 2017.




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




**Appointment
      of Directors and Terms of Office**




Our
      board
      of directors currently consists of 10 members. Under our Articles of
      Association, the board is to consist of between four and 10 members. Our
      directors are elected by our shareholders at an annual general shareholders
      meeting. Our directors generally commence the terms of their office at the
      close
      of the annual general shareholders meeting at which they are elected and, other
      than our external directors, serve in office until the close of the third annual
      general shareholders’ meeting following the meeting at which they are elected,
      and may be re-elected by the shareholders. Annual general shareholders meetings
      are required to be held at least once every calendar year, but not more than
      15
      months after the last preceding annual general shareholders meeting. In the
      intervals between the annual general shareholders meetings, the shareholders
      or
      our board of directors may appoint new directors 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 with the recommendation of our
      compensation committee.




The
      terms
      of office of our directors, Messrs. Friedman and Hanigal expire at our 2008
      annual general meeting; the terms of office of our directors, Messrs. Maher,
      Barel and Eran expire at our 2009 annual general meeting; and the terms of
      office of our directors, Messrs. Kettler, Slonimsky and Yacoby expire at our
      2010 annual general meeting. The
      terms of
      office of
      our
      external directors, Ms. Hacke and Professor Amit, expire in August 2010 and
      September 2009, respectively, as described below.




74




**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 at least two directors who qualify as external directors under the
      Israeli Companies Law. At least one of the external directors is required to
      have “financial and accounting expertise” ( unless
      another member of the audit committee, who is an independent director under
      the
      NASDAQ Marketplace Rules, has “financial and accounting expertise”)  and
      any
      other external director must have “accounting and financial expertise” or
“professional qualification,” as such terms are defined by regulations
      promulgated under the Israeli Companies Law.  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,
      controlled by or under common control with the company. Under
      the
      Israeli Companies Law, the
      term
      affiliation includes:




·
            an
                employment relationship;




·
            a
                business or professional relationship maintained on a regular
                basis;




·
            control;
                and




·
            service
                as an office holder.




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




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




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




75




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




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




**Independent
      Directors**




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




**Audit
      Committee**




Pursuant
      to the Israeli Companies Law and the NASDAQ Marketplace Rules,, the board of
      directors of a public company must appoint an audit committee. The
      responsibilities of the audit committee include monitoring the management of
      the
      Company’s business and suggesting appropriate courses of action, as well as
      approving related party transactions, reviewing and recommending on board
      members compensation and other matters as required by Israeli law and NASDAQ
      rules. The audit committee must be comprised of at least three directors,
      including 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, Mr. Eran and
      Mr. Yacoby, each of whom is an independent director under
      the requirements of the
      SEC
      and NASDAQ .
      Professor Amit qualifies as a financial expert for purposes of the rules of
      the
      SEC. As stated above, Ms. Hacke and Professor Amit qualify as external directors
      under the Israeli Companies Law.




As
      of
      December 17, 2007, the board of directors has resolved to split the
      compensation, nominating and corporate governance committee into two separate
      committees, a compensation committee and a nominating and corporate governance
      committee.




76




**Compensation
      Committee**




The
      compensation committee of our board of directors consists of Mr. Maher, Dr.
      Barel, Professor Amit and Dr. Kettler. Our board of directors has adopted a
      compensation committee charter setting forth the responsibilities of the
      committee, which include:




·
            reviewing
                and recommending to the board for its determination all compensation
                arrangements of our senior executive officers, including the chief
                executive officer, the president, the chief financial officer, the
                corporate vice presidents and the division
                presidents;


·
            determining
                the overall strategy for compensation of our employees;
                and


·
            overseeing
                our equity incentive plans and cash incentives and deferred compensation
                plans.




**Nominating
      and Corporate Governance Committee**




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




·
            seeking
                and recommending to the board nomination of qualified candidates
                for
                election to the board;





·
            recommending
                to the board the directors that shall serve on each committee of
                the
                board;





·
            leading
                and monitoring a process to assess board effectiveness;





·
            developing
                and recommending to the board a set of corporate governance guidelines,
                periodically reviewing such guidelines and recommending changes;
                and




·
            overseeing
                the evaluation of the board.




**Internal
      Auditor**




The
      Israeli Companies Law also requires the board of directors of a public company
      to appoint an internal auditor recommended by the audit committee. The role
      of
      the internal auditor is to examine, among other things, whether the company’s
      acts comply with applicable law and orderly business procedure. The internal
      auditor may be an employee of the company but may not be an interested party
      or
      office holder, or a relative of any interested party or office holder, and
      may
      not be a member of the company’s independent accounting firm or its
      representatives. The
      Israeli Companies Law defines an "interested party" as a holder of 5% or more
      of
      our shares or voting rights, any person or entity that has the right to nominate
      or appoint at least one of our directors or our general manager, or any person
      who serves as one of our directors or as our general manager. Our
      current internal auditor, Mr. Eyal Weitzman, has served in 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,
      including to avoid any conflict of interest between the office holder’s position
      in the company and any other position held by him or his personal affairs,
      and
      prohibits any competition with the company, or the exploitation of any business
      opportunity of the company in order to receive personal advantage for himself
      or
      others. This duty also requires disclosing to the company any information or
      documents relating to the company’s affairs that the office holder has received
      as a result of his position as an office holder. A
      company
      may approve any of the acts mentioned above provided that all the following
      conditions apply: the office holder acted in good faith and neither the act
      nor
      the approval of the act prejudices the good of the company and, the office
      holder disclosed the essence of his personal interest in the act, including
      any
      substantial fact or document, a reasonable time before the date for discussion
      of the approval.




77




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 the approval
      of
      the audit committee, the board of directors and the shareholders.




**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. "Personal
      interest", as defined by the Israeli Companies Law, includes a personal interest
      of any person in an act or transaction of the company, including a personal
      interest of his relative or of a corporation in which that person or a relative
      of that person is a 5% or greater shareholder, a holder of 5% or more of the
      voting rights, a director or general manager, or in which he or she has the
      right to appoint at least one director or the general manager. "Personal
      interest" does not apply to a personal interest stemming merely from holding
      shares in the company.




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




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




78




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




**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. For this purpose, 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. Two
      or
      more shareholders with a personal interest in the approval of the same
      transaction are deemed to be one shareholder .
      Subject
      to exceptions specified in regulations promulgated under the Israeli Companies
      Law, an extraordinary transaction, including
      a private placement, with a
      controlling shareholder or in which a controlling shareholder has a personal
      interest, and the terms of compensation or employment of a controlling
      shareholder or his or her relative 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.




**Duties
      of Shareholders**




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




·
            an
                amendment to the company’s articles of
                association;




·
            an
                increase in the company’s authorized share
                capital;




·
            a
                merger; or




·
            approval
                of related party transactions that require shareholder
                approval.




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




**Exculpation,
      Insurance and Indemnification of Directors and Officers**




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
      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.




79




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 prejudice
                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 to the full extent permitted by the Israeli Companies
      Law.




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




80




**D.**
            **EMPLOYEES**




As
      of
      December 31, 2007, we had 1,043 employees, of which 444 were engaged in
      research and development, 264 in operations, 265 in sales and marketing, and
      70
      in administration and management. Of our full-time employees, as of
      December 31, 2007, 764 were located in Israel, 50 in the United States and
      229 at our other branch offices, which offices are listed in “Item 4—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
      13.83% and 15.83% of the employee’s base salary. Employees are also entitled, in
      addition or instead of the Manager's Insurance above, to a pension fund to
      which
      the employee contributes an amount ranging from 5% to 5.5% of such employee’s
      base salary, and we contribute an amount equal to 14.83% of the employee’s base
      salary. We also provide our employees with an Education Fund, to which each
      participating employee contributes an amount equal to 2.5% of the employee’s
      base salary, and we contribute an amount of up to 7.5% of the employee’s base
      salary. Both of the above contributions are limited to maximum amounts
      promulgated under the Israeli tax regulations which are tax exempt. We also
      provide our employees with additional health insurance coverage for instances
      of
      severe illnesses. Outside of Israel, we offer alternative local plans of
      pension, health insurance, and social security as provided under the applicable
      laws in such jurisdictions.




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




**Management
      Employment Agreements**




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




81




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




The
      following table sets forth certain information as of March 24, 2008 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 63,078,861 ordinary shares outstanding as of March 24, 2008. 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)
            
            
            802,657
            
            
            1.27%All
                directors and executive officers as a group (19 persons)(3)
            
            
            4,085,421
            
            
            6.48%





·
            The
                number of ordinary shares beneficially owned includes the shares
                issuable
                pursuant to options that are exercisable within 60 days of March
                24,
                2008.




(1)
            Shares
                issuable pursuant to such options are deemed outstanding for computing
                the
                percentage of the person holding such options but are not outstanding
                for
                computing the holding percentage of any other
                person.




(2)
            Based
                on information provided by Mr. Yacoby and other information available
                to
                us. Includes options to purchase 116,530 of our ordinary shares which
                are
                exercisable within 60 days of March 24,
                2008.




(3)
            Includes
                options to purchase 3,329,736.00 of our ordinary shares which are
                exercisable within 60 days of March 24,
                2008.




Except
      as
      set forth in the table above, none of our other directors or executive officers listed above under “—Directors and Senior
      Management” held more than 1% of our outstanding shares as of March
      24,
      2008 .




As
      of
      March 24, 2008, our directors and executive officers listed above under
      "—Directors and Senior Management", as a group, held 5,125,731options to
      purchase of our ordinary shares at a weighted average exercise price of $8.53
      with expiration dates ranging from April 2008 until July 2017. 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, 2007, a total of 29,003,550 ordinary shares have been reserved
      for
      issuance upon exercise of options granted to our employees, officers, directors
      and consultants pursuant to our share option plans. These ordinary shares have
      been reserved pursuant to our 2006 Global Share Based Incentive Plan (the “2006
      Plan”), 2002 Global Share Option Plan (the “2002 Plan”), Key Employee Share
      Incentive Plan (1994), as amended, Key Employee Share Incentive Plan (1996),
      Key
      Employee Share Incentive Plan (1997), 1999 U.S. Stock Option Plan, interWAVE’s
      1994 Stock Option Plan, interWAVE’s 1999 Stock Option Plan and Floware’s Key
      Employee Share Incentive Plan (1996).




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




82




As
      of
      December 31, 2007, options to purchase 10,615,282 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 $8.74 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 10,615,282 options outstanding expire between
      six
      and ten years from the date of grant. As of December 31, 2007, options to
      purchase 2,807,482 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 consolidated
      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 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
      (commencing April 1, 2007) to equal 4% of our total outstanding shares as of
      the
      applicable reset date. As such, on April 1, 2007, the number of ordinary shares
      available for issuance under the 2006 Plan increased by 2,504,899. As of
      December 31, 2007, options to purchase 3,494,189 of our ordinary shares were
      outstanding under the 2006 Plan.





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




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




83




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.




84


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




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




The
      following table shows information as of March 24, 2008 for each person who, to
      our
      knowledge , beneficially owns 5% or more of our outstanding ordinary shares. The information
      in the table below is based on 63,078,861 ordinary
      shares outstanding as of March 24, 2008. Each
      of
      our outstanding ordinary shares has identical rights in all respects.





**Name**
            
            **Number
                of Ordinary Shares Beneficially Owned**
            
            **Percentage
                of Ordinary Shares**Renaissance
                Technologies LLC (1)
            
            
            3,578,929
            
            
            5.67%







(1)
            As
                of December 31, 2007, based on information contained in a Schedule
                13G
                filed with the SEC on February 13, 2008. Based on information available
                to
                us, as of December 31, 2005 and December 31, 2006, Renaissance
                Technologies LLC did not beneficially own more than 5% of our outstanding
                ordinary shares. The address for Renaissance Technologies LLC is
                800 Third
                Avenue, New York, New York 10022.




Based
      on
      a review of the information provided to us by our transfer agent, as of March
      24, 2008, there were 65 holders of record of our ordinary shares, including
      53
      holders of record with a U.S. mailing address, including banks, brokers and
      nominees. As of March 24, 2008, these 53 holders of record with a U.S. mailing
      address held approximately 60,579,213 ordinary shares, representing
      approximately 96% of the aggregate 63,078,861 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
      97% of our outstanding ordinary shares as of such date), the beneficial owners
      of these ordinary shares may include persons who reside outside the United
      States.




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




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




None.




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




Not
      applicable.




85


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




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




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




**Legal
      Proceedings**




On
      November 21, 2001, a purported Class Action (the “Action”) lawsuit was filed
      against interWAVE, certain of its former officers and directors, and certain
      of
      the underwriters for interWAVE’s initial public offering (the “IPO”). On April
      19, 2002, plaintiffs filed an amended complaint. The amended complaint alleged
      that the prospectus from interWAVE’s IPO failed to disclose certain alleged
      improper actions by various underwriters for the offering, in violation of
      the
      Securities Act of 1933, as amended and the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”). Similar complaints have been filed concerning more
      than 300 other IPOs; all of these cases have been coordinated as In re Initial
      Public Offering Securities Litigation, 21 MC 92. On October 8, 2002, the Second
      Circuit Court of Appeal (the
“Second Circuit”) entered an Order of Dismissal as to all of the individual
      defendants in the IPO litigation, without prejudice. In 2004, a stipulation
      of
      Settlement (the “Settlement”) was submitted to the Second Circuit, and in 2005,
      the Second Circuit granted preliminary approval. Under the Settlement, interWAVE
      would have been dismissed of all claims in exchange for a contingent payment
      guarantee by the insurance companies responsible for insuring interWAVE as
      an
      issuer. Class certification was a condition of the Settlement. After
      the
      Second Circuit issued a ruling overturning class certification in six test
      cases
      for the coordinated proceedings, the Settlement was terminated in June 2007
      by
      stipulation of the parties to the Settlement and order of the Second
      Circuit .
      Plaintiffs have filed amended master allegations and amended complaints in
      the
      six test cases, which the defendants in those cases have moved to dismiss.
      Plaintiffs have also moved for class certification in the six test cases, which
      the defendants in those cases have opposed. It is uncertain whether there will
      be any revised or future settlement. If no settlement is achieved,
      the Company believes that it has meritorious defenses and intends to defend
      the
      Action vigorously. However, the litigation results cannot be predicted at this
      point.




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




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.




86




**Export
      Sales**




Export
      sales constitute a significant portion of our sales. In 2007, export sales
      were
      approximately $235.7 million, constituting approximately 99.5% 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, 2007.




87


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




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




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




**NASDAQ
                Global Market**
            
            **Tel
                Aviv Stock Exchange****Year**
            
            **High**
            
            **Low**
            
            **High**
            
            **Low**2003
            
            $
            11.75
            
            $
            1.82
            
            
            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
                22.462007
            
            $
            15.21
            
            $
            6.03
            
            
            NIS
                59.76
            
            
            NIS
                26.54





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




**NASDAQ
                Global Market**
            
            **Tel
                Aviv Stock Exchange****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


**2007**
              
              **High**
              
              **Low**
              
              **High**
              
              **Low**First
                  Quarter
              
              $
              8.49
              
              $
              6.03
              
              
              NIS
                  36.00
              
              
              NIS
                  26.54Second
                  Quarter
              
              $
              9.97
              
              $
              7.80
              
              
              NIS
                  41.50
              
              
              NIS
                  31.20Third
                  Quarter
              
              $
              14.99
              
              $
              9.50
              
              
              NIS
                  58.90
              
              
              NIS
                  39.70Fourth
                  Quarter
              
              $
              15.21
              
              $
              8.58
              
              
              NIS
                  59.76
              
              
              NIS
                  34.00
  **2008**
              
              **High**
              
              **Low**
              
              **High**
              
              **Low**First
                  Quarter
              
              $
              9.69
              
              $
              5.20
              
              
              NIS
                  37.50
              
              
              NIS
                  18.32





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




**NASDAQ
                Global Market**
            
            **Tel
                Aviv Stock Exchange****Month**
            
            **High**
            
            **Low**
            
            **High**
            
            **Low**October
                2007
            
            $
            15.21
            
            $
            11.65
            
            
            NIS
                33.50
            
            
            NIS
                26.60November
                2007
            
            $
            12.35
            
            $
            8.84
            
            
            NIS
                33.19
            
            
            NIS
                26.83December
                2007
            
            $
            9.91
            
            $
            8.58
            
            
            NIS
                30.43
            
            
            NIS
                27.28January
                2008
            
            $
            9.69
            
            $
            6.95
            
            
            NIS
                37.50
            
            
            NIS
                26.50February
                2008
            
            $
            9.56
            
            $
            7.02
            
            
            NIS
                34.70
            
            
            NIS
                26.81March
                2008
            
            $
            7.50
            
            $
            5.20
            
            
            NIS
                27.70
            
            
            NIS
                18.32




As
      of
      March 24, 2008, the exchange rate of the NIS to the US$ was $1 to NIS
      3.5230.




88




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




Not
      applicable.




**C.**
            **MARKETS**




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




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




Not
      applicable.




**E.**
            **DILUTION**




Not
      applicable.




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




Not
      applicable.




89


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




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




Not
      applicable.




**B.**
            **MEMORANDUM
                AND ARTICLES OF ASSOCIATION**




We
      are
      registered under the Israel Companies Law as a public company with the name
      Alvarion Ltd. Our registration number with the Israeli Registrar of Companies
      is
      51-172231-6.




The
      following is a summary description of certain provisions of our Memorandum
      of
      Association and Articles of Association .




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




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




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




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




Our
      authorized share capital consists of 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, whether or not he has a personal interest in the resolution,
      as
      a condition for his right to vote and be counted with respect to such
      resolution.




90




Upon
      our
      liquidation, the liquidator, with the approval of a general meeting of the
      shareholders, may distribute all or part of the property to our shareholders,
      and may deposit any part of such property with trustees in favor of the
      shareholders, as deemed appropriate by the liquidator.




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




An
      annual
      general meeting of our shareholders, or “annual meeting,” must be held once in
      every calendar year, within a period of not more than 15 months from the
      preceding annual meeting, either within or outside of Israel. All general
      meetings of our shareholders other than annual meetings are called
“extraordinary meetings.” Our board of directors has discretion over when to
      convene an extraordinary meeting. However, our board of directors must convene
      an extraordinary meeting upon demand by: (i) any two directors of our
      Company; or a quarter of the directors of our Company, whichever is lower;
      or
      (ii) upon the demand of one or more shareholders holding alone or together
      at
      least (a) 5% of the issued share capital of our Company and 1% o f
      the
      voting rights or (b) 5%
      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. See "Item
      6 -
      Directors, Senior Management and Employees - Board Practices". Any director
      may
      be removed from his office by way of a resolution adopted by the vote of the
      holders of 75% of the voting power represented at a meeting.




The
      shareholders who are entitled to participate and vote at a general meeting
      are
      those shareholders who are registered in our shareholders register on the date
      determined by our board of directors, provided that such date not be more than
      40 days, nor less than 21 days (or at least 35 days for those cases prescribed
      under the Israeli Companies Law), 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.




The
      quorum required for a meeting of shareholders consists of at least two
      shareholders present in person or by proxy holding at least 33 1 ¤ 3 %
      of the
      voting power. A meeting adjourned for lack of a quorum will be adjourned to
      the
      same day in the next week at the same time and place, or any other time and
      place as the chairman of our board of directors may determine with the consent
      of the holders of a majority of the voting power represented at the meeting
      in
      person or by proxy. At the reconvened meeting, the required quorum consists
      of
      any two shareholders. The chairman of the board of directors presides at each
      of
      our shareholders meetings. The chairman of the meeting has neither an additional
      nor a casting vote.




There
      are
      no limitations imposed by our Articles of Association or the Israeli Companies
      Law on the right to own our shares including the rights of non-resident or
      foreign shareholders to hold or exercise voting rights of our shares, except
      with respect to subjects of countries which are in a state of war with
      Israel.




Certain
      provisions of Israeli corporate and tax law may have the effect of delaying,
      preventing or making more difficult a merger or other acquisition of our
      Company, as detailed in “Item 3—Key Information—Risk Factors—Risks Relating to
      Our Location in Israel". Provisions of Israeli law may delay, prevent or make
      difficult a merger with or an acquisition of us, which could prevent a change
      of
      control and therefore depress the market price of our ordinary
      shares.




91




The
      information contained under the heading “Description of Ordinary Shares” in our
      Registration Statement on Form F-1 (Registration Number 333-11572), is
      incorporated herein by reference.




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




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




None




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




Non-residents
      of Israel who own our ordinary shares may freely convert all amounts received
      in
      Israeli currency in respect of such ordinary shares, whether as a dividend,
      liquidation distribution or as proceeds from the sale of the ordinary shares,
      into freely-repatriable non-Israeli currencies at the rate of exchange
      prevailing at the time of conversion (provided in each case that the applicable
      Israeli income tax, if any, is paid or withheld).





Since
      January 1, 2003, all exchange control restrictions on transactions in foreign
      currency in Israel have been eliminated, although there are still reporting
      requirements for foreign currency transactions. Legislation remains in effect,
      however, pursuant to which currency controls may be imposed by administrative
      action at any time.




The
      State
      of Israel does not restrict in any way the ownership or voting of our ordinary
      shares by non-residents of Israel, except with respect to subjects of countries
      that are in a state of war with Israel.




**E.**
            **TAXATION**




**General**




The
      following is a discussion of Israeli and U.S. tax consequences material to
      our
      shareholders. To the extent that the discussion is based on new tax legislation
      that has not been subject to judicial or administrative interpretation, the
      views expressed in the discussion might not be accepted by the tax authorities
      in question. The discussion is not intended, and should not be construed, as
      legal or professional tax advice and does not exhaust all possible tax
      considerations.




Holders
      of our ordinary shares should consult their own tax advisors as to the United
      States, Israeli or other tax consequences of the purchase, ownership and
      disposition of ordinary shares, including, in particular, the effect of any
      foreign, state or local taxes.




**Israeli
      Taxation**




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




92




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




**General
      Corporate Tax Structure**




Generally,
      Israeli companies were subject in 2007 to corporate tax at the rate of 29%
      on
      taxable income and were 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 34%
      for
      2005 and 31% for 2006, and is scheduled to decline to 27% in 2008, 26% in 2009,
      and 25% in 2010 and subsequent years .
      However, the effective tax rate payable by a company that derives income from
      an
      approved enterprise (as discussed below) may be lower.




***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
      entitled to receive any benefits under the Industry Encouragement Law
      in
      the future.





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




*Tax
      Benefits Prior to the 2005 Amendment*




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




93




**Tax
      Benefits**




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




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




We
      believe that our capital investments qualify to receive tax benefits as an
      Approved Enterprise, however no assurance can be given that such investments
      will be approved as in fact qualifying for such tax benefits by the Israeli
      tax
      authorities. Additionally, no assurance can be given that we will, in the
      future, be eligible to receive additional tax benefits under this law.
      F or
      a
      discussion of the risks our business and prospects for growth face in connection
      with tax benefits under Israeli law, see “Risk Factors— *If
      we
      fail to comply with these conditions in the future, the tax benefits received
      could be canceled and we could be required to pay increased taxes in the future.
      We could also be required to refund tax benefits, with interest and adjustments
      for inflation based on the Israeli consumer price index”* and ** *“* Risk
      Factors— *We
      currently contemplate that a portion of our products will be manufactured
      outside of Israel. This could materially reduce the tax benefits to which we
      would otherwise be entitled. We cannot assure you that the Israeli tax
      authorities will not adversely modify the tax benefits that we could have
      enjoyed prior to these events.*




We
      currently have Approved Enterprise programs under the Capital Investments Law,
      which to our belief, entitle us to certain tax benefits. The tax benefit period
      for these programs has not yet commenced. We have elected the Alternative
      Benefits Program which provides for the waiver of grants in return for tax
      exemption. Accordingly, our income is tax exempt for a period of two years
      commencing with the year we first earn taxable income relating to each expansion
      program, and is subject to corporate taxes at the reduced rate of 10% to 25%,
      for an additional period of five
      to
      eight years, depending on the percentage of the company’s ordinary shares held
      by foreign shareholders in each taxable year .
      The
      exact rate reduction is based on the percentage of foreign ownership in each
      tax
      year. See note 11 to our consolidated financial statements. A company that
      has
      elected to participate in the Alternative Benefits Program and that subsequently
      pays a dividend out of the income derived from the Approved Enterprise during
      the tax exemption period will be subject to corporate tax in respect of the
      gross amount distributed, including withholding tax thereon, at the rate that
      would have been applicable had the company not elected the Alternative Benefits
      Program, ranging from 10% to 25%. The dividend recipient is subject
      to withholding tax
      at
      the reduced rate of 15%, applicable to dividends from Approved Enterprises
      if
      the dividend is distributed within 12 years after the benefits period. The
      withholding tax rate will be 25% after such period. In the case of a company
      with over 25% foreign investment level, as defined by law, the 12-year
      limitation on reduced withholding tax on dividends does not apply. This tax
      should be withheld by the company at the source, regardless of whether the
      dividend is converted into foreign currency. See “Withholdings and Capital Gains
      Taxes Applicable to Non-Israeli Shareholders.”




94




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




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




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




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




·
                exemption
                    from tax on its undistributed income up to ten
                    years;  ·
                an
                    additional period of reduced corporate tax liability at rates
                    ranging
                    between 10% and 25%, depending on the level of foreign (i.e.,
                    non-Israeli)
                    ownership of our shares;


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




*Tax
      Benefits Subsequent to the 2005 Amendment*




On
      April
      1, 2005, an amendment to the Investment Law went into effect (the “2005
      Amendment”). The 2005 Amendment revised the criteria for investments qualified
      to receive tax benefits. An eligible investment program under the 2005 Amendment
      will qualify for benefits as a Privileged Enterprise (rather than the previous
      terminology of Approved Enterprise). Among other things, the 2005 Amendment
      provides tax benefits to both local and foreign investors and simplifies the
      approval process. The period of tax benefits for a new Privileged Enterprise
      begins in the “Year of Commencement.” This year is the later of (i) the year in
      which taxable income is first generated by a company, or (ii) a year selected
      by
      the company for commencement, on the condition that the company meets certain
      provisions provided by the Investment Law (Year of Election). The 2005 Amendment
      does not apply to investment programs approved prior to December 31, 2004.
      The
      new tax regime applies to new
      investment programs only. Therefore, our existing Approved Enterprises will
      not
      be subject to the provisions of the 2005 Amendment.




95


**Measurement
      of Taxable Income**




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




**Tax
      Benefits of Research and Development**




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




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




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




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





In
      addition, under the income tax treaty between the United States and Israel,
      a
      U.S. resident holder of ordinary shares that are not listed for trading on
      a
      stock exchange outside of Israel will be exempt from Israeli capital gains
      tax
      on the sale, exchange or other disposition of such ordinary shares unless the
      holder owns, directly or indirectly, 10% or more of our voting power during
      the
      12 months preceding such sale, exchange or other disposition.




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.




96




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 U.S. federal income tax consequences
      applicable to “U.S. Holders” (as defined below) who beneficially own our
      ordinary shares. The discussion is based on the Internal Revenue Code of 1986,
      as amended, or the Code, applicable U.S. Treasury Regulations promulgated
      thereunder, and existing administrative rulings and court decisions in effect
      as
      of the date of this annual report, all of which are subject to change at any
      time, possibly with retroactive effect. For purposes of this discussion, it
      is
      assumed that U.S. Holders of our ordinary shares hold such stock as a capital
      asset within the meaning of Section 1221 of the Code, that is, generally for
      investment. This discussion does not address all aspects of United States
      federal income taxation that may be relevant to a particular U.S. Holder of
      our
      ordinary shares in light of his or her circumstances or to a U.S. Holder of
      our
      ordinary shares subject to special treatment under United States federal income
      tax law, including, without limitation:




·
            banks,
                other financial institutions, “financial services entities,” 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.




As
      used
      in this section, the term “U.S. Holder” refers to any beneficial owner of our
      ordinary shares that is any of the following:




·
            an
                individual who is a citizen or resident of the United States for
                U.S.
                federal income tax purposes;




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




97




·
            an
                estate the income of which is includible in gross income for U.S.
                federal
                income tax purposes regardless of its
                source;




·
            a
                trust (i) if a court within the United States is able to exercise
                primary
                supervision over the administration of the trust and one or more
                United
                States persons have the authority to control all of such trust’s
                substantial decisions; or (ii) that has in effect a valid election
                under
                applicable U.S. Treasury Regulations to be treated as a U.S.
                person.




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




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




*Distributions*





Subject
      to the discussion below under the heading “Passive Foreign Investment Company
      Status,” to the extent paid out of our current or accumulated earnings and
      profits, as determined under United States federal income tax principles, a
      distribution made with respect to our ordinary shares (including the amount
      of
      any non-U.S. withholding tax thereon) will be includible for U.S. federal income
      tax purposes in the income of a U.S. Holder as a taxable dividend. Dividends
      that are received by U.S. Holders that are individuals, estates or trusts will
      be taxed at the rate applicable to long-term capital gains (a maximum rate
      of
      15%) for taxable years beginning on or before December 31, 2010, provided that
      such dividends meet the requirement of “qualified dividend income” as defined by
      the Code. Dividends that fail to meet such requirements, and dividends received
      by corporate U.S. Holders, are taxed at ordinary income rates. No dividend
      received by a U.S. Holder will be a qualified dividend (1) if the U.S. Holder
      held the ordinary share with respect to which the dividend was paid for less
      than 61 days during the 121-day period beginning on the date that is 60 days
      before the ex-dividend date with respect to such dividend, excluding for this
      purpose, under the rules of Code Section 246(c), any period during which the
      U.S. Holder has an option to sell, is under a contractual obligation to sell,
      has made and not closed a short sale of, is the grantor of a deep-in-the-money
      or otherwise nonqualified option to buy, or has otherwise diminished its risk
      of
      loss by holding other positions with respect to, such ordinary share (or
      substantially identical securities) or (2) to the extent that the U.S. Holder
      is
      under an obligation (pursuant to a short sale or otherwise) to make related
      payments with respect to positions in property substantially similar or related
      to the ordinary share with respect to which the dividend is paid. If we were
      to
      be a “passive foreign investment company” (as such term is defined in the Code),
      or PFIC, for any taxable year, dividends paid on our ordinary shares in such
      year or in the following taxable year would not be qualified dividends. In
      addition, a non-corporate U.S. Holder will be able to take a qualified dividend
      into account in determining its deductible investment interest (which is
      generally limited to its net investment income) only if it elects to do so;
      in
      such case the dividend will be taxed at ordinary income rates.




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




98




Subject
      to certain conditions and limitations set forth in the Code (including certain
      holding period requirements), U.S. Holders generally will be able to elect
      to
      claim a credit against their United States federal income tax liability for
      any
      non-U.S. withholding tax deducted from dividends received in respect of our
      ordinary shares. For purposes of calculating the foreign tax credit, dividends
      paid on our ordinary shares generally will be treated as income from sources
      outside the United States and foreign source “passive income” for U.S. foreign
      tax purposes. In lieu of claiming a tax credit, U.S. Holders 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 U.S. federal income tax
      purposes in an amount equal to the difference between the U.S. dollar value
      of
      the amount realized on the disposition of our ordinary shares and the U.S.
      Holder’s adjusted tax basis in our ordinary shares, which is usually the U.S.
      dollar cost of the ordinary shares. Such gain or loss generally will be
      long-term capital gain or loss if our ordinary shares have been held for more
      than one year on the date of the disposition. Non-corporate U.S. Holders are
      currently subject to a reduced rate of taxation on long-term capital gains
      (15%
      for taxable years beginning on or before December 31, 2010). The deductibility
      of a capital loss recognized on the sale or exchange of ordinary shares is
      subject to limitations. Any gain or loss generally will be treated as United
      States source income or loss for United States foreign tax credit purposes.
      In
      addition, a U.S. Holder who receives foreign currency upon the sale or exchange
      of our ordinary shares and converts the foreign currency into U.S. dollars
      subsequent to receipt may have foreign exchange gain or loss, based on any
      appreciation or depreciation in the value of the foreign currency against the
      U.S. dollar, which will generally be United States source ordinary income or
      loss.




*Passive
      Foreign Investment Company Status*




Generally
      a non-U.S. corporation is treated as a PFIC for U.S. federal income tax purposes
      if either:




·
            75%
                or more of its gross income (including the pro rata share of gross
                income
                of any corporation (U.S. or foreign) of which such corporation is
                considered to own 25% or more of the ordinary shares by value) for
                the
                taxable year is passive income; or




·
            50%
                or more of its gross assets (including its pro rata share of the
                assets of
                any corporation in which such corporation is considered to own 25%
                or more
                of the ordinary shares by value) during the taxable year computed
                on a
                quarterly average basis produce or are held for the production of
                passive
                income.




As
      a
      result of the combination of our substantial holdings of cash, cash equivalents
      and securities and the decline in the market price of our ordinary shares from
      its historical highs, there is a risk that we could be classified as a PFIC,
      for
      U.S. federal income tax purposes. Based upon our market capitalization during
      2004, 2005, 2006 and 2007 and each taxable 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 taxable years. We cannot assure you, however, that the United States
      Internal Revenue Service (“IRS”) or the courts would agree with our conclusion
      if they were to consider our situation. In addition, the test for determining
      PFIC status are applied annually and it is difficult to make accurate
      predictions of our future income and assets and the future price of our ordinary
      shares, which are all relevant to the determination of whether we are classified
      as a PFIC. There is no assurance that we will not become a PFIC in 2008 or
      subsequent years.




99




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
      taxable 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:




·
            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.




100




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 taxable year subsequent
      to
      the first taxable year during the U.S. Holder’s holding period that we are
      classified as a PFIC to treat such holder’s interest in our Company as subject
      to a deemed sale of its PFIC stock on the first day of the first QEF year for
      an
      amount equal to its fair market value and recognize gain, but not loss, on
      such
      deemed sale in accordance with the general PFIC rules, including the interest
      charge provisions, described above and thereafter treating such interest in
      our
      Company as an interest in a QEF. In addition, under certain circumstances U.S.
      Holders may make a retroactive QEF election, but may be required to file a
      timely protective statement to preserve their ability to make a retroactive
      QEF
      election. U.S. Holders should consult their tax advisors regarding the
      advisability of filing a protective statement.




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




*Tax
      Consequences for Non-U.S. Holders of Our Ordinary Shares*





Except
      as
      described in “Information Reporting and Backup Withholding” below, a Non-U.S.
      Holder of our ordinary shares will not be subject to U.S. federal income or
      withholding tax on the payment of dividends on, and the proceeds from the
      disposition of, our ordinary shares, unless in the case of U.S. federal income
      taxes:




·
            such
                item is effectively connected with the conduct by the Non-U.S. Holder
                of a
                trade or business in the United States and, in the case of a resident
                of a
                country which has a treaty with the United States, such item is
                attributable to a permanent establishment or, in the case of an
                individual, a fixed place of business, in the United States,
                or




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




101




*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
      U.S. on, and the proceeds from the disposition of, our ordinary shares, unless
      they:




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




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




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




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




**F.**
            **DIVIDENDS
                AND PAYING AGENTS**




Not
      applicable.




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




Not
      applicable.




**H.**
            **DOCUMENTS
                ON DISPLAY**




We
      are
      subject to the informational requirements of the Exchange Act applicable to
      foreign private issuers and fulfill the obligation with respect to such
      requirements by filing reports with the SEC. As a foreign private issuer, we
      are
      exempt from the rules under the Exchange Act prescribing the furnishing and
      content of proxy statements, and our officers, directors and principal
      shareholders are exempt from the reporting and “short-swing” profit recovery
      provisions contained in Section 16 of the Exchange Act. In addition, we are
      not
      required under the Exchange Act to file periodic reports and financial
      statements with the SEC as frequently or as promptly as U.S. companies whose
      securities are registered under the Exchange Act. However,
      we file with the SEC an annual report on Form 20-F containing consolidated
      financial statements audited by an independent accounting firm. We also furnish
      reports on Form 6-K containing unaudited consolidated financial information
      after the end of each of the first three quarters.  You
      may
      read and copy any document we file with the SEC without charge at the SEC’s
      Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies
      of
      such material may be obtained by mail from the Public Reference Branch of the
      SEC at such address, at prescribed rates. Please call the SEC at l-800-SEC-0330
      for further information on the public reference room. A copy of each report
      submitted in accordance with applicable U.S. law is also available for public
      review at our principal executive offices.




102




In
      addition, the SEC maintains an Internet website at http://www.sec.gov that
      contains reports, proxy statements, information statements and other material
      that are filed through the SEC’s Electronic Data Gathering, Analysis and
      Retrieval (EDGAR) system. We began filing our reports through the EDGAR system
      in November 2002.




The
      Israeli Securities Authority maintains an Internet website at http://www.isa.gov.il that
      contains reports proxy statements, information statements and other material
      that are filed through the electronic disclosure system (MAGNA). We began filing
      our reports through the MAGNA system in August 2003.




**I.**   **SUBSIDIARY
      INFORMATION**




Not
      applicable.




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




We
      are
      exposed to financial market risk associated with changes in foreign currency
      exchange rates. To mitigate these risks, we use derivative financial
      instruments. The majority of our revenues and expenses are generated in U.S.
      dollars. A portion of our expenses, however, is denominated in NIS. In order
      to
      protect ourselves against the volatility of future cash flows caused by changes
      in foreign exchange rates, we use currency forward contracts and currency
      options. We hedge the part of our forecasted expenses denominated in NIS. If
      our
      currency forward contracts and currency options meet the definition of a hedge,
      and are so designated, changes in the fair value of the contracts will be offset
      against changes in the fair value of the hedged assets or liabilities through
      earnings. For derivative instruments not designated as hedging instruments,
      the
      gain or loss is recognized in current earnings during the period of change.
      Our
      hedging program reduces, but does not eliminate, the impact of foreign currency
      rate movements and due to a general economic slowdown along with the devaluation
      of the dollar, our results of operations may be adversely affected.




Our
      investment portfolio includes held to maturity marketable securities. The
      contractual cash flows of these investments are either agencies of the U.S.
      government that have implied guaranty by the U.S. government or were issued
      by
      highly rated corporations. As
      of
      December 31,2007 ,the long-term rating of the securities in our portfolio were
      rated at least as A. Securities representing about 29% of the portfolio are
      rated as AAA. The
      recent declines in interest rates may reduce our interest income.




**ITEM
          12.** **DESCRIPTION
          OF SECURITIES OTHER THAN EQUITY SECURITIES**




Not
      applicable.




103


PART
      II




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




None.




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




**A.**  Not
      applicable.




**B.**  Not
      applicable.




**C.**  Not
      applicable.




**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, 2007, 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**




The
      Company’s management, with the participation of its chief executive officer and
      chief financial officer, evaluated the effectiveness of the Company’s disclosure
      controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
      Securities Exchange Act) as of December 31, 2007. Based on this evaluation,
      the
      Company’s chief executive officer and chief financial officer have concluded
      that, as of such date, the Company’s disclosure controls and procedures were (i) designed
      to ensure that material information relating to the Company, including its
      consolidated subsidiaries, is made known to its management,
      including the
      Company’s chief executive officer and chief financial officer ,
      by
      others within those entities, as appropriate to allow timely decisions regarding
      required disclosure, particularly during the period in which this report was
      being prepared and (ii) effective, in that they provide reasonable assurance
      that information required to be disclosed by the Company in the reports that
      it
      files or submits under the Exchange Act is recorded, processed, summarized
      and
      reported within the time periods specified in the SEC’s rules and
      forms.




104




**b.**  **Management’s
      Annual Report on Internal Control Over Financial Reporting**





Our
      management, under the supervision of our Chief Executive Officer and Chief
      Financial Officer, is responsible for establishing and maintaining adequate
      internal control over our financial reporting, as defined in Rules 13a-15(f)
      and
      15d-15(f) of the Exchange Act. The Company’s internal control over financial
      reporting is designed to provide reasonable assurance to the Company’s
      management and board of directors regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in
      accordance with generally accepted accounting principles. Internal control
      over
      financial reporting includes policies and procedures that:




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




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




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




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




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, 2007 based on the framework for *Internal
      Control - Integrated Framework* set
      forth by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO). Based on our assessment under that framework and the criteria
      established therein, our management concluded that the Company’s internal
      control over financial reporting were effective as of December 31,
      2007.




Our
      financial statements and internal control over financial reporting has been
      audited by Kost, Forer, Gabbay & Kasierer (A member of Ernst & young
      Global), an independent registered public accounting firm.




**c.**  **Attestation
      Report of the Registered Public Accounting Firm**




This
      annual report includes an attestation report of our registered public accounting
      firm regarding internal control over financial reporting in page F4 of our
      audited consolidated financial statements set forth in “Item 18 - Financial
      Statements”, and are incorporated herein by reference.




**d.**  **Changes
      in Internal Control Over Financial Reporting**




There
      were no changes in our internal controls over financial reporting identified
      with the evaluation thereof that occurred during the period covered by this
      annual report that have materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.




**ITEM
      16.**  **[Reserved]**




105




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




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




ITEM
      16B.CODE
      OF
      ETHICS




In
      2003,
      we adopted a Code of Ethics that applies to our Chief Executive Officer, Chief
      Financial Officer and all other senior officers. In March 2008 we updated the
      Code of Ethics. The updated Code of Ethics is included as Exhibit 11 to this
      Annual Report on Form 20-F.




**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, 2006 and December 31,
      2007:




**Fee
                Category**
            
            **2006
                Fees**
            
            **2007
                Fees**Audit
                Fees
            
            $
            224,000
            
            $
            335,000Audit-Related
                Fees
            
            $
            15,000
            
            $
            26,711Tax
                Fees
            
            $
            113,263
            
            $
            51,045All
                Other Fees
            
            
            -
            
            
            -Total
                Fees
            
            $
            352,263
            
            $
            412,756




*Audit
      Fees:* Consists
      of the aggregate fees billed and accrued for professional services rendered
      for
      the audit of our annual financial statements and services that are normally
      provided by Kost,
      Forer, Gabbay & Kasierer in
      connection with statutory and regulatory filings or engagements.




*Audit
      Related Fees:* Consists
      of the aggregate fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of our financial
      statements and are not reported under “Audit Fees.”




*Tax
      Fees:* Consists
      of the aggregate fees billed for professional services rendered for tax
      compliance, tax advice and tax planning. These services include assistance
      regarding international and Israeli tax services.




*All
      Other Fees* :
      Consists of the aggregate fees billed for products and services other than
      the
      services reported above. We did not have such services in 2007 and
      2006.




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.




106




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




Not
      applicable.




ITEM
      16E.PURCHASESOF
      EQUITY SECURITIES BY THE ISSUER AND AFFILIATEDPURCHASERS




Not
      applicable.




**PART
      III**




ITEM
      17.FINANCIAL
      STATEMENTS




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




ITEM
      18.FINANCIAL
      STATEMENTS




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




107


ITEM
      19.EXHIBITS




The
      exhibits filed with or incorporated into this annual report are listed on the
      index of exhibits below.




**Exhibit
                No.**
            
            **Description**1.1
            
            Memorandum
                of Association (English translation accompanied by Hebrew original)
                (1)1.2
            
            Articles
                of Association(1)1.3
            
            Certificate
                of Name Change (English translation accompanied by Hebrew original)
                (2)2.1
            
            Form
                of Ordinary Share Certificate(3)2.2
            
            Form
                of Warrant (1)4.1
            
            Lease
                Agreement, dated April 16, 2000, between the Registrant and Bet Dror
                Ltd. And Ziviel Investments Ltd. (English summary accompanied by
                Hebrew
                original) (1)4.2
            
            Form
                of Indemnity Agreement for Directors and Executive Officers*4.3
            
            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
            
            Amended
                Code of Ethics*12.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002 *12.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002*13.1
            
            Certification
                of the Chief Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002 *13.2
            
            Certification
                of the Chief Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002 *




*  Filed
      herewith




(1)
            Incorporated
                herein by reference to the Registration Statement on Form F-1 (File
                No.
                333-11572).




(2)
            Incorporated
                by reference to the Registration Statement on Form S-8 (File No.
                333-13786).




(3)
            Incorporated
                by reference to the Registration Statement on Form S-8 (File No.333-14142).




(4)
            Incorporated
                by reference to the Annual Report on Form 20-F for the fiscal period
                ending December 31, 2001.




108


**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.By:
            /s/
              Tzvika
              FriedmanTzvika
              FriedmanChief
              Executive OfficerDate: April 2, 2008




109




**ALVARION
      LTD. AND ITS SUBSIDIARIES**




**CONSOLIDATED
      FINANCIAL STATEMENTS**





**AS
      OF DECEMBER 31, 2007**





**IN
      U.S. DOLLARS**





**INDEX**





**Page****Report
                of Independent Registered Public Accounting Firm**
            **F-2
                - F-3****Consolidated
                Balance Sheets**
            **F-4
                - F-5****Consolidated
                Statements of Operations**
            **F-6****Statements
                of Changes in Shareholders' Equity**
            **F-7****Consolidated
                Statements of Cash Flows**
            **F-8****Notes
                to Consolidated Financial Statements**
            **F-9
                - F-39**




F-1


pg2 logo




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





**To
      the Board of Directors and 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, 2006 and 2007, and the related
      consolidated statements of operations, changes in shareholders' equity and
      cash
      flows for each of the three years in the period ended December 31, 2007. These
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of the Company
      and
      its subsidiaries at December 31, 2006 and 2007, and the consolidated
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 31, 2007, in conformity with accounting principles
      generally accepted in the United States.





As
      discussed in Note 2l to the consolidated financial statements, in 2007 the
      Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes - An Interpretation of FASB Statement No. 109", effective January
      1, 2007. As discussed in Note 2m to the consolidated financial statements,
      in
      2006 the Company adopted Statement of Financial Accounting Standards No. 123(R),
      "Share-Based Payment", as revised, effective January 1,
      2006.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the Company and subsidiaries' internal control
      over financial reporting as of December 31, 2007, based on criteria
      established in Internal Control-Integrated Framework issued by the Committee
      of
      Sponsoring Organizations of the Treadway Commission and our report dated
      April 2, 2008 expressed an unqualified opinion thereon.








Tel-Aviv,
                Israel
            KOST
                FORER GABBAY & KASIERERApril
                2, 2008
            A
                Member of Ernst & Young Global




F-2




pg2 logo




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





**To** **the
      Board of Directors** **and
      Shareholders of**





**ALVARION
      LTD. AND ITS SUBSIDIARIES**





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





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





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





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





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





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Alvarion
      and
      its subsidiaries as of December 31, 2006 and 2007 and the related consolidated
      statements of operations, changes in shareholders' equity and cash flows for
      each of the three years in the period ended December 31, 2007 and our report
      dated April 2, 2008 expressed an unqualified opinion thereon.





Tel-Aviv,
                Israel
            KOST
                FORER GABBAY & KASIERERApril
                2, 2008
            A
                Member of Ernst & Young Global




F-3




**ALVARION
        LTD. AND ITS SUBSIDIARIES**




**CONSOLIDATED
      BALANCE SHEETS**


**U.S.
      dollars in thousands**





**December
                31,****2006**
            
            **2007**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            40,832
            
            $
            52,087Short-term
                bank deposits
            
            
            1,835
            
            
            -Marketable
                securities (Note 3)
            
            
            47,134
            
            
            43,331Trade
                receivables, net
            
            
            34,332
            
            
            31,224Other
                accounts receivable, prepaid expenses and current maturities of long-term
                note (Note 4)
            
            
            10,644
            
            
            16,250Inventories
                (Note 5)
            
            
            30,539
            
            
            42,746Current
                assets of discontinued operations
            
            
            3,921
            
            
            -Totalcurrent assets
            
            
            169,237
            
            
            185,638LONG-TERM
                INVESTMENTS:Investment
                in affiliates
            
            
            -
            
            
            605Marketable
                securities (Note 3)
            
            
            28,625
            
            
            43,456Severance
                pay fund
            
            
            8,749
            
            
            11,667Totallong-term investments
            
            
            37,374
            
            
            55,728LONG-TERM
                NOTE (Note 1c)
            
            
            1,830
            
            
            -PROPERTY
                AND EQUIPMENT, NET (Note 6)
            
            
            10,379
            
            
            13,078INTANGIBLE
                ASSETS, NET (Note 7)
            
            
            4,137
            
            
            1,593GOODWILL
            
            
            57,106
            
            
            57,106Totalassets
            
            $
            280,063
            
            $
            313,143




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




F-4


**ALVARION
        LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**U.S.
      dollars in thousands, except share and per share data**





**December
                31,****2006**
            
            **2007**LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Current
                maturities of long-term debt
            
            $
            1,749
            
            $
            -Trade
                payables
            
            
            22,418
            
            
            24,091Other
                accounts payable and accrued expenses (Note 8)
            
            
            40,546
            
            
            52,257Liabilities
                - discontinued operations
            
            
            7,355
            
            
            -Totalcurrent liabilities
            
            
            72,068
            
            
            76,348LONG-TERM
                LIABILITIES:Accrued
                severance pay
            
            
            12,694
            
            
            16,242Totallong-term liabilities
            
            
            12,694
            
            
            16,242COMMITMENTS
                AND CONTINGENT LIABILITIES (Note 9)SHAREHOLDERS'
                EQUITY:Share
                capital (Note 10) -Ordinary
                shares of NIS 0.01 par value -Authorized:
                85,080,000 shares at December 31, 2006 and 2007; Issued: 65,425,984
                and
                66,846,030 shares at December 31, 2006 and 2007, respectively;
                Outstanding: 61,629,211 and 63,049,257 shares at December 31, 2006
                and 2007, respectively
            
            
            165
            
            
            168Additional
                paid-in capital
            
            
            403,543
            
            
            415,045Treasury
                shares at cost 3,796,773 shares at December 31, 2006 and
                2007
            
            
            (7,876
            )
            
            (7,876
            )Other
                accumulated comprehensive income
            
            
            58
            
            
            1,264Accumulated
                deficit
            
            
            (200,589
            )
            
            (188,048
            )Totalshareholders' equity
            
            
            195,301
            
            
            220,553Totalliabilities and shareholders' equity
            
            $
            280,063
            
            $
            313,143




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




F-5




**ALVARION
        LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**U.S.
      dollars in thousands, except per share data**





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Sales
                (Note 12)
            
            $
            176,927
            
            $
            181,594
            
            $
            236,573Cost
                of sales
            
            
            85,817
            
            
            80,410
            
            
            114,099Write-off
                of excess inventory and provision for inventory purchase commitments
                (Note
                2g)
            
            
            7,338
            
            
            9,472
            
            
            4,762Gross
                profit
            
            
            83,772
            
            
            91,712
            
            
            117,712Operating
                costs and expenses:Research
                and development, net (Note 13a)
            
            
            29,710
            
            
            38,807
            
            
            51,389Selling
                and marketing
            
            
            39,900
            
            
            44,929
            
            
            55,943General
                and administrative
            
            
            9,602
            
            
            13,680
            
            
            15,426Amortization
                of intangible assets
            
            
            2,685
            
            
            2,676
            
            
            2,544Totaloperating costs and expenses
            
            
            81,897
            
            
            100,092
            
            
            125,302Operating
                income (loss)
            
            
            1,875
            
            
            (8,380
            )
            
            (7,590
            )Other
                income (Note 1c)
            
            
            -
            
            
            -
            
            
            8,265Financial
                income, net (Note 13b)
            
            
            2,551
            
            
            3,796
            
            
            6,453Income
                (loss) from continuing operations (Note 1c)
            
            
            4,426
            
            
            (4,584
            )
            
            7,128Income
                (loss) from discontinued operations, net
            
            
            (17,044
            )
            
            (36,167
            )
            
            5,413Net
                income (loss)
            
            $
            (12,618
            )
            $
            (40,751
            )
            $
            12,541Net
                earnings (loss) per share (Note 13c):Basic:Continuing
                operations
            
            $
            0.08
            
            $
            (0.08
            )
            $
            0.11Discontinued
                operations
            
            
            (0.30
            )
            
            (0.59
            )
            
            0.09$
            (0.22
            )
            $
            (0.67
            )
            $
            0.20Diluted:Continuing
                operations
            
            $
            0.07
            
            $
            (0.08
            )
            $
            0.11Discontinued
                operations
            
            
            (0.27
            )
            
            (0.59
            )
            
            0.08$
            (0.20
            )
            $
            (0.67
            )
            $
            0.19




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




F-6


**ALVARION
        LTD. AND ITS SUBSIDIARIES**


**STATEMENTS
      OF CHANGES IN SHAREHOLDERS' EQUITY**


**U.S.
      dollars in thousands, except share data**





**Ordinary
                shares**
            
            **Additional
                paid-in**
            
            **Treasury**
            
            **Deferred**
              **stock**
            
            **Other
                accumulated comprehensive**
            
            **Accumulated**
            
            **Total
                comprehensive**
            
            **Total
                shareholders'****Number**
            
            **Amount**
            
            **capital**
            
            **shares**
            
            **compensation**
            
            **income**
            
            **deficit**
            
            **Income
                (loss)**
            
            **equity**Balance
                at January 1, 2005
            
            
            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
                123(R)
            
            
            -
            
            
            -
            
            
            (173
            )
            
            -
            
            
            173
            
            
            -
            
            
            -
            
            
            
            
            
            -Exercise
                of employee stock options
            
            
            2,228,219
            
            
            5
            
            
            5,021
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            5,026Stock-based
                compensation expenses related to SFAS 123(R)
            
            
            -
            
            
            -
            
            
            6,450
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            6,450Stock-based
                compensation expenses related to SFAS 123(R), 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
            )
            
            
            
            
            195,301Exercise
                of employee stock options
            
            
            1,420,046
            
            
            3
            
            
            4,078
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            4,081Stock-based
                compensation expenses related to SFAS 123(R)
            
            
            -
            
            
            -
            
            
            7,424
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            7,424Unrealized
                gains on foreign currency cash flow hedges
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,206
            
            
            -
            
            $
            1,206
            
            
            1,206Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            12,541
            
            
            12,541
            
            
            12,541Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            13,747Balance
                at December 31, 2007
            
            
            63,049,257
            
            $
            168
            
            $
            415,045
            
            $
            (7,876
            )
            $
            -
            
            $
            1,264
            
            $
            (188,048
            )
            
            
            
            $
            220,553




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




F-7


**ALVARION
        LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**U.S.
      dollars in thousands**




**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (12,618
            )
            $
            (40,751
            )
            $
            12,541Adjustments
                required to reconcile net income (loss) to net cash provided by (used
                in)
                operating activities:Loss
                (income) from discontinued operations
            
            
            17,044
            
            
            36,167
            
            
            (5,413
            )Depreciation
            
            
            4,094
            
            
            4,926
            
            
            4,232Stock-based
                compensation expenses related to SFAS 123(R)
            
            
            44
            
            
            6,450
            
            
            7,424Accrued
                interest, amortization of premium and accretion of discounts on
                held-to-maturity marketable securities and bank deposits
            
            
            876
            
            
            (247
            )
            
            (404
            )Amortization
                of other intangible assets
            
            
            2,676
            
            
            2,676
            
            
            2,544Decrease
                (increase) in trade receivables
            
            
            (11,512
            )
            
            1,057
            
            
            3,108Decrease
                in long-term receivables
            
            
            792
            
            
            -
            
            
            -Decrease
                (increase) in other accounts receivable and prepaid expenses
            
            
            (198
            )
            
            45
            
            
            (9,859
            )Decrease
                (increase) in inventories
            
            
            7,055
            
            
            105
            
            
            (12,207
            )Increase
                (decrease) in trade payables
            
            
            4,542
            
            
            (4,470
            )
            
            1,660Increase
                (decrease) in other accounts payable and accrued expenses
            
            
            (5,828
            )
            
            9,981
            
            
            9,259Accrued
                severance pay, net
            
            
            221
            
            
            623
            
            
            630Net
                cash provided by continuing operating activities
            
            
            7,188
            
            
            16,562
            
            
            13,515Net
                cash provided by (used in) discontinued operating activities
            
            
            (22,402
            )
            
            (10,946
            )
            
            4,431Net
                cash provided by (used in) operating activities
            
            
            (15,214
            )
            
            5,616
            
            
            17,946Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (3,331
            )
            
            (4,801
            )
            
            (6,918
            )Investment
                in affiliates
            
            
            -
            
            
            -
            
            
            (605
            )Proceeds
                from bank deposits
            
            
            30,375
            
            
            6,725
            
            
            1,835Investment
                in bank deposits
            
            
            (13,200
            )
            
            (34
            )
            
            -Investment
                in held-to-maturity marketable securities
            
            
            (58,778
            )
            
            (170,044
            )
            
            (186,150
            )Proceeds
                from maturity of held-to-maturity marketable securities
            
            
            81,766
            
            
            158,946
            
            
            175,502Proceeds
                from LGC transaction
            
            
            -
            
            
            -
            
            
            7,289Net
                cash provided by (used in) continuing investing activities
            
            
            36,832
            
            
            (9,208
            )
            
            (9,047
            )Net
                cash used in discontinued investing activities
            
            
            (753
            )
            
            (225
            )
            
            -Net
                cash provided by (used in) investing activities
            
            
            36,079
            
            
            (9,433
            )
            
            (9,047
            )Cash
                flows from financing activities:Proceeds
                from exercise of employee stock options
            
            
            3,539
            
            
            5,026
            
            
            4,081Repayment
                of long term debt
            
            
            (1,742
            )
            
            (1,749
            )
            
            (1,725
            )Net
                cash provided by financing activities
            
            
            1,797
            
            
            3,277
            
            
            2,356Increase
                in cash and cash equivalents from continuing operations
            
            
            45,817
            
            
            10,631
            
            
            6,824Increase
                (decrease) in cash and cash equivalents from discontinued
                operations
            
            
            (23,155
            )
            
            (11,171
            )
            
            4,431Increase
                (decrease) in cash and cash equivalents
            
            
            22,662
            
            
            (540
            )
            
            11,255Cash
                and cash equivalents at the beginning of the year
            
            
            18,710
            
            
            41,372
            
            
            40,832Cash
                and cash equivalents at the end of the year
            
            $
            41,372
            
            $
            40,832
            
            $
            52,087Supplemental
                disclosure of cash flows activities:Cash
                paid during the year for interest
            
            $
            90
            
            $
            130
            
            $
            95Non-cash
                transactions:Notes
                received in connection with the CMU net assets sale
            
            $
            -
            
            $
            6,868
            
            $
            -Conversion
                of the LGC convertible note into common stock
            
            $
            -
            
            $
            -
            
            $
            1,400Purchase
                of property and equipment accrued in trade payables
            
            $
            -
            
            $
            732
            
            $
            745





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




F-8




**ALVARION
      LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands, except share and per share data**


**NOTE
                1:-**
            **GENERAL**





a.
            Alvarion
                Ltd. together with its worldwide subsidiaries ("the Company") is
                a
                provider of wireless broadband systems. The Company mainly focuses
                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 12.





b.
            Alvarion
                Ltd. has wholly-owned active subsidiaries in the United States, France,
                Romania, Brazil, Hong-Kong, Singapore, Japan, Mexico, Poland, Israel,
                Uruguay, Spain, UK, Singapore, South-Africa and Philippines primarily
                engaged in marketing, pre-sales, sales and developing
                activities.





c.
            Discontinued
                operations of the Cellular Mobile Unit
                ("CMU"):





On
      November 21, 2006, the Company signed an agreement to sell substantially all
      of
      the assets and certain liabilities related to its CMU, representing the majority
      of former interWAVE Communications International Ltd ("interWAVE") business,
      to
      LGC Wireless Inc ("LGC"), a privately held U.S. company, pursuant to the terms
      of which LGC issued to Alvarion Promissory Notes ("the Promissory Notes") in
      the
      amount of $ 7,920 and a Convertible Note ("the Convertible Note", and
      together with the Promissory Note, "the Notes")  in
      the
      amount of $ 6,930. The CMU was a separate reporting unit of the Company
      which focused on development and production of compact cellular GSM and CDMA
      networks.





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





The
      parties 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.





For
      the
      year ended December 31, 2006, the transaction was treated as a non-monetary
      transaction and the Notes were recorded at their fair value, which was
      $ 6,868 which was less than their face value.




F-9


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


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





The
      transaction was accounted for as a 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, 2006 are presented
      separately in the Company's balance sheets as assets and liabilities from
      discontinued operations. 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 all periods
      presented. No additional cash flows are expected.





Assets
      and liabilities of the discontinued segment:




**December
                31,****2006**
            
            **2007**Assets
                relating to discontinued segment:Trade
                and other receivables
            
            $
            61
            
            $
            -Inventories
            
            
            3,860
            
            
            -$
            3,921
            
            $
            -





Liabilities
                relating to discontinued segment:Trade
                payables
            
            $
            58
            
            $
            -Other
                payables and accrued liabilities
            
            
            7,297
            
            
            -$
            7,355
            
            $
            -





In
      September, 2007 the Company converted the convertible notes to LGC common
      shares. On November 30, 2007, ADC Telecommunication Inc. ("ADC"), a U.S.
      publicly traded company,  completed
      its acquisition of LGC. As of December 31, 2007, the Company received
      approximately $7.3 million in respect of the common shares of LGC while an
      additional $1 million has been secured for 12 months in escrow. Following the
      acquisition, the promissory note became due. As a result of these transactions,
      the Company recorded approximately $8.3 million as "other income".





Results
      of operations of the discontinued segment:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Revenues
                (*)
            
            $
            18,788
            
            $
            24,840
            
            $
            9,675Operating
                expenses (*)
            
            
            35,832
            
            
            32,491
            
            
            4,262Impairment
                of goodwill (Note 2k)
            
            
            -
            
            
            23,378
            
            
            -Loss
                from disposal of discontinued operation
            
            
            -
            
            
            5,138
            
            
            -Net
                results
            
            $
            (17,044
            )
            $
            (36,167
            )
            $
            5,413





(*)
            In
                2007, the Company collected amounts in reference to the former sale
                of CMU
                equipment and services which occurred before the sale of the
                CMU.




F-10




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**


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





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, most
      of
      the Company's costs are denominated and determined in dollars and in Israel
      shekels. 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.





d.
            Cash
                equivalents:





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





e.
            Short-term
                bank deposits:





Bank
      deposits with maturities of more than three months and up to one year were
      included in short-term bank deposits. As of December 31, 2006, most of the
      bank
      deposits were in U.S. dollars and bore interest at a weighted average interest
      rate of 5.45%. The deposits are presented at their cost, including accrued
      interest. As of December 31, 2007, the Company did not have short term bank
      deposits.




F-12




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**


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





f.
            Marketable
                securities:





The
      Company accounts for its investments in marketable securities using Statement
      of
      Financial Accounting Standard No. 115, "Accounting for Certain Investments
      in
      Debt and Equity Securities" ("SFAS No. 115").





Management
      determines the appropriate classification of its investments in debt securities
      at the time of purchase and reevaluates such determinations at each balance
      sheet date. Marketable debt securities are classified as held-to-maturity since
      the Company has the positive intent and ability to hold the securities to
      maturity and are stated at amortized cost.





In
      the
      years ended December 31, 2006 and 2007, all securities covered by SFAS No.
      115
      were designated by the Company's management as held-to-maturity.





The
      amortized cost of held-to-maturity securities is adjusted for amortization
      of
      premiums and accretion of discounts to maturity. Such amortization and interest
      are included in the statements of operations as financial income or expenses,
      as
      appropriate. Realized gains and losses on sales of investments, as determined
      on
      a specific identification basis, if any, are included in the statements of
      operations.





g.
            Inventories:





Inventories
      are stated at the lower of cost or market value. Cost is determined as
      follows:





Raw
      materials and components - using the "weighted moving average cost" method.





Work
      in
      progress and finished products is based on the cost of raw materials and
      components used and the cost of production as follows:





Labor
      and
      overhead calculated on a periodic average basis, which approximates actual
      cost
      including direct and indirect manufacturing costs and related
      overhead.





Inventory
      write-offs have been provided to cover risks arising from dead and slow moving
      items, technological obsolescence and excess inventories according to revenue
      forecasts.





During
      2005, 2006 and 2007, the Company recorded inventories write-offs for inventory
      no longer required and provision for inventory purchase commitments in a total
      amount of $ 7,338, $ 9,472 and $ 4,762, 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
      $ 2,587 and $ 926 as of December 31, 2006 and 2007,
      respectively.





In
      2005,
      2006 and 2007, approximately $ 4,218, $ 3,594 and $ 2,923, 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.




F-13




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**




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





h.
            Long-term
                receivables:





The
      long-term promissory notes received in consideration with the CMU net assets
      sale carry extended payment terms. Accordingly, during 2006 the promissory
      notes
      were recorded at estimated present values that were determined based on
      appropriate interest rates and were reported at their net amount, which was
      less
      than their face value.





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 2005, 2006
      and 2007, no impairment losses were identified.





k.
            Goodwill
                and other intangible assets:





Goodwill
      and certain other purchased intangible assets have been recorded as a result
      of
      acquisitions. Goodwill represents the excess of the purchase price in a business
      combination over the fair value of net tangible and intangible assets acquired.
      Goodwill is not amortized, but rather is subject to an annual impairment test.
      The Company performs an annual impairment test during the third quarter of
      each
      fiscal year, or more frequently if impairment indicators are present. As of
      December 31, 2007 the Company operates in one operating segment, and this
      segment comprises its only reporting unit. Intangible assets that are not
      considered to have an indefinite useful life are amortized using the
      straight-line basis over their estimated useful lives, which range from 3.75
      to
      7.75 years. The carrying amount of these assets is reviewed whenever events
      or
      changes in circumstances indicate that the carrying value of an asset may not
      be
      recoverable. Recoverability of these assets is measured by comparison of the
      carrying amount of the asset to the future undiscounted cash flows the asset
      is
      expected to generate. If the asset is considered to be impaired, the amount
      of
      any impairment is measured as the difference between the carrying value and
      the
      fair value of the impaired asset.




F-14


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


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





During
      the second quarter of 2006, the Company identified circumstances that required
      the reassessment of the recoverability of the various assets associated with
      its
      CMU unit, as required in SFAS 142. Management conducted an impairment analysis
      of goodwill and other intangibles. Based on a fair valuation, an impairment
      charge of goodwill in the amount of $ 23,378 was recorded. In addition, as
      a result of the CMU sale (refer to Note 1c), the Company wrote off additional
      amount of $ 4,766 related to the CMU goodwill.





As
      of the
      year ended December 31, 2007, no impairment losses were identified.





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.





In
      June
      2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes-an
      interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
      accounting for uncertainty in income taxes recognized under SFAS No. 109.
      FIN 48 prescribes a recognition threshold and measurement attribute for
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return and also provides guidance on various
      related matters such as derecognition, interest and penalties, and disclosure.
      On January 1, 2007, the Company adopted FIN 48. The initial application of
      FIN 48 to the Company's tax positions had no effect on the Company's
      Shareholders' Equity.





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).




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.)**





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 years ended December 31, 2006 and as of December 31, 2007,
      include: (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.





The
      following table illustrates the effect on net loss and loss 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 for the year ended
      December 31, 2005. 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,****2005**Net
                loss as reported
            
            $
            (12,618
            )Add:
                stock-based compensation expenses included in the reported net
                loss
            
            
            563Deduct:
                Total stock-based compensation expenses determined under fair value
                based
                method for all awards
            
            
            *)
                (15,749
            )Pro
                forma net loss
            
            $
            (27,804
            )Loss
                per shareBasic
                net loss per share- as reported
            
            $
            (0.22
            )Basic
                net loss per share - pro forma
            
            $
            (0.47
            )Diluted
                net loss per share- as reported
            
            $
            (0.20
            )Diluted
                net loss per share - pro forma
            
            $
            (0.44
            )





*)
            On
                December 28, 2005, the Company accelerated the vesting of 1,834,452
                options with a fair value amounting $ 5,224, see also Note
                10d.





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,****2005**Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            55
            %Risk-free
                interest rate
            
            
            4.4
            %Expected
                life (years)
            
            
            3




F-16


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





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





The
      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.





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**
            
            **2007**Volatility
            
            
            54
            %
            
            51.8
            %Risk-free
                interest rate
            
            
            4.9
            %
            
            4.3
            %Dividend
                yield
            
            
            0
            %
            
            0
            %Forfeiture
                rate
            
            
            12
            %
            
            12
            %Expected
                life
            
            
            4
                years
            
            
            4
                years





The
      Company's aggregate compensation cost for the years ended December 31, 2006
      and
      2007 totaled $ 6,898 ($ 6,450 related to continued operations) and
      $ 7,424, respectively.





The
      total
      equity-based compensation expense related to all of the Company's equity-based
      awards, recognized for the years ended December 31, 2006 and 2007, was comprised
      as follows:





**Year
                ended**
              **December
                31,****2006**
            
            **2007**Cost
                of goods sold
            
            $
            486
            
            $
            583Research
                and development
            
            
            1,408
            
            
            1,848Sales
                and marketing
            
            
            1,418
            
            
            1,696General
                and administrative
            
            
            3,138
            
            
            3,297Equity-based
                compensation expense related to continuing operations
            
            $
            6,450
            
            $
            7,424Equity-based
                compensation expense related to discontinued operations
            
            $
            448
            
            $
            -Total
                equity-based compensation expense
            
            $
            6,898
            
            $
            7,424





F-17


**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**




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





For
      the
      year ended December 31, 2006, basic and diluted net equity-based compensation
      expense per share of common stock was $0.11.





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.





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,****2005**
            
            **2006**
            
            **2007**Balance
                at the beginning of the year
            
            $
            6,173
            
            $
            5,330
            
            $
            4,106Warranties
                issued during the year
            
            
            3,900
            
            
            4,734
            
            
            5,548Settlements
                made during the year
            
            
            (4,743
            )
            
            (5,958
            )
            
            (5,359
            )$
            5,330
            
            $
            4,106
            
            $
            4,295




F-18




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**




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





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.





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, 2005, 2006 and 2007, were
      $2,886, $3,162 and $4,647, respectively.





s.
            Advertising
                expenses:





Advertising
      expenses are carried to the statement of operations as incurred. Advertising
      expenses for the years ended December 31, 2005, 2006 and 2007, were $680, $1,188
      and $1,427, 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 Accounting Standard No. 128, "Earnings Per Share" ("SFAS No.
      128").





The
      total
      weighted average number of shares related to the outstanding options excluded
      from the calculations of diluted net earning (loss) per share due to their
      anti-dilutive effect was 5,130,689, 11,244,000 and 6,293,918 for the years
      ended
      December 31, 2005, 2006 and 2007, respectively.




F-19


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




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





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,
      marketable debt securities, trade receivables and long-term note.





The
      majority of the Company's cash and cash equivalents and short-term bank deposits
      are invested in U.S. dollar deposits with major U.S., European and Israeli
      banks. Deposits in the U.S. may be in excess of insured limits and are not
      insured in other jurisdictions. Management believes that the financial
      institutions that hold the Company's investments are financially sound and
      accordingly, minimal credit risk exists with respect to these
      investments.





The
      Company's marketable securities include investments in debentures of U.S.
      corporations 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.





As
      a
      result of the recent turmoil in capital markets the Company tightened its
      control and monitoring over its marketable securities portfolio in order to
      minimize potential risks stemming from current capital markets environment.
      Such
      measures included among the others: the Company's investment policy approved
      by
      the Investment Committee, limits the amount the Company may invest in any one
      type of investment or issuer and the grade of the security, thereby reducing
      credit risk concentrations.





The
      trade
      receivables of the Company and its subsidiaries are derived from sales to
      customers located primarily in North and South America, Asia Pacific, Africa
      and
      Europe. However, under certain circumstances, the Company and its subsidiaries
      may require letters of credit, other collateral, additional guarantees or
      advance payments. Regarding certain credit balances, the Company is covered
      by
      foreign trade risk insurance. The Company and its subsidiaries perform ongoing
      credit evaluations of their customers and, to date, have not experienced
      material losses.





Allowance
      for doubtful accounts amounted to $ 1,236 and $ 567 as of December 31, 2006
      and
      2007, respectively. The Company charges off receivables when they are deemed
      uncollectible. Actual collection experience may not meet expectations and may
      result in increased bad debt expense. Doubtful debt expense (income) amounted
      to
      $1,134, $186 and $112 in 2005, 2006 and 2007, respectively. Total write offs
      during 2005, 2006 and 2007 amounted to $ (838), $ (206) and $ (781),
      respectively.





As
      for
      derivative financial instruments, see Note 2w.




F-20


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


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





v.
            Fair
                value of financial instruments:





The
      estimated fair value of financial instruments has been determined by the Company
      using available market information and valuation methodologies. Considerable
      judgment is required in estimating fair values. Accordingly, the estimates
      may
      not be indicative of the amounts the Company could realize in a current market
      exchange.





The
      carrying amounts of cash and cash equivalents, short-term bank deposits, trade
      receivables and trade payables approximate their fair values, due to the
      short-term maturities of these instruments.





The
      fair
      value of marketable debt securities are based on quoted market prices and do
      not
      significantly differ from carrying amount (see Note 3).





The
      fair
      value of long-term note, 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 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:





Statement
      of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
      and Hedging Activities" ("SFAS No. 133"), requires companies to recognize all
      of
      its derivative instruments as either assets or liabilities in the statement
      of
      financial position at fair value.





For
      those
      derivative instruments that are designated and qualify as hedging instruments,
      a
      company must designate the hedging instrument, based upon the exposure being
      hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment
      in
      a foreign operation.





For
      derivative instruments that are designated and qualify as a cash flow hedge
      (i.e., hedging the exposure to variability in expected future cash flows that
      is
      attributable to a particular risk), the effective portion of the gain or loss
      on
      the derivative instrument is reported as a component of other comprehensive
      income and reclassified into earnings in the same period or periods during
      which
      the hedged transaction affects earnings. The remaining gain or loss on the
      derivative instrument in excess of the cumulative change in the present value
      of
      future cash flows of the hedged item, if any, is recognized in current earnings
      during the period of change. For derivative instruments not designated as
      hedging instruments, the gain or loss is recognized in current earnings during
      the period of change.




F-21


**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.)**





Cash
      flow
      hedging strategy - To hedge against the risk of overall changes in cash flows
      resulting from foreign currency trade payables and salary payments during the
      year, the Company has instituted a foreign currency cash flow hedging program.
      The Company hedges portions of its forecasted expenses denominated in NIS with
      currency forwards and options. These 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.





As
      of
      December 31, 2007, the Company recorded accumulated other comprehensive income
      in the amount of $ 1,264 from its currency forward and option transactions
      with
      respect mainly to trade payables and payroll expenses expected to be incurred
      during 2008. Such amount will be recorded into earnings during
      2008.





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
      September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
      No. 157, "Fair Value Measurements" ("SFAS No. 157"). This Standard defines
      fair value, establishes a framework for measuring fair value in generally
      accepted accounting principles and expands disclosures about fair value
      measurements. The provisions of SFAS No. 157 are effective for the
      Company beginning January 1, 2008. The FASB issued a FASB Staff Position
      (FSP 157-2) to defer the effective date of SFAS No. 157 for one year for all
      nonfinancial assets and nonfinancial liabilities, except for those items that
      are recognized or disclosed at fair value in the financial statements on a
      recurring basis. The Company does not expect the adoption of
      SFAS No. 157 will have material impact on its consolidated financial
      statements.




F-22




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


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





In
      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 companies to choose to measure certain financial
      instruments and other items at fair value. The standard requires that unrealized
      gains and losses are reported in earnings for items chosen to be measured using
      the fair value option. SFAS No. 159 is effective for the Company
      beginning in the first quarter of fiscal year 2008. The adoption of
      SFAS No. 159 will not have an impact on its consolidated financial
      statements.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
      Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
      requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, any non
      controlling interest in the acquiree and the goodwill acquired. SFAS 141R
      also establishes disclosure requirements to enable the evaluation of the nature
      and financial effects of the business combination. SFAS 141R is effective
      for fiscal years beginning after December 15, 2008. Earlier adoption is
      prohibited. The adoption of SFAS 141R might have a material effect if and when
      the Company enters into a business combination after December 31,
      2008.





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




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





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




F-23


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




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





aa.
            Investment
                in affiliates:





The
      Company accounts for its investment in affiliate using the cost method of
      accounting since the Company does not have the ability to exercise significant
      influence over operating and financial policies of this company in accordance
      with the requirements of Accounting Principle Board ("APB") No. 18, "The Equity
      Method of Accounting for Investments in Common Stock".





The
      Company's investments are reviewed for impairment whenever events or changes
      in
      circumstances indicate that the carrying amount of the investment may not be
      recoverable, in accordance with APB No. 18. As of December 31, 2007, based
      on management's most recent analyses, no impairment losses have been
      identified.


**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, 2007:Maturing
                within one year:US
                Government agencies
            
            $
            6,088
            
            $
            14
            
            $
            -
            
            $
            6,102Corporate
                bonds
            
            
            37,243
            
            
            34
            
            
            (2
            )
            
            37,27543,331
            
            
            48
            
            
            (2
            )
            
            43,377Maturing
                over one year:US
                Government agencies
            
            
            5,944
            
            
            118
            
            
            -
            
            
            6,062Corporate
                bonds
            
            
            37,512
            
            
            307
            
            
            -
            
            
            37,81943,456
            
            
            425
            
            
            -
            
            
            43,881$
            86,787
            
            $
            473
            
            $
            (2
            )
            $
            87,258December
                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




F-24


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




**NOTE
                3:-**
            **MARKETABLE
                SECURITIES (Cont.)**





As
      of
      December 31, 2006 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 and
      2007.





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





**December
                31,****2006**
            
            **2007**Government
                authorities
            
            $
            3,226
            
            $
            4,174Deposits
                and derivatives
            
            
            616
            
            
            1,599Prepaid
                expenses
            
            
            730
            
            
            1,014Employees
                and others
            
            
            1,034
            
            
            808Notes
                (see also Note 1c)
            
            
            5,038
            
            
            8,655$
            10,644
            
            $
            16,250





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


Raw
                materials and components
            
            $
            6,603
            
            $
            11,930Work
                in progress
            
            
            8,853
            
            
            12,765Finished
                products
            
            
            15,083
            
            
            18,051$
            30,539
            
            $
            42,746





See
      also
      Note 2g.




F-25




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




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






**December
                31,****2006**
            
            **2007**Cost:Office
                furniture and equipment
            
            $
            2,098
            
            $
            2,183Computers
                and manufacturing equipment
            
            
            32,100
            
            
            37,117Motor
                vehicles
            
            
            377
            
            
            328Leasehold
                improvements
            
            
            3,142
            
            
            4,21537,717
            
            
            43,843Accumulated
                depreciation:Office
                furniture and equipment
            
            
            1,044
            
            
            1,020Computers
                and manufacturing equipment
            
            
            24,339
            
            
            27,253Motor
                vehicles
            
            
            207
            
            
            170Leasehold
                improvements
            
            
            1,748
            
            
            2,32227,338
            
            
            30,765Depreciated
                cost
            
            $
            10,379
            
            $
            13,078





Depreciation
      expenses for the years ended December 31, 2005, 2006 and 2007 amounted to $
      4,094, $ 4,926 and $ 4,232, respectively.





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




**December
                31,****2006**
            
            **2007**Cost:Current
                technology
            
            $
            17,871
            
            $
            17,871Customer
                relations
            
            
            500
            
            
            50018,371
            
            
            18,371Accumulated
                amortization:Current
                technology
            
            
            13,734
            
            
            16,278Customer
                relations
            
            
            500
            
            
            50014,234
            
            
            16,778Amortized
                cost
            
            $
            4,137
            
            $
            1,593





Current
      technology amortization expenses amounted to $2,543 for each of the years ended
      December 31, 2005, 2006 and 2007.





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




F-26


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


**NOTE
      7:-**  **INTANGIBLE
      ASSETS, NET (Cont.)**





Estimated
      amortization expenses for the years ended:





**Amortization****Year
                ended December 31,**
            
            **expenses**2008
            
            $
            1,3312009
            
            $
            1312010
            
            $
            131




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





**December
                31,****2006**
            
            **2007**Employees
                and payroll accruals
            
            $
            11,545
            
            $
            14,916Service
                providers and consultants
            
            
            5,359
            
            
            5,598Accrued
                expenses
            
            
            971
            
            
            2,961Royalties
            
            
            1,071
            
            
            1,529Warranty
                provision *)
            
            
            4,106
            
            
            4,295Advances
                from customers
            
            
            10,759
            
            
            16,956Provision
                for agent commissions
            
            
            4,496
            
            
            3,583Others
            
            
            2,239
            
            
            2,419$
            40,546
            
            $
            52,257


*)
            See
                Note 2o.





**NOTE
      9:-**  **COMMITMENTS
      AND CONTINGENT LIABILITIES**





a.
            Premises
                occupied by the Company are leased under various lease agreements.
                The
                lease agreements for these premises will expire in 2011.





The
      Company has leased various motor vehicles under operating lease agreements.
      These leases expire in fiscal year 2010.





Future
      minimum rental payments under such leases for the year ending December 31,
      2007 are as follows:





**Rental
                of**
              **premises**
            
            **Lease
                of motor vehicles**2008
            
            $
            5,314
            
            $
            2,2862009
            
            
            4,614
            
            
            1,2852010
            
            
            4,310
            
            
            3582011
            
            
            1,047
            
            
            -$
            15,285
            
            $
            3,929




F-27


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


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





Total
      rental expenses for the years ended December 31, 2005, 2006 and 2007, were
      $4,590, $5,129 and $5,408, respectively. Motor vehicle leasing expenses for
      the
      years ended December 31, 2005, 2006 and 2007, were $2,170, $2,295 and $2,766,
      respectively.





b.
            Litigation:





On
      November 21, 2001, a purported Class Action (the "Action") lawsuit was filed
      against interWAVE, certain of its former officers and directors, and certain
      of
      the underwriters for interWAVE's initial public offering ("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. In 2004, a
      stipulation of Settlement (the "Settlement") was submitted to the Court and
      in
      2005, the Court granted preliminary approval. Under the Settlement, interWAVE
      would have been dismissed of all claims in exchange for a contingent payment
      guarantee by the insurance companies responsible for insuring interWAVE as
      an
      issuer. Class certification was a condition of the Settlement. After the Second
      Circuit Court of Appeals issued a ruling overturning class certification in
      six
      test cases for the coordinated proceedings, the Settlement was terminated in
      June 2007 by stipulation of the parties to the Settlement and order of the
      Court. Plaintiffs have filed amended master allegations and amended complaints
      in the six test cases, which the defendants in those cases have moved to
      dismiss. Plaintiffs have also moved for class certification in the six test
      cases, which the defendants in those cases have opposed. On March 26, 2008,
      the
      Court denied the defendants’ motion to dismiss the amended complaints. It is
      uncertain whether there will be any revised or future settlement. If no
      settlement is achieved, the Company believes that it has meritorious defenses
      and intends to defend the Action vigorously. However, the litigation results
      cannot be predicted at this point.





On
      January 19, 2007 and February 2, 2007, purported securities class action
      lawsuits were filed in the United States District Court for the Northern
      District of California, and on February 13, 2007 and March 9,
      2007, purported securities class action lawsuits were filed in the
      United States District Court for the Southern District of New York (one of
      which
      was subsequently dismissed voluntarily by the plaintiff). The four
      complaints were substantially identical. Each complaint named as defendants
      the
      Company and certain of its current and former officers and directors. Each
      complaint generally alleged violations of certain U.S. federal securities laws
      and sought unspecified damages on behalf of a class of purchasers of Alvarion
      common stock between November 3, 2004 and May 12, 2006. The plaintiffs 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 Exchange Act and Rule 10b-5 promulgated thereunder.  On
      May 4, 2007, the two New York lawsuits were transferred to California. On April
      9, 2007, three separate groups of plaintiffs filed motions with the California
      court, requesting appointment as lead plaintiff. On September 20, 2007, the
      Second Court consolidated the lawsuits into one matter, and on October 30,
      2007,
      the Second Court appointed two lead plaintiffs to represent the alleged class.
      On January 23, 2008, the parties filed a stipulated request for dismissal of
      the
      lawsuit, which the Second Circuit approved on January 24, 2008.




F-28




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**





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





The
      court-approved dismissal terminated this consolidated securities class action
      lawsuit. Pursuant to the dismissal stipulation, each side will bear its own
      costs





c.
            As
                of December 31, 2007, the Company obtained bank guarantees in the
                total
                amount of approximately $4,756, in favor of vendors, customers, lessors
                and Government authorities.





d.
            Royalties:





The
      Company participated in programs sponsored by the Office of the Chief Scientist
      ("OCS") of the Israeli Government for the support of research and development
      activities. 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% of the amount granted
      by
      the OCS. The obligation to pay these royalties is contingent upon actual sales
      of the products, and in the absence of such sales, no payment is
      required.





During
      2007, the Company paid or accrued royalties to the OCS in the amount of $ 434
      that were recorded in the cost of revenues. As of December 31, 2007, the
      aggregate contingent liability to the OCS amounted to $5,266.





**NOTE
          10:-** **SHARE
          CAPITAL**





a.
            The
                Company's shares are listed for trading on the NASDAQ National Market
                and
                on the Tel-Aviv Stock Exchange.





b.
            Shareholders'
                rights:





The
      Ordinary shares confer upon the holders rights to receive notice to participate
      and vote in general meetings of the Company, to receive dividends, if and when
      declared and to receive, upon liquidation, a pro rata share of any remaining
      assets.





c.
            Treasury
                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 will not exceed
      $9,000.





As
      of
      December 31, 2007, the Company purchased 3,796,773 shares at a weighted average
      price per share of approximately $2.07 per share. No purchases occurred during
      2007.




F-29




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**





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





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.





The
      Company has six stock option plans under which 29,003,550 Ordinary shares were
      reserved for issuance. As of December 31, 2007, 2,807,482 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, 2007, options to purchase 3,494,189 of the Ordinary shares
      were
      outstanding under the 2006 Plan.




F-30


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




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





A
      summary
      of option activity under the Company's stock option plans as of December 31,
      2007 and changes during year than ended are as follows:





**Year
                ended December 31,****2007**
            
            **2006**
            
            **2005****Amount
                of options**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Aggregate
                intrinsic value**
            
            **Amount
                of options**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Aggregate
                intrinsic value**
            
            **Amount
                of options**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Aggregate
                intrinsic value**Options
                outstanding at beginning of year
            
            
            10,420,697
            
            $
            8.27
            
            
            
            
            
            12,099,033
            
            $
            7.69
            
            
            
            
            
            12,756,127
            
            $
            7.55Changes
                during the year:Granted
            
            
            2,772,930
            
            $
            9.07
            
            
            
            
            
            1,748,767
            
            $
            7.02
            
            
            
            
            
            1,641,732
            
            $
            9.46Exercised
            
            
            (1,420,046
            )
            $
            2.88
            
            $
            10,923
            
            
            (2,228,219
            )
            $
            2.25
            
            $
            13,827
            
            
            (1,447,763
            )
            $
            2.44
            
            $
            10,481Forfeited
                or cancelled
            
            
            (1,158,299
            )
            $
            12.44
            
            
            
            
            
            (1,198,884
            )
            $
            11.80
            
            
            
            
            
            (851,063
            )
            $
            17.86Options
                outstanding at end of year
            
            
            10,615,282
            
            $
            8.74
            
            $
            21,809
            
            
            10,420,697
            
            $
            8.27
            
            $
            15,941
            
            
            12,099,033
            
            $
            7.69
            
            $
            36,862Options
                exercisable at end of year
            
            
            5,743,690
            
            $
            8.56
            
            $
            15,294
            
            
            6,174,178
            
            $
            7.53
            
            $
            13,902
            
            
            7,945,085
            
            $
            6.46
            
            $
            32,836




F-31


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





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





The
      weighted-average grant-date fair value of options granted during the year ended
      December 31, 2007 was $4.55. The
      weighted-average fair value of the options vested during the year ended December
      31, 2007 was $ 11.33.
      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 2007 and the exercise price, multiplied by the number
      of
      in-the-money options) that would have been received by the option holders had
      all option holders exercised their options on December 31, 2007. This amount
      changes based on the fair market value of the Company's shares.





As
      of
      December 31, 2007, there was $17,351 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 2.91 years.





The
      options outstanding as of December 31, 2007, have been separated into ranges
      of
      exercise prices, as follows:




**Exercise
                price**
              **(range)**
            
            **Options
                outstanding**
              **as
                of**
              **December
                31, 2007**
            
            **Weighted**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Options
                exercisable**
              **as
                of**
              **December
                31, 2007**
            
            **Remaining
                contractual life (years for exercisable options**
            
            **Weighted**
              **average**
              **exercise**
              **price**$0.0026
            
            
            259,220
            
            
            4.43
            
            $
            0.0026
            
            
            27,583
            
            
            0.89
            
            $
            0.0024$1.058-1.27
            
            
            93,545
            
            
            2.17
            
            $
            1.26
            
            
            93,545
            
            
            2.17
            
            $
            1.26$1.90-2.74
            
            
            1,605,793
            
            
            4.63
            
            $
            2.13
            
            
            1,583,293
            
            
            4.62
            
            $
            2.13$4.60-6.63
            
            
            895,072
            
            
            4.68
            
            $
            5.76
            
            
            604,548
            
            
            4.71
            
            $
            5.80$7.02-10.30
            
            
            3,751,233
            
            
            6.07
            
            $
            8.67
            
            
            531,293
            
            
            6.81
            
            $
            8.85$10.66-15.40
            
            
            3,998,656
            
            
            6.15
            
            $
            12.67
            
            
            2,891,665
            
            
            6.01
            
            $
            12.64$16.26-16.94
            
            
            1,441
            
            
            3.76
            
            $
            16.81
            
            
            1,441
            
            
            3.76
            
            $
            16.81$24.18-35.04
            
            
            8,746
            
            
            2.66
            
            $
            34.55
            
            
            8,746
            
            
            2.66
            
            $
            34.55$50.37-528.87
            
            
            1,576
            
            
            1.10
            
            $
            374.84
            
            
            1,576
            
            
            1.10
            
            $
            374.8410,615,282
            
            
            
            
            
            
            
            
            5,743,690





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).





e
            Dividends:





In
      the
      event that cash dividends are declared in the future, such dividends will be
      paid in NIS. The Company's Board of Directors has determined that tax exempt
      income if any, will not be distributed as dividends.




F-32




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**




**NOTE
          11:-** **TAXES
          ON INCOME**





Income
      derived by Alvarion Ltd. is generally subject to the regular Israeli corporate
      tax rate of 29%. 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 1997, Alvarion
      Ltd's production facility in Nazareth was granted status as an "Approved
      Enterprise". Accordingly, Alvarion Ltd's income from that "Approved Enterprise"
      will be tax-exempt for a period of 10 years. The 10-year period of benefits
      will
      commence with the first year in which Alvarion Ltd. earns taxable
      income.





During
      2000, Alvarion Ltd's expansion request for its third "Approved Enterprise"
      regarding its production facilities in Migdal Haemek was approved. The income
      derived from this "Approved Enterprise" will be tax-exempt for 10 years period
      commencing in first year Alvarion Ltd. earns taxable income.





The
      duration of tax benefits is subject to limits of the earlier of 12 years from
      the commencement of production, or 14 years from receiving the approval. The
      period of benefits for the plans has not yet commenced, and will expire in
      2009
      and 2012, respectively.





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





Floware
      Ltd. was granted "Approved Enterprise" status for its 1997 plan regarding the
      production facility in Or-Yehuda. After the merger, the operations were
      relocated to Alvarion's facilities in Tel-Aviv. The income derived from this
      "Approved Enterprise" will be tax-exempt for a period of two years and will
      enjoy a reduced tax rate thereafter of 10% - 25% for an additional period of
      five to eight years (depending on the percentage of foreign investment in the
      Company). The period of benefits will commence with the first year in which
      Alvarion Ltd. earns taxable income.





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





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.




F-33




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**





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





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, 2007, the accumulated deficit of the Company
      does not include tax-exempt profits earned by the Company's "Approved
      Enterprise".





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





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





Under
      the
      Amendment, in 2005 and 2007, Alvarion Ltd. submitted an expansion requests
      for
      additional "Approved Enterprise" approval regarding its production facilities.
      A
      portion of the income derived from this "Approved Enterprise" will be tax-exempt
      for a period of 10 years and the rest will be taxed at a reduced rate of 10%
      to
      25% (depending on the percentage of foreign investment in the Company). The
      10-year period of benefits will commence with the first year in which Alvarion
      Ltd. earns taxable income.





Alvarion
      Ltd. has had no taxable income since inception and does not have any profit
      under Approved Enterprise.





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





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




F-34




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**





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





c.
            Income
                (loss) from continuing operations:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Domestic
            
            $
            (6,632
            )
            $
            4,693
            
            $
            (1,192
            )Foreign
            
            
            11,058
            
            
            (9,277
            )
            
            8,320$
            4,426
            
            $
            (4,584
            )
            $
            7,128





The
      loss
      and income from discontinued operations for the years ended 2005, 2006 and
      2007
      substantially attributable to foreign sources.





d.
            Carryforward
                losses:





As
      of
      December 31, 2007, Alvarion Ltd. had an available tax loss carryforward
      amounting to approximately $140,000, which may be carried forward, in order
      to
      offset taxable income in the future, for an indefinite period.





As
      of
      December 31, 2007, the state and the federal tax losses carryforward of the
      U.S.
      subsidiaries amounted to approximately $29,000 and $38,000, respectively. Such
      losses are available to be offset against any future U.S. taxable income of
      the
      U.S. subsidiary and will expire in 2017 and 2027, respectively.





The
      state
      and federal loss carryforwards per the income tax returns filed included
      uncertain tax positions taken in prior years.  Due to application of
      FIN 48, they are larger than the net operating loss deferred tax asset
      recognized for financial statement purposes.





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





e.
            Reduction
                in corporate tax rate:





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





Inter
      alia, the Income Tax Amendment provides for a gradual reduction in the statutory
      corporate tax rate in the following manner: in 2007 the tax rate was 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%.




F-35




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**


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





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,****2006**
            
            **2007**Tax
                assets in respect of:Allowance
                for doubtful accounts
            
            $
            308
            
            $
            151Accrued
                severance pay and accrued vacation pay
            
            
            1,136
            
            
            1,162Other
                deductions for tax purposes
            
            
            12,585
            
            
            9,723Net
                loss carryforward
            
            
            59,525
            
            
            51,015Total
                deferred tax assets before valuation allowance
            
            
            73,554
            
            
            62,051Valuation
                allowance
            
            
            (73,554
            )
            
            (62,051
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -





The
      main
      reconciling item between the statutory tax rate of the Company and the effective
      tax rate are the non-recognition of tax benefits resulted from the Company’s
      accumulated net operating losses carryforward due to the uncertainty of the
      realization of such tax benefits.





g.
            The
                Company adopted the provisions of FIN 48 on January 1, 2007. Prior
                to 2007
                the Company used the provisions of SFAS 5 to determine tax contingencies.
                As of January 1, 2007 there was no difference between the provision
                under
                FIN 48 therefore there was no effect on the Company's shareholders
                equity
                upon the Company's adoption of FIN 48.





A
      reconciliation of the beginning and ending amount of unrecognized tax benefits
      is as follows:





Gross
                unrecognized tax benefits as of January 1, 2007
            
            $
            1,598Increase
                in tax position for current year
            
            
            431Gross
                unrecognized tax benefits as of December 31, 2007
            
            $
            2,029





The
      Company recognizes interest and penalties related to unrecognized tax benefits
      in financial expenses and general and administrative expenses, respectively.
      During the year ended December 31, 2007, the Company recorded $285 for interest
      and penalties expenses related to uncertain tax positions. The liability for
      unrecognized tax benefits included accrued interest and penalties of $492 and
      $207 at December 31, 2007 and January 1, 2007,
      respectively.




F-36




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**


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





The
      Company and its subsidiaries file income tax returns in Israel, USA and other
      foreign jurisdictions. With respect to Alvarion Ltd., the Israeli Tax
      Authorities had never examined the Company’s tax returns, nevertheless the tax
      returns until 2002 tax year (including 2002 tax returns) are deemed to be
      approved. The last examination conducted and finalized by U.S. tax authorities
      was in respect to the Company's U.S. federal income tax return for 2004. With
      respect to other Company’s subsidiaries, the Company has not had a tax audit on
      their behalf.




**NOTE
          12:-** **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, 2005, 2006
      and 2007:




**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007****Total
                revenues**
            
            **Total
                revenues**
            
            **Total
                revenues**Israel
            
            $
            1,271
            
            $
            863
            
            $
            861United
                States (including Canada)
            
            
            29,564
            
            
            25,047
            
            
            32,767Europe
                (without Russia, Romania, Italy and Spain)
            
            
            40,341
            
            
            39,903
            
            
            57,985Russia
            
            
            11,278
            
            
            9,517
            
            
            10,277Romania
            
            
            6,628
            
            
            13,438
            
            
            10,114Italy
            
            
            6,565
            
            
            10,771
            
            
            13,269Spain
            
            
            10,678
            
            
            14,563
            
            
            13,767Latin
                America (without Mexico)
            
            
            18,156
            
            
            22,834
            
            
            42,325Mexico
            
            
            14,790
            
            
            8,023
            
            
            8,657Africa
            
            
            25,924
            
            
            22,904
            
            
            26,609Asia
            
            
            11,732
            
            
            13,731
            
            
            19,942$
            176,927
            
            $
            181,594
            
            $
            236,573




F-37




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**




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





a.
            Research
                and development:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Research
                and development costs
            
            $
            32,772
            
            $
            42,042
            
            $
            54,967Less
                - grants
            
            
            3,062
            
            
            3,235
            
            
            3,578$
            29,710
            
            $
            38,807
            
            $
            51,389





b.
            Financial
                income, net:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Financial
                income:Interest
                and others
            
            $
            3,161
            
            $
            4,026
            
            $
            6,019Foreign
                currency transaction differences
            
            
            (42
            )
            
            309
            
            
            9093,119
            
            
            4,335
            
            
            6,928Financial
                expenses:Interest
                and bank expenses
            
            
            (568
            )
            
            (539
            )
            
            (475
            )$
            2,551
            
            $
            3,796
            
            $
            6,453




F-38




**ALVARION
      LTD. AND ITS SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands, except share and per share data**





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





c.
            Net
                earnings (loss) per share:





The
      following table sets forth the computation of basic and diluted net earnings
      (loss) per share:




**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Numerator:Numerator
                for basic and diluted net earnings (loss) per share- income (loss)
                from
                continuing operations available to shareholders of Ordinary
                shares
            
            $
            4,426
            
            $
            (4,584
            )
            $
            7,128Numerator
                for basic and diluted net income (loss) per share- (loss) income
                from
                discontinued operations available to shareholders of Ordinary
                shares
            
            
            (17,044
            )
            
            (36,167
            )
            
            5,413Numerator
                for basic and diluted net earnings (loss) per share- net income (loss)
                available to shareholders of Ordinary shares
            
            $
            (12,618
            )
            $
            (40,751
            )
            $
            12,541Denominator:Denominator
                for basic net earnings (loss) per share- weighted average number
                of
                Ordinary shares
            
            
            58,687,658
            
            
            60,841,424
            
            
            62,344,993Effect
                of dilutive securities:Employee
                stock options
            
            
            *)
                4,873,341
            
            
            *)
                -
            
            
            *)
                2,280,890Denominator
                for diluted net earnings (loss) per share - adjusted weighted average
                number of shares
            
            
            63,560,999
            
            
            60,841,424
            
            
            64,625,883





*)
            Antidilutive.




F-39