Company Quick10K Filing
Ceragon Networks
20-F 2019-12-31 Filed 2020-03-31
20-F 2018-12-31 Filed 2019-04-01
20-F 2017-12-31 Filed 2018-03-27
20-F 2016-12-31 Filed 2017-04-07
20-F 2015-12-31 Filed 2016-03-23
20-F 2014-12-31 Filed 2015-04-02
20-F 2013-12-31 Filed 2014-04-30
20-F 2012-12-31 Filed 2013-04-03
20-F 2011-12-31 Filed 2012-04-05
20-F 2010-12-31 Filed 2011-03-31
20-F 2009-12-31 Filed 2010-04-19

CRNT 20F Annual Report

Item 17 ¨ Item 18 ¨
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8: Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities.
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds.
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1:- General
Note 2:- Significant Accounting Policies
Note 3:- Marketable Securities
Note 4:- Other Accounts Receivable and Prepaid Expenses
Note 5:- Inventories
Note 6:- Property and Equipment, Net
Note 7:- Other Accounts Payable and Accrued Expenses
Note 8:- Commitments and Contingent Liabilities
Note 9:- Shareholders' Equity
Note 10:- Taxes on Income
Note 11:- Segments, Customers and Geographic Information
Note 12:- Selected Statements of Operations Data
Note 13:- Related Party Balances and Transactions
EX-4.2 exhibit_4-2.htm
EX-4.3 exhibit_4-3.htm
EX-4.4 exhibit_4-4.htm
EX-8.1 exhibit_8-1.htm
EX-10.1 exhibit_10-1.htm
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-12.1 exhibit_13-1.htm

Ceragon Networks Earnings 2010-12-31

Balance SheetIncome StatementCash Flow

20-F 1 zk1109621.htm 20-F zk1109621.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR

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

For the fiscal year ended December 31, 2010
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

For the transition period from __________ to __________
 
Commission file number 0-30862
 
_________________________
 
 
 
CERAGON NETWORKS LTD.
(Exact Name of Registrant as Specified in Its Charter)
_______________________
 
Israel
(Jurisdiction of Incorporation or Organization)
24 Raoul Wallenberg Street, Tel Aviv 69719, Israel
(Address of Principal Executive Offices)
Donna Gershowitz, (+972) 3-645-5733 (tel.), (+972) 3-645-5499 (fax), 24 Raoul Wallenberg Street, Tel Aviv 69719,
 Israel
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
________________________
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Exchange of Which Registered
Ordinary Shares, Par Value NIS 0.01 Nasdaq Global Select 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:   35,267,875 Ordinary Shares, NIS 0.01 par value.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
 
Yes ¨   No þ
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant  to Section 13 or 15(d) of the Securities Exchange Act of 1934.  
 
Yes ¨   No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  
 
Yes þ   No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes ¨   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer  ¨   Accelerated filer  þ Non-accelerated filer   ¨
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP  þ
 
International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨
 
Other  ¨
 
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:  
 
Item 17 ¨      Item 18 ¨
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨          No þ
 
 
 

 
 
TABLE OF CONTENTS
 
    Page
     
PART I    
1
1
1
21
30
30
43
61
64
67
69
80
80
PART II
   
81
81
81
82
82
82
82
83
83
83
83
PART III
   
84
84
84
 
 
i

 
 
INTRODUCTION
 
Definitions
 
In this annual report, unless the context otherwise requires:
 
 
·
references to “Ceragon,” the “Company,” “us,” “we” and “our” refer to Ceragon Networks Ltd. (the “Registrant”), an Israeli company, and its consolidated subsidiaries;
 
 
·
references to “ordinary shares,” “our shares” and similar expressions refer to the Registrant’s Ordinary Shares, NIS 0.01 nominal (par) value per share;
 
 
·
references to “dollars,” “U.S. dollars” and “$” are to United States Dollars;
 
 
·
references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;
 
 
·
references to the “Companies Law” are to Israel’s Companies Law, 5759-1999; and
 
 
·
references to the “SEC” are to the United States Securities and Exchange Commission.
 
Cautionary Statement Regarding Forward-Looking Statements
 
This annual report includes certain statements that are intended to be, and are hereby identified as, “forward-looking statements” for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  We have based these forward-looking statements on our current expectations and projections about future events.
 
Forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” “believe” or other similar expressions, but are not the only way these statements are identified.  These statements discuss future expectations, plans and events, contain projections of results of operations or of financial condition or state other “forward-looking” information.  When a forward-looking statement includes an underlying assumption, we caution that, while we believe the assumption to be reasonable and make it in good faith, assumed facts almost always vary from actual results, and the difference between a forward-looking statement and actual results can be material.  Forward-looking statements may be found in Item 4: “Information on the Company” and Item 5: “Operating and Financial Review and Prospects” and in this annual report generally. Our actual results could differ materially from those anticipated in these statements as a result of various factors, including all the risks discussed in “Risk Factors” and other cautionary statements in this annual report.  All of our forward-looking statements are qualified by and should be read in conjunction with those disclosures. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this annual report might not occur.
 
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
 
Selected Financial Data
 
The selected financial data set forth in the table below have been derived from our audited historical financial statements for each of the years from 2006 to 2010. The selected consolidated statement of operations data for the years 2008, 2009 and 2010, and the selected consolidated balance sheet data at December 31, 2009 and 2010, have been derived from our audited consolidated financial statements set forth in “Item 18 – Financial Statements.” The selected consolidated statement of income data for the years 2006 and 2007, and the selected consolidated balance sheet data at December 31, 2006, 2007 and 2008, has been derived from our previously published audited consolidated financial statements, which are not included in this Annual Report on Form 20-F. This selected financial data should be read in conjunction with our consolidated financial statements and are qualified entirely by reference to such consolidated financial statements. We prepare our consolidated financial statements in U.S. dollars and in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).  You should read the consolidated financial data with the section of this annual report entitled “Item 5 - Operating and Financial Review and Prospects” and our consolidated financial statements and the notes to those financial statements included elsewhere in this annual report.
 
 
 

 
 
    Year ended December 31,  
Consolidated Statement of Operations Data:     2006      2007      2008      2009     2010  
    (In thousands, except share and per share data)  
Revenues
  $ 108,415     $ 161,888     $ 217,278     $ 184,220     $ 249,852  
Cost of revenues1
    80,776       103,406       144,040       122,662       160,470  
Gross profit
    27,639       58,482       73,238       61,558       89,382  
                                         
Operating expenses:
                                       
Research and development
    13,336       15,457       19,413       18,954       25,115  
Less: grants and participations
    1,543       --       --       --       --  
Research and development, net
      11,793         15,457         19,413         18,954         25,115  
Selling and marketing
    17,420       25,344       31,663       29,251       37,179  
General and administrative.
    5,170       5,277       9,203       10,705       12,328  
Expense in respect of settlement reserve
    --       450       --       --       --  
Acquisition related cost
    --       --       --       --       775  
Total operating expenses
    34,383       46,528       60,279       58,910       75,397  
                                         
Operating income (loss)
    (6,744 )     11,954       12,959       2,648       13,985  
Financial income, net
    1,284       1,182       2,184       1,496       1,255  
Income (loss) before taxes
    (5,460 )     13,136       15,143       4,144       15,240  
Tax benefit (taxes on income)
    --       --       10,834       (489 )     (1,178 )
Net income (loss)
    (5,460 )     13,136       25,977       3,655       14,062  
                                         
Basic net earnings (loss) per share
  $ (0.20 )   $ 0.44     $ 0.70     $ 0.11     $ 0.40  
Diluted net earnings (loss) per share
  $ (0.20 )   $ 0.41     $ 0.68     $ 0.10     $ 0.38  
Weighted average number of shares used in computing basic earnings (loss) per share
          26,728,053             29,692,670             36,863,684             34,369,212             34,854,657  
Weighted average number of shares used in computing diluted earnings (loss) per share2
        26,728,053           32,101,394           38,338,584           35,796,878           36,564,830  
 
 
(1)
In 2006, the amount includes a one-time charge of $10,444 related to an agreement with the Office of the Chief Scientist to terminate our grant program.
 
(2)
In 2006, all outstanding share options have been excluded from the calculation of diluted net loss per share because all these securities are antidilutive for the periods presented.
 
 
2

 
 
 
     
At December 31,
 
     
2006
     
2007
     
2008
     
2009
     
2010
 
     
(In thousands)
 
Consolidated Balance Sheet Data:        
Cash and cash equivalents, short and long term bank deposits, short and long term marketable securities
  $ 29,485     $ 121,741     $ 97,761     $ 98,320     $ 81,533  
Working capital
    47,268       132,420       136,294       149,284       167,509  
Total assets
    96,351       217,640       244,221       269,373       287,182  
Total long term liabilities
    12,277       9,936       6,647       7,174       8,600  
Shareholders’ equity
    47,561       160,894       182,916       180,906       204,169  
 
Significant Changes
 
In January 2011, we acquired Nera Networks AS, or Nera, a privately held company and former competitor. This was a significant acquisition and we incurred indebtedness in order to finance a majority of the purchase price of such acquisition.  See Item 8 – Significant Changes.
 
Risk Factors
 
The following risk factors, among others, could affect our actual results of operations and cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and we assume no obligation to update this information.  You should carefully consider the risks described below, in addition to the other information contained elsewhere in this annual report. The following risk factors are not the only risk factors facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. Our business, financial condition and results of operations could be seriously harmed if any of the events underlying any of these risks or uncertainties actually occur. In that event, the market price for our ordinary shares could decline.
 
Risks Relating to Our Acquisition of Nera

Our recent acquisition of Nera may not be successfully integrated or produce the results we anticipate.

The Nera Acquisition was our first acquisition involving significant international operations. We expect that the integration of Nera’s operations with our own will be a complex, time-consuming and costly process involving both typical and unique acquisition risks and related challenges, some of which are discussed below:

 
assessing and maintaining the combined company’s internal control over financial reporting and disclosure controls and procedures as required by U.S. securities laws;
 
 
3

 
 
 
the possibility that we may incur significant expenses in connection with this transaction or be required to expend material sums on potential contingent tax, litigation or other liabilities associated with Nera’s prior operations or facilities;
 
 
the greater cash management, exchange rate, legal and income taxation risks associated with the combined company’s new multinational character and the movement of cash between Ceragon  and its foreign subsidiaries;
 
 
increased difficulty in financial forecasting due to our limited familiarity with Nera’s operations, customers and markets or their impact on the overall results of operations of the combined company;
 
 
the possibility that we did not sufficiently take into account Nera’s contingent liabilities, including tax, intellectual property or employment exposures;
 
 
managing geographically dispersed personnel with diverse cultural backgrounds and organizational structures;
 
 
diversion of management’s attention from normal daily operations of our business;
 
 
potential incompatibility of business cultures and/or loss of key personnel;
 
 
difficulties in integrating the personnel, operations, technology or products and service offerings of Nera;
 
 
insufficient net revenues to offset increased expenses associated with the Nera Acquisition;
 
 
the Nera Acquisition may create or result in additional liquidity needs;
 
 
possible inadequacy, or coverage limitations, of insurance we have obtained covering the warranties and indemnities in our favor made in connection with the Nera Acquisition; and
 
 
the costs and effects of the purchase accounting associated with this acquisition.

In addition, the accounting treatment for the Nera acquisition may result in significant amortizable intangible assets, which when amortized will negatively affect our consolidated results of operations. The accounting treatment for the Nera acquisition may also result in significant goodwill, which, if impaired, will negatively affect our consolidated results of operations.

The Nera Acquisition exposes us to a large amount of contingent liabilities

In acquiring Nera, we undertook a number of identified contingent liabilities from Nera, such as various known litigations with third parties, as well as potential tax and other contingent exposures with customers, suppliers and employees, all of which could accumulate to a substantial amount.  If these contingent liabilities were to materialize, it may result in the transaction being substantially more expensive than the agreed purchase price.  We assessed these contingent liabilities and attempted to factor them into the purchase price.

However, our assessment of such contingent liabilities may not have been accurate and we may be exposed to actual payments which may be significantly higher than we assessed which could result in the Nera Acquisition being substantially more expensive than originally estimated and would negatively affect results of our operations and financial condition.

 
4

 
 
Our due diligence in the Nera Acquisition may not adequately cover all risks.

There may be liabilities or risks that we failed to discover when we performed our due diligence investigation relating to the acquisition of Nera Networks. Examples of these liabilities may include estimated costs to complete performance under existing contracts with customers, undisclosed claims, intellectual property infringements or regulatory compliance liabilities for which we, as successor owner, may be responsible. Such risks may include changes in estimated costs or loss of profits to complete projects and estimated future revenues.

The indemnification covenants we obtained from the sellers of Nera may not be applicable, enforceable, collectible or sufficient to fully offset the possible additional contingent or other additional liabilities. Such liabilities could have a material adverse effect on our business, financial condition, results of operations or prospects.

Loss of part of Nera’s past business

There may be additional risk relating to the Nera Acquisition including, but not limited to, the consequences of Nera operating in regions in which we previously did not have a presence, which may prove to be problematic for us due to the fact that we are an Israeli company and which, as a result, we may lose either the business as a whole in these regions or certain customers located there.

Failure to successfully address one or more of the above risks may result in unanticipated liabilities and cash outlays, lower than expected net revenue, losses from operations, failure to realize any of the expected benefits of the acquisition, and related declines in our share price.
 
Risks Relating to Our Business
 
We face intense competition from other wireless equipment providers. If we fail to compete effectively, our business, financial condition and results of operations would be materially adversely affected.

The market for wireless equipment is rapidly evolving, fragmented, highly competitive and subject to rapid technological change. Increased competition, which may differ from region to region, in the wireless equipment market could result in reduced demand for our products, price reductions and reduced gross margins, any of which could seriously harm our business and results of operations. Our primary competitors include Aviat Networks (formerly known as Harris Stratex Networks, Inc.), Alcatel-Lucent, Fujitsu Limited,  Huawei Technologies Co., Ltd., L.M. Ericsson Telephone Company, NEC Corporation (NEC) and Nokia Siemens Networks B.V. (NSN). In addition to these primary competitors, a number of other communications equipment suppliers, including DragonWave Inc., SIAE Microelectronica S.p.A. and ZTE Corporation, offer or are developing products that compete with our products. Some of our competitors are original equipment manufacturers through whom we market and sell our products, which means our business success may depend on these competitors to some extent.

Most of our principal competitors are substantially larger than we are and have longer operating histories and greater financial, sales, marketing, distribution, technical, manufacturing and other resources than we have. They also have greater name recognition and a larger customer base than we have. Many of these competitors have well-established relationships with our current and potential customers, have extensive knowledge of our target markets, and have begun to focus more on selling services and bundling the entire network as a full-package offering. As a result, our competitors may be able to respond more quickly to evolving industry standards and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products than we can. In addition, our competitors, especially those from China, may be able to offer customers financing that would increase the attractiveness of their products in comparison to ours.

Additionally, the telecommunications equipment industry has experienced significant consolidation among its participants, and we expect this trend to continue.  For example, Nokia and Siemens formed a joint venture to merge the Networks Business Group of Nokia and the carrier-related operations of Siemens into NSN. Other examples are the mergers of Alcatel and Lucent and of the wireless divisions of Harris and Stratex Networks, and the acquisition by Ericsson of Marconi. These consolidations have increased the size and thus the competitive resources of these companies. In the future, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties that may allow them to increase their market share and competitive position.
 
 
5

 
 
We expect to face increasing competitive pressures in the future. If we are unable to compete effectively, our business, financial condition and results of operations would be materially adversely affected.

Global competition and current market conditions, as well as significant concentration of our business in India and other parts of Asia Pacific, have resulted in downward pressure on the prices for our products, which could result in reduced revenues, gross margins and profitability.

We operate in the wireless equipment market, which is characterized by vigorous, worldwide competition for market share and by rapid technological development. These factors have resulted in aggressive pricing practices and downward pricing pressures, as well as growing competition from both start-up companies and well-capitalized telecommunication systems providers. Moreover, competition for larger equipment orders is particularly intense since the number of large equipment orders in any year is limited. Consequently, we generally experience greater pricing pressure when we compete for larger orders as a result of this increased competition and demand from purchasers for greater volume discounts. As an increasing portion of our revenues is derived from large orders, we believe that our business will be more susceptible to these pressures.

Also, in recent years we have increased sales of our products in India and other parts of Asia Pacific in response to the rapid build-out of cellular networks in those regions. For the years ended December 31, 2009 and 2010, 37% and 50%, respectively, of our revenues were earned in the Asia Pacific region, the majority of which was derived from India. We expect our revenues from sales of our products in Asia Pacific will continue to constitute a significant portion of our business in the future, although these revenues may decrease as a percentage of our revenues as a result of markets and customers in other regions acquired by us through the Nera Networks AS, or Nera, acquisition (“Nera Acquisition”) (See Item 8 – Significant Changes).  Sales of our products in these markets are generally at lower gross margins in comparison to other regions.

If we are unable to effectively respond to these pricing pressures, our revenues, gross margin and profitability could be materially reduced, and our gross margins could continue to be reduced.

We are dependent upon sales of our single family of products into a single market. Any reduction in demand for these products in this market would cause our revenues to decrease.

We design, develop, manufacture and sell nearly all of our products to meet high-capacity point-to-point wireless backhaul needs. Nearly all of our revenues are generated from sales of our single portfolio of products. We expect sales of our single portfolio of products to continue to account for nearly all of our revenues for the foreseeable future. As a result, we are more likely to be adversely affected by a reduction in demand for point-to-point wireless backhaul products than companies that sell multiple and diversified product lines or into multiple markets.

We sell a significant portion of our products through a small number of strategic relationships with OEMs. The loss of one or more of these key OEM relationships would result in a significant loss of revenues.

We market and sell our products to customers through key OEMs that integrate our solutions into their product offerings. We anticipate that sales to our key OEMs will continue to constitute a significant portion of our business in the future.  For the year ended December 31, 2010, sales to our OEMs, represented approximately 24% of our revenues.

Our sales to our OEMs are made on the basis of purchase orders rather than long-term purchase commitments. Our relationships with our OEMs are generally governed by non-exclusive agreements that require us to competitively price our products, have no minimum sales commitments and do not prohibit our OEMs from offering products that compete with our solutions. The size of purchases by our OEMs typically fluctuates from quarter-to-quarter and year-to-year, and may continue to fluctuate in the future, which may affect our quarterly and annual results of operations. Our OEM agreements typically have an initial term between one and five years and automatically renew for successive one year terms.
 
 
6

 
 
Some of our OEMs also possess significant resources and advanced technical capabilities and may, either independently or jointly with our competitors, develop and market products and related services that compete with our solutions. If either of these were to occur, our OEMs may discontinue marketing, distributing and supporting our solutions.

By selling our products to OEMs, we rely in part on the sales and marketing efforts of the OEMs, as well as on their post-sale support. These OEMs may decide to promote competing products or alternative technologies. If our OEMs fail to effectively market and support our products, or if we experience a loss or a substantial reduction in orders from these OEMs, or one of our OEMs terminates its relationship with us, our revenues may decline, and our business, financial condition, and results of operations would be materially adversely affected.

We rely on a limited number of contract manufacturers to manufacture our products and if they experience delays, disruptions, quality control problems or a loss in capacity, it could materially adversely affect our operating results.

We outsource all of our manufacturing processes to a limited number of contract manufacturers that are located in Israel and the Philippines. We do not have long-term contracts with any of these contract manufacturers. We have experienced and may in the future experience delays in shipments from these contract manufacturers.

Our contract manufacturers may themselves in the future experience manufacturing problems, including inferior quality and insufficient quantities of components.  In addition, our contract manufacturers rely on certain single source components from Japan and the earthquake and accompanying tsunami that struck the north-east of Japan during March 2011 caused significant damage in the surrounding region and substntically disrupted the electronics supply chain and transportation resources within Japan.  These delays, disruptions, including a disruption of business of our Japanese suppliers, quality control problems and loss in capacity could result in delays in deliveries of our product to our customers, which could subject us to penalties payable to our customers, increased warranty costs and possible cancellation of orders. If our contract manufacturers experience financial, operational, manufacturing capacity or other difficulties, or shortages in components required for manufacturing, our supply may be disrupted and we may be required to seek alternate manufacturers. We may be unable to secure alternate manufacturers that meet our needs in a timely and cost-effective manner. In addition, some of our contract manufacturers have granted us licenses with respect to certain technology that is used in a number of our products. If we change contract manufacturers, we may be required to renegotiate such licenses or re-design some of our products, either of which could increase our cost of revenues and cause product delivery delays. If we change manufacturers, during such a transition period, we may be more likely to face delays, disruptions, quality control problems and loss in capacity, and our sales, profits and customer relationships may suffer.

If we fail to effectively manage deliveries of our products and ancillary equipment, we may be unable to timely fulfill our customer commitments, which would adversely affect our business and results of operations and, in the event of an inability to fulfill commitments, would harm our customer relationships.

We outsource our manufacturing operations and purchase ancillary equipment to our products from contract and other independent manufacturers and other third parties.  If we fail to effectively manage and synchronize our deliveries from all these sources to the customer, or if one or more of the contract and other independent manufacturers or other third parties should not fully comply with their contractual obligations or should experience delays, disruptions or component procurement problems, then our ability to deliver complete product orders to our customers or otherwise fulfill our contractual obligations to our customers could be delayed or impaired which would adversely affect our business, financial results and customer relationships.

 
7

 
 
We are increasingly engaged in supplying installation or turnkey projects for our customers. Such projects have inherent additional risks and are generally subject to acceptance testing procedures. Problems in executing this turnkey projects, including delays or failure in such acceptance tests, would have a material adverse effect on our results of operations.

We are increasingly engaged in supplying installation and other services for our customers. In this context, we may act as prime contractor and equipment supplier for network build-out projects, providing installation, supervision and commissioning services required for these projects, or we may provide such services and equipment for projects handled by system integrators. As we engage in more turn-key projects, we expect to routinely enter into contracts involving significant amounts to be paid by our customers over time, and we are dependent on the customer to issue acceptance certificates to generate and recognize revenue.  In such turn-key projects, we typically bear the risks of loss and damage to our products until the customer has issued an acceptance certificate upon successful completion of acceptance tests. If our products are damaged or stolen, or if the network we install does not pass the acceptance tests or if the customer does not or will not issue an acceptance certificate, the end user or the system integrator, as the case may be, could refuse to pay us any balance owed and we would incur substantial costs, including fees owed to our installation subcontractors, increased insurance premiums, transportation costs, and expenses related to repairing or manufacturing the products. Moreover, in such a case, we may not be able to repossess the equipment, thus suffering additional losses.  In such event, we may not be able to generate or recognize revenue which could materially adversely impact our results of operation and financial position.

Our contract manufacturers obtain some of the components included in our products from a limited group of suppliers and, in some cases, single or sole source suppliers. The loss of any of these suppliers could cause us to experience production and shipment delays and a substantial loss of revenue.

Our contract manufacturers currently obtain key components from a limited number of suppliers. Some of these components are obtained from a single or sole source supplier, including a single-source supplier located in Japan. Our contract manufacturers’ dependence on a single or sole source supplier or on a limited number of suppliers subjects us to the following risks:

 
The component suppliers may experience shortages in components and interrupt or delay their shipments to our contract manufacturers. Consequently, these shortages could delay the manufacture of our products and shipments to our customers which could result in penalties and/or cancellation of orders for our products.

 
The component suppliers could discontinue the manufacture or supply of components used in our systems. In such an event, our contract manufacturers or we may be unable to develop alternative sources for the components necessary to manufacture our products, which could force us to redesign our products. Any such redesign of our products would likely interrupt the manufacturing process and could cause delays in our product shipments. Moreover, a significant modification in our product design may increase our manufacturing costs and bring about lower gross margins.

 
The component suppliers may increase component prices significantly at any time and with immediate effect, particularly if demand for certain components increases dramatically in the global market. These price increases would increase component procurement costs and could significantly reduce our gross margins and profitability.

We face intense competition from other high-speed communications solutions that compete with our high-capacity point-to-point wireless products, which could reduce demand for our products and have a material adverse effect on our business and results of operations.

Our products compete with other high-speed communications solutions, including fiber optic lines, leased copper lines and other wireless technologies. Some of these technologies utilize existing installed infrastructure and have achieved significantly greater market acceptance and penetration than high-capacity point-to-point wireless technologies.

Some of the disadvantages of high capacity, point-to-point wireless technologies that may make other technologies more appealing include:

 
Extreme Weather Conditions: wireless backhaul solutions may not operate optimally in certain extreme weather conditions, including severe rainfalls or hurricanes; and

 
Line-of-Sight Limitations: wireless backhaul solutions generally require a direct line-of-sight between antennas. Consequently, service providers often install these solutions on wireless antenna towers, rooftops of buildings and on other tall structures. As a result, service providers must generally secure roof or other property rights from the owners of each building or other structure on which our products are installed. This may delay deployment and increase the installation costs. Some base stations cannot be linked by line-of-sight solutions.

 
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In addition, customers may decide to use transmission frequencies for which we do not offer products.

To the extent that these competing communications solutions reduce demand for our high-capacity point-to-point wireless transmission products, this reduction could have a materially adverse effect our business and results of operations.

Consolidation of our potential customer base could harm our business.

The trend toward mergers in the telecommunications industry has resulted in the consolidation of our potential customer base. In situations where an existing customer consolidates with another industry participant which uses a competitor’s products, our sales to that existing customer could be reduced or eliminated completely to the extent that the consolidated entity decides to adopt the competing products. Further, consolidation of our potential customer base could result in purchasing decision delays as consolidating customers integrate their operations and could generally reduce our opportunities to win new customers to the extent that the number of potential customers decreases. Moreover, some of our potential customers have agreed to share backhaul networks which results in a decrease in the overall size of the market.  Finally, as our customers become larger they may have more leverage to negotiate better pricing which could harm our revenues and gross margins.

We have recently acquired and may additionally acquire other businesses, which could result in integration problems and adversely affect our business.

The risks of our business will be substantially affected by the Nera Acquisition,  For specific risk factors related to the Nera Acquisition, see above, Risk Factor - “Risks Relating to Our Acquisition of Nera”.

In January 2011 we acquired Nera, which will result in a material expansion of our business and geographic markets, and we may acquire other businesses.  As a result we are subject to risks such as an inability to effectively integrate our sales force and manufacture and distribute our products and services and an inability to effectively integrate the technology and other processes of the acquired businesses.  Such acquisitions may also subject us to risks relating to:

 
the diversion of management’s attention from our core business during the integration process;

 
the management of a larger combined business, including implementing adequate internal controls;

 
the loss of key employees of the acquired businesses; and

 
unanticipated losses in the event the acquisition is not consummated.

Moreover, the acquired businesses may not achieve the anticipated benefits or result in writedown or in result of impairment charges.  In the event that we consummate the acquisition of other businesses, these challenges and uncertainties could have a material adverse effect on our business, financial condition and results of operations.

Our ability to grow depends on acceptance by our customers of IP-based solutions, our ability to develop and introduce IP-based products and our ability to provide solutions to transition from circuit-switched to hybrid products to IP-based products.

The market for IP-based backhaul equipment for mobile networks is continuing to evolve. Our future success depends in part on the acceptance by customers of IP-based networks, IP-based or hybrid backhaul solutions and IP-based or hybrid products that we are selling and continue to develop. Moreover, our future success depends on our ability to design and manufacture IP-related products and solutions that satisfy our customers’ needs to transition to IP-based networks and IP-based backhaul. If the IP-based backhaul for mobile networks market does not develop at the rate we expect as a result of alternative or changing technologies, changes in product standards and regulation, inability to gain customer acceptance or for any other reason, our future growth, business, financial condition, and results of operations may be materially adversely affected.

 
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If we do not succeed in developing and marketing new products that keep pace with technological developments, changing industry standards and our customers’ needs, we may not be able to grow our business.

The market for our products is characterized by rapid technological advances, changing customer needs and evolving industry standards, as well as increasing pressures to make existing products more cost efficient. Accordingly, our success will depend on our ability to:

 
develop and market new products in a timely manner to keep pace with developments in technology;

 
meet evolving customer requirements;

 
enhance our current product offerings, including technological improvements which reduce the cost and manufacturing time; and

 
timely deliver products through appropriate distribution channels.

In addition, the wireless equipment industry is subject to evolving industry standards. The emergence or evolution of new industry standards for wireless products, through official standards committees or widespread use by operators, could either render our products obsolete or require us to modify our products. Any such modifications may be expensive and time-consuming and, if we are able to meet these standards at all, could increase our product costs and adversely affect our profitability.

We are continuously seeking to develop new products and enhance our existing products. Developing new products and product enhancements requires research and development resources and cooperation with subcontractors. We may not be successful in enhancing our existing products or developing new products in response to technological advances or to satisfy increasingly sophisticated customer needs in a timely and cost-effective manner which would have a material adverse effect on our ability to grow our business.  For a discussion of products acquired as a result of the Nera Acquisition, see Item 8 – Significant Changes.

We rely on a limited number of contractors as part of our research and development efforts.

We conduct a part of our research and development activities through outside contractors. We depend on our contractors’ ability to achieve stated milestones and commercialize our products, and on their ability to cooperate and overcome design difficulties. Our contractors may experience problems, including the inability to recruit professional personnel, which could delay our research and development process. These delays could:

 
increase our research and development expenses;

 
delay the introduction of our upgraded and new products to current and prospective customers and our penetration into new markets; and

 
adversely affect our ability to compete.

If our contractors fail to perform, we may be unable to secure alternative contractors that meet our needs. Moreover, qualifying new contractors may also increase our research and development expenses.

Our sales cycles in connection with competitive bids or to prospective customers are lengthy.

It typically takes from three to twelve months after we first begin discussions with a prospective customer before we receive an order from that customer. In some instances, we participate in competitive bids in tenders issued by our customers or prospective customers. These tender processes can continue for many months before a decision is made by the customer. As a result, we are required to devote a substantial amount of time and resources to secure sales. In addition, the lengthy sales cycle results in greater uncertainty with respect to any particular sale, as events may occur during the sales cycle that impact customers’ decisions which, in turn, increases the difficulty of forecasting our results of operations.

 
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We sell other manufacturers’ products as an OEM, which subjects us to various risks that may cause our revenues to decline.

We sell a limited number of products on an OEM basis through relationships with a number of manufacturers. These manufacturers have chosen to sell a portion of their systems through us in order to take advantage of our reputation and sales channels. The sale of these OEM products by us depends in part on the quality of these products, the ability of these manufacturers to deliver their products to us on time and their ability to provide both presale and post-sale support. Sales of OEM products by us expose our 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, technical and financial problems these companies might encounter or the promotion of their products through other channels and turning them into competitors rather than partners. If any of these risks materialize, we may not be able to develop alternative sources for these OEM products, which may cause our revenues to decline.

Our products are used in critical communications networks which may subject us to significant liability claims.

Since our products are used in critical communications networks, we may be subject to significant liability claims if our products do not work properly. The provisions in our agreements with customers that are intended to limit our exposure to liability claims may not preclude all potential claims. In addition, any insurance policies we have may not adequately limit our exposure with respect to such claims. We warrant to our current customers that our products will operate in accordance with our product specifications. If our products fail to conform to these specifications, our customers could require us to remedy the failure or could assert claims for damages. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any such claims, whether or not successful, would be costly and time-consuming to defend, and could divert management’s attention and seriously damage our reputation and our business.

Uncertainty and possible delays in deployment of advanced wireless and other networks could cause our revenues to be lower than expected.

Our sales depend on the deployment of advanced wireless networks and other networks. Any delay by wireless service providers in their network deployment schedules could result in lower than expected revenues for us, since these delays would also delay purchasing decisions by the wireless providers.

Due to the growing volume of our sales to developing countries, we are susceptible to a number of political and economic risks that could have a material adverse effect on our business, financial condition and results of operations.

A majority of our sales are made in countries in Asia Pacific, Latin America, Africa and Eastern Europe. For the year ended December 31, 2010, sales in these regions accounted for approximately 61% of our revenues. As a result, the occurrence of any international, political or economic events that adversely affects our business could result in significant revenue shortfalls. Any such revenue shortfalls could have a material adverse effect on our business, financial condition and results of operations. The following are some of the risks and challenges that we face doing business internationally, several of which are more likely in the emerging markets than in other countries:

 
unexpected changes in or enforcement of regulatory requirements, including security regulations relating to international terrorism and hacking concerns;

 
unexpected changes in or imposition of tax and/or customs levies ;

 
fluctuations in foreign currency exchange rates;

 
imposition of tariffs and other barriers and restrictions;

 
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management and operation of an enterprise spread over various countries;

 
burden of complying with a variety of foreign laws;

 
general economic and geopolitical conditions, including inflation and trade relationships;

 
longer sales cycles;

 
difficulties in protecting intellectual property;

 
laws and business practices favoring local competitors;

 
demand for high-volume purchases with discounted prices;

 
payment delays and uncertainties; and

 
civil unrest, war and acts of terrorism.

If we fail to obtain regulatory approval for our products, or if sufficient radio frequency spectrum is not allocated for use by our products, our ability to market our products may be restricted.

Radio communications are subject to regulation in most jurisdictions and to various international treaties relating to wireless communications equipment and the use of radio frequencies. Generally, our products must conform to a variety of regulatory requirements established to avoid interference among users of transmission frequencies and to permit interconnection of telecommunications equipment. Any delays in compliance with respect to our future products could delay the introduction of those products. Also, these regulatory requirements may change from time to time, which could affect the design and marketing of our products as well as the competition we face from other suppliers’ products.

In addition, in most jurisdictions in which we operate, users of our products are generally required to either have a license to operate and provide communications services in the applicable radio frequency or must acquire the right to do so from another license holder. Consequently, our ability to market our products is affected by the allocation of the radio frequency spectrum by governmental authorities, which may be by auction or other regulatory selection. These governmental authorities may not allocate sufficient radio frequency spectrum for use by our products or we may not be successful in obtaining regulatory approval for our products from these authorities. Historically, in many developed countries, the lack of available radio frequency spectrum has inhibited the growth of wireless telecommunications networks. If sufficient radio spectrum is not allocated for use by our products, our ability to market our products may be restricted which would have a materially adverse effect on our business, financial condition and results of operations. Additionally, regulatory decisions allocating spectrum for use in wireless backhaul at frequencies used by our competitors’ products could increase the competition we face.

Other areas of regulation and governmental restrictions, including tariff on imports and technology controls on exports, could adversely affect our operations and financial results.

Widespread use of wireless products may have health and safety risks.

Our wireless communications products emit electromagnetic radiation. In recent years, there has been publicity regarding the potentially negative direct and indirect health and safety effects of electromagnetic emissions from wireless telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. 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. Claims against other wireless equipment suppliers or wireless service providers could adversely affect the demand for our backhaul solutions.

 
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Part of our inventory may be written off, which would increase our cost of revenues. In addition, we may be exposed to inventory-related losses on inventories purchased by our contract manufacturers and other suppliers.

Inventory of raw materials, work in-process or finished products may accumulate in the future, and we may encounter losses due to a variety of factors including:

 
new generations of products replacing older ones;

 
the migration of products at our customers from Nera’s Evolution product line to our FibeAir family of products, or vice versa, following the Nera Acquisition (see Item 8, Significant Changes);

 
the need of our contract manufacturers to order raw materials that have long lead times and our inability to estimate exact amounts and types of items thus needed, especially with regard to the frequencies in which the final products ordered will operate; and

 
changes in products because of technological advances and cost reduction measures.

Further, our inventory of finished products may accumulate if a customer were to cancel an order or refuse to physically accept delivery of our products, or in turnkey projects which include acceptance tests, refuse to accept the network. The rate of such accumulation may increase in a period of economic downturn.

Our contract manufacturers and other suppliers are required to purchase inventory based on manufacturing projections we provide to them. If our actual orders from our customers are lower than these manufacturing projections, our contract manufacturers and/or other suppliers will have excess inventory of raw materials or finished products which we would be required to purchase.

In addition, we require our contract manufacturers and other suppliers from time to time to purchase more inventory than is immediately required, and, with respect to our contract manufacturers, to partially assemble components, in order to shorten our delivery time in case of an increase in demand for our products. In the absence of such increase in demand, we may need to compensate our contract manufacturers and/or other suppliers.

If we are required to purchase excess inventory from our contract manufacturers and/or other suppliers or otherwise compensate our contract manufacturers and/or other suppliers for purchasing excess inventory, our business, financial condition, and results of operations could be materially adversely affected.

We also may purchase components or raw materials from time to time for use by our contract manufacturers in the manufacturing of our products. These purchases are based on our own manufacturing projections. If our actual orders are lower than these manufacturing projections, we may accumulate excess inventory which we may be required to write-off. If we are forced to write-off this inventory other than in our ordinary course of business, our business, financial condition, results of operations could be materially adversely effected.

If we are unable to protect our intellectual property rights, our competitive position may be harmed.

Our ability to compete will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology internationally. We currently rely upon a combination of trade secret, trademark and copyright laws, as well as contractual rights, to protect our intellectual property.

In 2009, we began to more aggressively pursue patent protection and consequently, our patent portfolio may not be as extensive as those of our competitors. As a result, we may have limited ability to assert any patent rights in negotiations with, or in counterclaiming against, competitors who assert intellectual property rights against us.  In connection with the Nera Acquisition, we acquired additional patents and patent applications.

We also enter into confidentiality, non-competition and invention assignment agreements with our employees and contractors engaged in our research and development activities, and enter into non-disclosure agreements with our suppliers and certain customers so as to limit access to and disclosure of our proprietary information. We cannot assure you that any steps taken by us will be adequate to deter misappropriation or impede independent third-party development of similar technologies. Moreover, under current law, we may not be able to enforce the non-competition agreements with our employees to their fullest extent.
 
 
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We cannot assure you that the protection provided to our intellectual property by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law. Furthermore, we cannot assure you that third parties will not assert infringement claims against us based on foreign intellectual property rights and laws that are different from those established in the United States. Any such failure or inability to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.

Defending against intellectual property infringement claims could be expensive and could disrupt our business.

The wireless equipment industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in often protracted and expensive litigation.  We have been exposed to infringement allegations in the past.  We are involved in discussions with a third party regarding the licensing of that party’s intellectual property.  The other party offered a flat fee license however, no agreement has been reached.  We are unable to estimate the outcome of such discussions. We may in the future be notified that we are infringing certain patent or other intellectual property rights of others. Any such litigation or claim could result in substantial costs and diversion of resources. In the event of an adverse result of any such litigation, we could be required to pay substantial damages (including potentially treble damages and attorney’s fees should a court find such infringement willful), cease the use and licensing of allegedly infringing technology and the sale of allegedly infringing products and expend significant resources to develop non-infringing technology or to obtain licenses for the infringing technology. We cannot assure you that we would be successful in developing such non-infringing technology or that any license for the infringing technology would be available to us on commercially reasonable terms, if at all.

If we fail to attract and retain qualified personnel, our business, operations and product development efforts may be materially adversely affected.

Our products require sophisticated research and development, marketing and sales, and technical customer support. Our success depends on our ability to attract, train and retain qualified personnel in all these areas. We compete with other companies for personnel in all of these areas and we may not be able to hire sufficient personnel to achieve our goals or support the anticipated growth in our business. The market for the highly-trained personnel we require is competitive, due to the limited number of people available with the necessary technical skills and understanding of our products and technology. If we fail to attract and retain qualified personnel due to compensation or other factors, our business, operations and product development efforts would suffer.

General economic conditions may adversely affect our results.
 
Current uncertainty in global economic conditions, including the residual effects of the disruption in financial and credit markets in the recent past, as well as the unknown future consequences of the earthquake and tsunami in Japan, pose a risk to the overall economy that may result in our customers postponing spending, which could adversely affect demand for our products and services, as well as our ability to manage commercial relationships with our customers, suppliers and creditors. If the current economic situation deteriorates, our business could be negatively impacted, including such areas as reduced demand for our products and services, supplier or customer disruptions, or insolvency of certain of our key distributors, resellers, OEMs and systems integrators, which could impair our distribution channels, which could reduce our revenues or our ability to collect our accounts receivable and have a material adverse effect on our financial condition and results of operations.

Our success in handling a possible contraction of our business due to global economic turmoil will depend on our ability, among other things, to:

 
develop efficient forecast methods for evaluating the prospective quantity of products that will be ordered by our customers;

 
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control inventories of components ordered by our contract manufacturers required to meet actual demand, including but not limited to handling the effects of excess inventories accumulated by such manufacturers;

 
reduce the costs of manufacturing our products;

 
continue to collect receivables from our customers in full and in a timely manner; and

 
properly balance the size and capabilities of our workforce.

Our international operations expose us to the risk of fluctuation in currency exchange rates.

Although we derive the majority of our revenues in U.S. dollars a portion of our U.S. dollar revenues are derived from customers operating in local currencies which are different from the U.S. dollar.  Therefore, devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to cancel or decrease orders or delay payment. In addition, part of our revenues from customers are in non-U.S. dollar currencies, therefore we are exposed to the risk of devaluation of such currencies relative to the dollar which could have a negative impact on our revenues.

In addition, a portion of our expenses are denominated in New Israeli Shekels, or NIS, and to a lesser extent other non-U.S. dollar currencies. Our NIS-denominated expenses consist principally of salaries and related costs and related personnel expenses. We anticipate that a portion of our expenses will continue to be denominated in NIS. In 2010, the NIS continued to fluctuate in comparison to the U.S. dollar, devaluating by approximately 3% in the first half of the year and then appreciating by approximately 8% in the second half of the year. In total, during 2010, the NIS appreciated by 6% in comparison to the U.S. dollar. If the U.S. dollar continues to weaken against the NIS in the future, there will be a negative impact on our results of operations.  Following the Nera Acquisition, we anticipate that an additional portion of our expenses will in the future be in Norwegian Kroner (NOK).  In 2010, the NOK fluctuated in comparison to the U.S. dollar and in total devaluated by 4% in comparison to the U.S. dollar.  In some cases, we are paid in non-U.S. dollar currencies or maintain monetary assets in non- U.S. dollar currencies, which could affect our reported results of operations.

We use derivative financial instruments, such as foreign exchange forward contracts, to mitigate the risk of changes in foreign exchange rates on balance sheet accounts and forecast cash flows. We may not purchase derivative instruments adequate to insulate ourselves from foreign currency exchange risks and over the past year, we have incurred losses as a result of exchange rate fluctuations that have not been offset in full by our hedging strategy. The volatility in the foreign currency markets may make it challenging to hedge our foreign currency exposures effectively.
 
If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences, including higher tax rates and potentially punitive interest charges on certain distributions and on the proceeds of share sales.

We do not believe that for the year ended December 31, 2010 we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Non-U.S. companies may generally be characterized as a PFIC if for any taxable year in which 75% or more of such company’s gross income is passive income, or at least 50% of the average value of all such company’s assets are held for the production of, or produce, passive income. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain income, and having potentially punitive interest charges apply to the proceeds of share sales.  Similar rules apply to distributions that are “excess distributions.”

It is possible that the United States Internal Revenue Service could attempt to treat us as a PFIC for the taxable year ended December 31, 2010 or prior years. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets, activities and market capitalization, including fluctuations in the price of our ordinary shares, which are relevant to this determination. Accordingly, there can be no assurance that we will not become a PFIC in 2011 or in subsequent years. For a discussion of the rules relating to passive foreign investment companies and related tax consequences, please see the section of this annual report entitled “U.S. Federal Income Tax Considerations.”

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

Our quarterly results are difficult to predict and may vary significantly from quarter to quarter. Most importantly, delays in completing product order delivery or completion of a sale can cause our revenues and net income to fluctuate significantly from anticipated levels. Furthermore, we may temporarily reduce prices in response to competition or increase spending in order to pursue new market opportunities.

Additionally, the following factors may also cause fluctuations in our quarterly results:

 
volume and timing of product orders received and delivered during the quarter;

 
The ability to effectively manage and synchronize delivery of completed product order to customer;

 
the timing of when our customers provide acceptance certificates in turnkey projects;

 
the ability of our contract manufacturers to manufacture products on time;

 
changes in the mix of products sold by us;

 
timing of new product introductions by us or our competitors;

 
disruption in our continued relationship with our OEM partners;

 
cost and availability of components and subsystems;

 
adoption of new technologies and industry standards;

 
competitive factors, including pricing, availability and demand for competing products;

 
ability of our customers to obtain financing to enable their purchase of our products;

 
fluctuations in foreign currency exchange rates;

 
worldwide regulatory developments; and

 
global economic conditions.

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

 
announcement of corporate transactions;

 
announcements of technological innovations;

 
customer orders or new products or contracts;

 
competitors’ positions in the market;

 
changes in financial estimates by securities analysts;
 
 
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our earnings releases and the earnings releases of our competitors;

 
the general state of the securities markets (with particular emphasis on the technology and Israeli sectors thereof); and

 
the general state of the credit markets, the current volatility of which could have an adverse effect on our investments.

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

Due to the size of their shareholdings, Yehuda and Zohar Zisapel have influence over matters requiring shareholder approval.

As of March 15, 2011, Yehuda Zisapel beneficially owned, directly or indirectly, 6.3% of our outstanding ordinary shares; and Zohar Zisapel beneficially owned, directly or indirectly, 12.5 % of our outstanding ordinary shares. Such percentages include options which are exercisable within 60 days of March 15, 2011. Yehuda and Zohar Zisapel, who are brothers, do not have a voting agreement. Regardless, these shareholders may influence the outcome of various actions that require shareholder approval.

Provisions of our Articles of Association, Memorandum of Association and Israeli law could delay, prevent or make difficult a change of control and therefore depress the price of our shares.

The Israeli Companies Law, or the Companies Law, generally provides that a merger be approved by the board of directors and by a majority of shareholders, and has specific provisions for determining the majority of the shareholder vote. However, with respect to companies such as ours which were incorporated prior to the effectiveness of the Companies Law, shareholder approval of a merger must be obtained by at least 75% of the shares participating at the shareholders’ meeting and voting thereon, not taking into account any abstentions. Shareholders may resolve to lower this super-majority requirement; however, such a resolution must be approved by at least a 75% majority. Moreover, the modification of our Memorandum of Association requires a 75% majority vote, and such a requirement may subject certain types of merger transactions or other business combinations to the same super-majority approval requirements. Additionally, upon the request of any creditor of a party to the proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations to creditors. Further, a merger generally may not be completed until the passage of certain time periods. In certain circumstances, an acquisition of shares in a public company must be made by means of a tender offer. Our Articles of Association provide that our directors (other than the external directors) are divided into two classes: Class I and Class II. A director will generally serve for a term ending on the date of the third annual general meeting following the annual general meeting at which such director was elected. This election mechanism may discourage a takeover of our company.

Furthermore, certain provisions of other Israeli laws may have the effect of delaying, preventing or making more difficult an acquisition of or merger with us, which could depress our share price. For example, Israeli tax law treats some acquisitions, such as share-for-share exchanges between an Israeli company and a foreign company, less favorably than U.S. tax laws. In addition, a merger, which may include the acquisition of more than 25% of the share capital of our company, may be subject to approval by the Israeli Controller of Restrictive Trade Practices, who may impede or delay a merger in accordance with the Restrictive Trade Practices Law, 1988. Finally, we must comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development of 1984 and regulations promulgated there under, which we refer to as the R&D Law, which may restrict our ability to consummate a merger or similar transaction.

 
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Risks Relating to Our Location in Israel

Conditions in Israel may limit our ability to produce and sell our products. This could result in a decrease of our revenues.

Our principal offices and research and development facilities, and the majority of our contract manufacturers’ facilities are located in Israel. Accordingly, we are directly influenced by the political, economic and military conditions affecting Israel. Specifically, we could be adversely affected by:

 
any major hostilities involving Israel;

 
the interruption or curtailment of trade between Israel and its present trading partners;

 
a full or partial mobilization of the reserve forces of the Israeli army; and

 
a significant downturn in the economic or financial condition of Israel.

Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. In an attempt to stop missile strikes from the Gaza Strip against Israelis, in January 2009 Israel became engaged in an armed conflict with Hamas in the Gaza Strip, during which missile attacks aimed at populated areas in parts of southern Israel (some of which are in vicinity of warehouse space we use) continued daily, disrupting most day-to-day civilian activity in these areas. These developments have further strained relations between Israel and the Palestinians. Any on-going or future violence between Israel and the Palestinians, armed conflicts, terrorist activities, tension along Israel’s northern borders, or political instability in the region would likely disrupt international trading activities in Israel and may materially and negatively affect our business conditions and those of our major contract manufacturers and could harm our results of operations.

Certain countries, as well as certain companies and organizations, primarily in the Middle East, as well as Malaysia and Indonesia, continue to participate in a boycott of Israeli firms and others doing business with Israel and Israeli companies. Thus, there have been sales opportunities that we could not pursue and there may be such opportunities in the future from which we will be precluded. For example, certain countries participating in the boycott described above have recently been increasing their investment in telecom operators in Africa. This growing control of the market in Africa could lead to a decrease of our sales in Africa in the future. We are also precluded from marketing our products to certain of these countries due to U.S. and Israeli regulatory restrictions. In addition, such boycott, restrictive laws, policies or practices may change over time and we cannot predict which countries, as well as whether certain companies and organizations, will be subject thereto. The boycott, restrictive laws, policies or practices directed towards Israel or Israeli businesses could, individually or in the aggregate, have a material adverse affect on our business in the future.

Some of our executive officers and employees in Israel are, unless exempt, obligated to perform annual military reserve duty in the Israel Defense Forces, depending on their age and position in the army. Additionally, they may be called to active reserve duty at any time under emergency circumstances for extended periods of time. Our operations could be disrupted by the absence for a significant period of time of one or more of our executive officers or key employees due to military service, and any significant disruption in our operations could harm our business. The full impact on our workforce or business if some of our executive officers and employees will be called upon to perform military service, especially in times of national emergency, is difficult to predict.

We can give no assurance that the political and security situation in Israel, as well as the economic situation, will not have a material impact on our business in the future.

 
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Since we received Israeli government grants for research and development expenditures, we are subject to ongoing restrictions and conditions, including restrictions on our ability to manufacture products and transfer technologies outside of Israel.

We received grants from the Government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor, or the OCS, for the financing of a significant portion of our research and development expenditures in Israel through the end of 2006. We therefore must comply with the requirements of the R&D Law with respect to a portion of our products. Under the R&D Law, we cannot transfer technology developed with OCS grants, including by the sale of the technology, the grant of a license of such technology or the manufacture of a significant amount of our products that are based on such technology outside of Israel, unless we obtain the approval of an OCS committee. There is no assurance that we will receive such OCS approvals. Even if such OCS approvals are obtained, we may be required to pay additional royalties to the OCS or, in case of a transfer of the technology outside of Israel, a percentage of the consideration paid for such transfer, but not less than the OCS grants. If we fail to comply with any of the requirements of the R&D Law and of those imposed by the OCS, we may be required to pay additional royalties to the OCS together with interest and penalties, and we may be subject to criminal charges. In addition, under the R&D Law, any non-Israeli who becomes a direct holder of 5% or more of our share capital is required to notify the OCS and to undertake to observe the law governing the grant programs of the OCS, the principal restrictions of which are the transferability limits described above in this paragraph.

In December 2006, we entered into an agreement with the OCS to conclude our research and development grant programs sponsored by the OCS. We retired all our debt to the OCS in 2008. The agreement with the OCS impacts and will continue to impact our future results of operations in two respects: first, we will no longer receive additional grants from the OCS, which would have offset our research and development costs; second, we will no longer record expenses relating to royalty payments to the OCS. Our agreement with the OCS did not amend the terms of the OCS grants we received, and does not release us from continued compliance with the provisions of the R&D Law.

The tax benefits to which we are currently entitled from our approved enterprise program and our beneficiary enterprise program require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to pay increased taxes and would likely be denied these benefits in the future.

The Company has capital investment programs that have been granted approved enterprise status ("Approved Programs") and a program under beneficiary enterprise status pursuant to the Law for the Encouragement of Capital Investments, 1959 ("Beneficiary Program"). When we begin to generate taxable income from these approved and/or beneficiary enterprise programs, the portion of our income derived from these programs will be exempt from tax for a period of two years and will be subject to a reduced tax for an additional eight years thereafter, depending on the percentage of our share capital held by non-Israelis. The benefits available to an approved enterprise program are dependent upon the fulfillment of conditions stipulated under applicable law and in the certificate of approval. If we fail to comply with these conditions, in whole or in part, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates and would likely be denied these benefits in the future. The amount by which our taxes would increase will depend on the difference between the then applicable tax rate for regular enterprises and the rate of tax, if any, that we would otherwise pay as an approved enterprise and/or beneficiary enterprise, and the amount of any taxable income that we may earn in the future.

The tax benefits available to approved and beneficiary enterprise programs may be reduced or eliminated in the future. This would likely increase our tax liability.

The Israeli government may reduce or eliminate in the future tax benefits available to approved and/or beneficiary enterprise programs. Our approved and beneficiary program and the resulting tax benefits may not continue in the future at their current levels or at any level and the new legislation regarding Preferred Enterprise may not be applicable to us or may not fully compensate us for such change. The termination or reduction of these tax benefits would likely increase our tax liability. The amount, if any, by which our tax liability would increase will depend upon the rate of any tax increase, the amount of any tax benefit reduction, and the amount of any taxable income that we may earn in the future.

 
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It may be difficult to enforce a U.S. judgment against us, and our officers and directors named in this annual report, to assert U.S. securities laws claims in Israel and to serve process on substantially all of our officers and directors.

We are incorporated under the laws of the State of Israel. Service of process upon our directors and officers, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and substantially all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of them may not be collectible within the United States. It may be difficult to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these matters.

Subject to specified time limitations and legal procedures, Israeli courts may enforce a U.S. final judgment in a civil matter, including a judgment based upon the civil liability provisions of the U.S. securities laws, and including a judgment for the payment of compensation or damages in a non-civil matter, provided that:

 
the judgment was given by a court which was, according to the laws of the state of the court, competent to give it;

 
the judgment is executory in the state in which it was given;

 
the judgment is no longer appealable;

 
the judgment was not given by a court that is not competent to do so under the rules of private international law applicable in Israel;

 
there has been due process;

 
the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy;

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

 
an action between the same parties in the same matter is not pending in any Israeli court or tribunal at the time the lawsuit is instituted in the U.S. court.

Even if these conditions are satisfied, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel.

 
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ITEM 4.                      INFORMATION ON THE COMPANY
 
A.             History and Development of the Company
 
 We were incorporated under the laws of the State of Israel on July 23, 1996 as Giganet Ltd.  We changed our name to Ceragon Networks Ltd. on September 6, 2000. We operate under the Israeli Companies Law.  Our registered office is located at 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel and the telephone number is 011-972-3-645-5733.  Our world wide web address is www.ceragon.com. Information contained on our website does not constitute a part of this annual report.
 
 Our agent for service of process in the United States is Ceragon Networks, Inc., our wholly owned U.S. subsidiary and North American headquarters, located at 10 Forest Avenue, Suite 120, Paramus, New Jersey 07652.
 
 In the years ended December 31, 2010, 2009 and 2008, our capital expenditures were $ 9.8 million, $6.7 million and $5.0  million, respectively, and were spent primarily on investment in production test equipment, information-technology systems, equipment for research and development, general computer software and hardware and leasehold improvements. We have no current commitments for capital expenditures.
 
B.             Business Overview

We are the premier wireless backhaul specialist providing solutions that enable cellular operators and other wireless service providers to deliver voice and data services, enabling smart-phone applications such as Internet browsing, music and video applications.  Our wireless backhaul solutions use microwave technology to transfer large amounts of telecommunication traffic between base stations and the core of the service provider’s network.
 
Designed to enable risk-free migration from legacy to next-generation backhaul networks, our solutions provide fiber-like connectivity for circuit-switched, or SONET/SDH, networks, next generation Ethernet/Internet Protocol, or IP-based, networks, and hybrid networks that combine circuit-switched and IP-based networks. Our solutions support all wireless access technologies, including GSM, CDMA, EV-DO, HSPA, LTE and WiMAX. These solutions allow wireless service providers to cost-effectively and seamlessly evolve their network from circuit-switched and hybrid concepts to all IP thereby meeting the increasing demands by the growing numbers of subscribers and the increasing demand for mobile data services.

We also provide our solutions to businesses and public institutions that operate their own private communications networks. Our solutions are deployed by more than 230 service providers of all sizes, as well as in hundreds of private networks, in more than 130 countries.

In September 2010, we acquired all the shares of the privately-held Elxys Innovations – Electronics Circuits and Systems SA (“Elxys”), a Greek company for total consideration of $1.6 million plus the issuance of 200,000 restricted share units to Elxys founders who are now Ceragon employees.  Elxys, a design partner to Ceragon for a number of years, is a designer of advanced next generation radio frequency integrated circuits (“RFICs”).

In January 2011, we acquired all the shares of privately-held Nera, a former competitor of ours with significant global operations, from Eltek ASA for the consideration of approximately $48.5 million on a cash-free and debt-free basis and may be subject to certain adjustments based on Nera's net working capital as defined in the Share Purchase Agreement.  In connection with the Nera Acquisition, we entered into an agreement with Bank Hapoalim for a loan of approximately $35 million.  See Item 8 – Significant Changes, for more detailed discussion.

Industry Background

The market for wireless backhaul is being generated primarily by cellular operators, wireless broadband service providers and businesses and public institutions operating private networks. This market is constantly on the rise, fueled by the continuous customer growth in developing countries, and the explosion in mobile data usage in developed countries.

 
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Rapid subscriber growth and the proliferation of advanced, data-centric handsets have significantly increased the amount of traffic that must be carried over a cellular operator’s backhaul infrastructure. As a result, existing backhaul capacity is heavily strained, creating a bottleneck that hinders service delivery and quality. In order to meet the demand for more bandwidth, operators turn to high-capacity solutions in order to replace previous generation equipment. Wireless backhaul systems offer service providers a variety of advantages including ease and speed of deployment, scalability and lower total cost of ownership.

Traditionally based on circuit-switched solutions such as T1/E1 or SONET/SDH, the market for high-capacity wireless backhaul is now shifting to more flexible and cost efficient architectures based on high-capacity IP/Ethernet. This shift enables next-generation mobile backhaul networks to successfully cope with the continuing growth of bandwidth-hungry data services over 3G, HSPA and future LTE access technologies. New wireless broadband networks based on WiMAX technology as well as wireless Internet service providers (WISP) and private networks also rely on high-capacity IP/Ethernet technology to backhaul large amounts of data traffic.

Cellular Operators

In order to address the strain on backhaul capacity, cellular operators have a number of alternatives, including leasing existing copper or fiber lines, laying new fiber optic networks or deploying wireless backhaul solutions. Leasing existing lines requires a significant increase in operating expenses and, in some cases, requires the wireless service provider to depend on a direct competitor. Laying new fiber-optic lines is capital-intensive and these lines cannot be rapidly deployed. The deployment of high capacity point-to-point wireless links represents a scalable, flexible and cost-effective alternative for expanding backhaul capacity. Supporting data rates of up to several Gigabits per second, wireless backhaul solutions enable cellular operators to add capacity only as required while significantly reducing upfront and ongoing backhaul costs.

Today’s backhaul networks are still dominated by circuit switched (or TDM) solutions - be it T1/E1 or high-capacity SDH/SONET. These networks, originally designed to carry voice-only services, have a limited bandwidth capacity and offer no cost-efficient scalability model. The surge in mobile data usage drives operators to migrate their networks to a more flexible, feature-rich and cost optimized IP/Ethernet architecture. As operators transition to HSPA and LTE, two IP-based wireless access technologies, they also look for ways to benefit from IP technology in the backhaul segment.

In order to ensure the success of this backhaul network migration phase, operators require solutions that can support their legacy transport technology (TDM) while providing all the advanced IP/Ethernet capabilities and functionalities. This is because, in most cases, next generation HSPA and LTE base stations are co-located with 2G/3G base stations, and thus share the same backhaul network. Cellular operators therefore seek “hybrid” wireless backhaul solutions that can carry both types of traffic seamlessly over a single network, to facilitate their network migration.

Wireless Broadband Service Providers

For wireless broadband service providers, including operators that utilize WiMAX technology, high-capacity backhaul is essential for ensuring continuous delivery of rich media service across their high-speed data networks.  If the backhaul and its components do not satisfy the service providers’ need for cost-effectiveness, resilience, scalability or ability to supply sufficient capacity, then the efficiency and productivity of the network may be seriously compromised. While both wireless and wireline technologies can be used to build these backhaul systems, many wireless service providers opt for wireless point-to-point microwave solutions. This is due to a number of advantages of the technology including: rapid installation, support for high-capacity data traffic, scalability and lower cost-per-bit compared to wireline alternatives.
 
 
Private Networks
 
Many large businesses and public institutions require private high bandwidth communication networks to connect multiple locations. These private networks are typically built using IP-based communications infrastructure. This market includes educational institutions, utility companies, state and local governments, public safety agencies and defense contractors. These customers continue to invest in their private communications networks for numerous reasons, including security concerns, the need to exercise control over network service quality and redundant network access requirements. As data traffic on these networks rise, we expect that businesses and public institutions will continue to invest in their communications infrastructure, including backhaul equipment. Like wireless service providers, customers in this market demand a highly reliable, cost-effective backhaul solution that can be easily installed and scaled to their bandwidth requirements.
 
 
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Our Solutions

We offer a broad portfolio of innovative, field-proven, high capacity wireless backhaul solutions which enable cellular operators and other wireless service providers to effectively eliminate the backhaul capacity bottleneck, significantly reduce backhaul costs and gradually evolve their network from TDM to IP/Ethernet-based networks. We also provide advanced pure IP/Ethernet solutions to wireless broadband service providers as well as to businesses and public institutions that operate their own private communications networks.

Our FibeAir® family of LTE/4G ready wireless backhaul solutions supports any transport technology, deployment architecture or network topology. We deliver platforms that carry pure TDM, a combination (hybrid) of native TDM and native IP/Ethernet and pure IP/Ethernet traffic. Our systems can be deployed in multi-radio all-indoor configurations, split-mount or all-outdoor installations. Understanding the many needs of our customers, we provide solutions for every segment of the backhaul network – from tail site to large aggregations sites – and that support both tree and ring topologies.
 
We believe our solutions have proven their ability to provide high performance in a cost-effective manner, and they are differentiated in the following ways:
 
Leading Offering for Wireless Backhaul Market.  We believe that we provide our customers with a leading offering of high capacity wireless backhaul solutions for the broader wireless backhaul market. Our competitive differentiation is demonstrated by our relationships with our key OEMs, as well as by our global customer base. This differentiation results from our focus on product development from components to subsystem integration to overall system solution design.  Our IP-based wireless backhaul solutions provide fiber-like performance with throughput speeds from 10 Megabit up to 1 Gigabit per second over a single radio channel, with high availability and low latency. Our solutions enable wireless service providers to gradually evolve their network from all circuit-switched through a combined “hybrid” model to all IP/Ethernet-based networks. Our suite of IP-based wireless backhaul products and hybrid network products is currently deployed in over 200 wireless service providers’ networks as well as private networks around the world. These solutions were the first of their kind to receive certification from Metro Ethernet Forum, a leading industry alliance of telecommunications service providers and other industry participants that develop technical specifications to promote the adoption of IP-based networks.
 
Broad Product Portfolio.  We offer a broad range of high capacity wireless backhaul solutions, enabling us to offer complete solutions for the specific needs of a wide range of customers, based on service type, frequency, distance and capacity requirements. Our solutions include platforms based on circuit-switched (or TDM), pure IP-based products, and hybrid solutions that deliver both circuit-switched and IP traffic in their native form over a single radio. This functionality makes the latter particularly attractive for wireless service providers and facilitates cost effective, risk-free migration to IP-based backhaul network and can be integrated in any pure IP, hybrid or circuit-switched network. Our solutions can be deployed in all-indoor, all-outdoor and split-mount configurations and support a wide range of network topologies.

Network Management Tools for Ethernet Microwave Networks. We offer both “stand-alone” management tools as well as tailored solutions in combination with third party partners. These tools enable advanced Ethernet service delivery across the network, while allowing effectively seamless management of all the backhaul network’s elements.
 
Turnkey Services Capabilities. We offer our customers a comprehensive set of services including: advanced network and radio planning, site survey, solutions development, installation, maintenance, training and more.  Our proven turnkey project track-record includes thousands of links already installed and in operation with a variety of industry leading operators.
 

 
 
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Low Total Cost of Ownership.  Our solutions address industry requirements for low total cost of ownership backhaul solutions. Total cost of ownership includes the combined cost of initial acquisition, installation and ongoing operation and maintenance, regardless of whether these costs are incurred through leasing arrangements or operating owned equipment.
 
Scalability and Flexibility.  We design our products to enable incremental deployment to meet increased service demand, making it possible for wireless service providers to rapidly deploy additional capacity as needed. This approach allows our customers to establish a wireless broadband network with a relatively low initial investment and later expand the geographic coverage area of their networks as subscriber demand increases.

Strong Partnerships. Ceragon maintains strong partnerships with third party solution vendors and network integrators. Through these relations Ceragon develops interoperable ecosystems, enabling operators to profitably evolve mobile networks by using complementary backhaul and networking alternatives.
 
Our Products
 
Our portfolio of products utilizes microwave radio technology that enables our customers to construct a wireless connectivity that dynamically adapts to weather conditions and optimizes range and efficiency for a given frequency channel bandwidth. Our products are typically sold as a complete system comprised of four components: an outdoor unit, an indoor unit, a compact high-performance antenna and a network management system. We offer all-packet microwave radio links, with optional migration from TDM to Ethernet. Our products include integrated networking functions for both TDM and Ethernet.
 
 
Indoor units convert the transmission signals from digital to intermediate frequency signals and vice versa, process and manage information transmitted to and from the outdoor unit, aggregate multiple transmission signals and provide a physical interface to wireline networks.

 
Outdoor units are used to control power transmission, convert intermediate frequency signals to radio frequency signals and vice versa, and provide an interface between antennas and indoor units. They are contained in compact weather-proof enclosures fastened to antennas. Indoor units are connected to outdoor units by standard coaxial cables.

 
Antennas are used to transmit and receive microwave radio signals from one side of the wireless link to the other. These devices are mounted on poles typically placed on rooftops, towers or buildings. We rely on third party vendors to supply this component.

 
End-to-End Network Management.  Our network management system uses standard  management protocol to monitor and control managed devices at both the element and network level and can be easily integrated into our customers’ existing network management systems.

An antenna, an outdoor unit and an indoor unit comprise a terminal. Two terminals are required to form a radio link, which typically extends across a distance of several miles and can extend across a distance of 80 miles or more. The specific distance depends upon the customer’s requirements and chosen modulation scheme, the frequency utilized, the available line of sight, local rain patterns and antenna size. Each link can be controlled by our network management system or can be interfaced to the network management system of the service provider. The systems are available in both split-mount, including an indoor and outdoor unit, all-indoor and all-outdoor installations.

 
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The diverse FibeAir® product family offers products that address the complete backhaul needs of IP-based, hybrid and circuit-switched networks:
 
Network
Infrastructure
IP-based
Hybrid
Circuit Switched
Product
FibeAir
IP-10E/IP-MAX2-
FibeAir
IP-10G/IP-MAX2
 
FibeAir
2000/4800
FibeAir
/1500R
FibeAir
3200T
Description
High-Capacity
Ethernet
High-Capacity
Multi-Service
 
Unlicensed
Multi-Service
High-Capacity
SDH/SONET
High-Capacity Circuit-switched TDM
Interfaces
Gigabit Ethernet, Fast Ethernet
Multiple Gigabit Ethernet, Multiple Fast Ethernet
Gigabit Ethernet multiple E1/T1, Fast Ethernet multiple E1/T1
 
Fast Ethernet multiple E1/T1
STM-1/OC-3
Multiple STM-1/OC-3
Typical Applications
Wireless backhaul for carriers,   Private networks and Metro area networks
Wireless backhaul for carriers and Private networks
 
Private Networks, Business access
Wireless backhaul, Metro area networks
Wireless backhaul, Long distance networks
Type of Customers
Cellular operators, WiMax carriers, Wireless ISPs, Incumbent local exchange carriers, Businesses, Public institutions
Cellular operators, Wireless service providers, Incumbent local exchange carriers
 
Wireless ISPs, Businesses, Public institutions
Wireless service providers, Incumbent local exchange carriers, Public institutions
Wireless service providers, Incumbent local exchange carriers
 
Our IP-based network products use native IP technology. Our hybrid products use our Native2™ concept which allows them to transmit both native IP and native circuit-switched TDM traffic simultaneously over a single radio link. Native IP refers to systems that are designed to transport IP-based network traffic directly rather than adapting IP-based network traffic to existing circuit-switched systems. This approach increases efficiency and decreases latency. Our products provide effectively seamless migration to gradually evolve the network from an all circuit-switched and hybrid concept to an all IP-based packet.

As telecommunication networks and services become more demanding, there is a significant importance to match the indoor units’ advanced networking capabilities with powerful and efficient radio units. Our outdoor radio frequency units (RFUs) are designed with sturdiness, power, simplicity, and compatibility in mind. As such, they provide high-power transmission for both short and long distances and can be assembled and installed quickly and easily. The RFUs can operate with different FibeAir indoor units, according to the desired configuration, addressing any network need be it cellular, backbone, rural or private backhaul networks.

Our RFUs deliver a maximum capacity over 3.5-56 MHz channels with configurable modulation schemes from QPSK to 256QAM. High spectral efficiency is ensured by using the same bandwidth for double the capacity, using a single channel, with vertical and horizontal polarizations. This feature is implemented with a built-in cross polarization interference canceller (XPIC) mechanism.

For a discussion of Nera products, see Item 8 – Significant Changes.
 
Our Services
 
We are committed to providing high levels of service and implementation support to our customers. Our sales and network field engineering services personnel work closely with customers, system integrators and others to coordinate network design and ensure successful installation of our solutions.

We offer our customers turnkey project services that include: advanced network and radio planning, site survey, solutions development, installation, maintenance, training and more.  We are increasingly engaged in projects in which we provide the requisite installation, supervision and testing services, either directly or through subcontractors.

 
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We support our products with documentation and training courses tailored to our customers’ varied needs. We have the capability to remotely monitor the in-network performance of our products and to diagnose and address problems that may arise. We help our customers to integrate our network management system into their existing internal network operations control centers.

For a discussion of Nera services, see Item 8 – Significant Changes.
 
Our Customers
 
We have sold our products through a variety of channels to over 230 service providers and the operators of hundreds of private networks in more than 130 countries. Our principal customers are wireless service providers that use our products to expand backhaul network capacity, reduce backhaul costs and support the provision of advanced telecommunications services. We reach a number of these customers through our OEM relationships. We also sell systems to large businesses and public institutions that operate their own private communications networks through system integrators, resellers and distributors. Our customer base is diverse in terms of both size and geographic location.

The following table summarizes the distribution of our revenues by region, stated as a percentage of total revenues for the years ended December 31, 2008, 2009 and 2010, and the names of representative customers:
 
     
Year Ended December 31,
   
     
2008
     
2009
     
2010
   
Region                          Representative Customers
North America
    9 %     16 %     16 %
AT&T, CellularOne, Connectronics,
Hutton Communications, Stelera Wireless
                           
Europe, Middle East and Africa
    31 %     38 %     27 %
Hutchison 3, Belgacom, KPN, ITM, Botswana Telecom, Masterline
Asia Pacific
    52 %     37 %     50 %
Bharti Airtel, Digitel Mobile Philippines, IDEA Cellular, Reliance Communications, Tata Teleservices,
                           
Latin America
    8 %     9 %     7 %
Telcel

For a discussion of Nera customers, see Item 8 – Significant Changes.
 
Sales and Marketing

We sell our products through a variety of channels, including direct sales, OEMs, resellers, distributors and system integrators. Our sales and marketing staff includes approximately 316 employees in numerous countries worldwide, who work together with local agents, distributors and OEMs to expand our sales.

We are a supplier to three OEMs, which together accounted for 24% of our revenues for the year ended December 31, 2010. We plan to increase our efforts in the development of additional strategic relationships with equipment vendors, integrators, networking companies and other industry suppliers with the goal of gaining greater access to our target markets.

Our marketing efforts include advertising, public relations and participation in industry trade shows and conferences.
 
 
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 Manufacturing and Assembly

Our manufacturing process consists of materials planning and procurement, assembly of indoor units and outdoor units, final product assurance testing, quality control and packaging and shipping. With the goal of streamlining all manufacturing and assembly processes, we have implemented an outsourced, just-in-time manufacturing strategy that relies on contract manufacturers to manufacture and assemble circuit boards and other components used in our products and to assemble and test indoor units and outdoor units for us. The use of advanced supply chain techniques has enabled us to increase our manufacturing capacity, reduce our manufacturing costs and improve our efficiency.

We outsource the majority of our manufacturing operations to major contract manufacturers in Israel and the Philippines. Our warehouse operations are outsourced to subcontractors in each of Israel and the Philippines. The raw materials for our products come primarily from the United States, Europe and Asia Pacific.

We comply with standards promulgated by the International Organization for Standardization and have received certification under the ISO 9001, ISO 9002, and ISO 14000 standards. These standards define the procedures required for the manufacture of products with predictable and stable performance and quality, as well as environmental guidelines for our operations.

Our activities in Europe require that we comply with European Union Directives with respect to product quality assurance standards and environmental standards including the “RoHS” (Restrictions of Hazardous Substances) Directive. In addition, the “WEEE” (Waste Electrical and Electronic Equipment) Directive requires producers of electrical and electronic equipment to register in different European countries and to provide collection and recycling facilities for used products.
 
Research and Development
 
We place considerable emphasis on research and development to improve and expand the capabilities of our existing products, to develop new products, with particular emphasis on equipment for transitioning to IP-based networks, and to lower the cost of producing both existing and future products. We intend to continue to devote a significant portion of our personnel and financial resources to research and development. As part of our product development process, we maintain close relationships with our customers to identify market needs and to define appropriate product specifications. In addition, we intend to continue to comply with industry standards and, in order to participate in the formulation of European standards, we are full members of the European Telecommunications Standards Institute.

Our research and development activities are conducted at our facilities in Tel Aviv, Israel and at our recently acquired subsidiary in Greece (see below). As of December 31, 2010, our research, development and engineering staff consisted of 166 employees. Our research and development team includes highly specialized engineers and technicians with expertise in the fields of millimeter wave design, modem and signal processing, data communications, system management and networking solutions.
 
Our research and development department provides us with the ability to design and develop most of the aspects of our proprietary solutions, from the chip-level, including both application specific integrated circuits, or ASICs, and RFICs, to full system integration. We leverage our research and development capabilities through the use of specialized outside design firms and in September 2010, we acquired Elxys Innovations – Electronics Circuits and Systems S.A., or Elxys,  a Greek company, which designs advanced, next generation RFICs. Our research and development projects currently in process include extensions to our leading IP-based networking product lines and development of new technologies to support future product concepts. In addition, our engineers continually work to redesign our products with the goal of improving their manufacturability and testability while reducing costs.

Intellectual Property

To safeguard our proprietary technology, we rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality agreements and other contractual arrangements with our customers, third-party distributors, consultants and employees, each of which affords only limited protection. We have a policy which requires all of our employees to execute employment agreements which contain confidentiality provisions.

 
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We have registered trademarks as follows:

 
for the standard character mark Ceragon Networks and our logo in the United States, Israel, and the European Union;
 
 
for the standard character mark Ceragon Networks in Canada;
 
 
for the standard character mark Ceragon in Russia
 
 
for our design mark for FibeAir in the United States, Israel and the European Union;
 
 
for the standard character mark FibeAir in the United States;
 
 
for the standard character mark CeraView in the United States, Israel and the European Union; and
 
 
For the standard character mark Native2 in India
 
In 2009, we began to more aggressively pursue patent protection and consequently, our patent portfolio may not be as extensive as those of our competitors. As a result, we may have limited ability to assert any patent rights in negotiations with, or in counterclaiming against, competitors who assert intellectual property rights against us.  To date, we have one patent granted in the United States,  seven patent applications pending in the United States and other foreign jurisdictions, two  patent applications pending in the PCT and six provisional patent applications. We cannot assure you that any patents will actually be issued or that the scope of any issued patent will adequately protect our intellectual property rights.  In connection with the Nera Acquisition, we acquired additional patents and patent applications.
 
Competition
 
The market for wireless equipment is rapidly evolving, fragmented, highly competitive and subject to rapid technological change. We expect competition, which may differ from region to region, to persist, intensify and increase in the future, especially if rapid technological developments occur in the broadband wireless equipment industry or in other competing high-speed access technologies.

We compete with a number of wireless equipment providers worldwide that vary in size and in the types of products and solutions they offer. Our primary competitors include Aviat Networks (formerly known as Harris Stratex Networks, Inc.), Alcatel-Lucent,  Fujitsu Limited, Huawei Technologies Co., Ltd., L.M. Ericsson Telephone Company, NEC Corporation (NEC) and Nokia Siemens Networks B.V. (NSN). In addition to these primary competitors, a number of other wireless equipment suppliers, including DragonWave Inc.,  SIAE Microelectronica S.p.A. and ZTE Corporation, offer or are developing products that compete with our products.
 
We believe we compete favorably on the basis of:

 
product performance, reliability and functionality;

 
range and maturity of product portfolio, including the ability to provide both circuit switch and IP solutions and therefore to provide a migration path for circuit-switched to IP-based networks;

 
cost structure; and

 
support and technical service and experience and commitment to high quality customer service.

Our products also indirectly compete with other high-speed communications solutions, including fiber optic lines and other wireless technologies.

 
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Israeli Office of Chief Scientist

The Government of Israel encourages research and development projects through the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the OCS, pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, and the regulations promulgated thereunder, commonly referred to as the R&D Law.
 
Under the R&D Law, we applied for and were granted R&D grants. In exchange, we as a recipient of such grants are required to pay the OCS royalties from the revenues derived from products incorporating know-how developed within the framework of each such program or derived from such program.
 
In December 2006, we entered into an agreement with the OCS to conclude our R&D grant programs sponsored by the OCS. We have retired all the debt remaining from this agreement by mid 2008. . The R&D Law generally requires that the product developed under a program be manufactured in Israel. However, upon the approval of the OCS, some of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate and at an increased total amount, which may be substantial. The R&D Law further permits the OCS, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties.
 
The R&D Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the research committee.  Such approval is not required for the sale or export of any products resulting from such research or development. The R&D Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel, except in certain circumstances and subject to prior OCS approval. The OCS may approve the transfer of OCS-funded know-how outside Israel, in the following cases: (a) the grant recipient pays to the OCS a portion of the sale price paid in consideration for such OCS-funded know-how (according to certain formulas); or (b) the grant recipient receives know-how from a third party in exchange for its OCS-funded know-how; or (c) such transfer of OCS-funded know-how arises in connection with certain types of cooperation in research and development activities.
 
The R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient.  The law requires the grant recipient and its controlling shareholders and foreign interested parties to notify the OCS of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient and requires the new interested party to undertake to the OCS to comply with the R&D Law.  In addition, the rules of the OCS may require additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company.  A person is presumed to have control if such person holds 50% or more of the means of control of a company.  “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer.  An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors.  Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the R&D Law.

 
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C.            Organizational Structure
 
We are an Israeli company that commenced operations in 1996.  The following is a list of our significant subsidiaries:
 
Company
 
Place of Incorporation
 
Ownership Interest
 
           
Ceragon Networks, Inc.
 
New Jersey
    100 %
Ceragon Networks, S.A. de C.V.
 
Mexico
    100 %
Ceragon Networks do Brasil Limitada
 
Brazil
    100 %
Ceragon Networks (India) Private Limited
 
India
    100 %
 
D.            Property, Plants and Equipment
 
Our corporate headquarters and principal administrative, finance, sales and marketing, R&D and operations departments are located at a leased facility of approximately 73,680 square feet in Tel Aviv, Israel.  The leases for the majority of this space are valid until December 2012, with an option to renew for an additional two-year period.
 
In the United States, we lease approximately 5,800 square feet in Paramus, New Jersey, for our North American headquarters.  The lease in Paramus is valid until July 2013. In the United Kingdom, we lease approximately 2,560 square feet in Birmingham expiring in March 2015; in India, we lease approximately 11,737 square feet expiring in October 2013; and in Singapore, we lease approximately 2,375 square feet expiring in October 2011.  We also lease space for other local subsidiaries to conduct pre-sales and marketing activities in their respective regions.
ITEM 4A.                   UNRESOLVED STAFF COMMENTS
 
Not applicable.
ITEM 5.                      OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements, the notes to those financial statements and other financial data that appear elsewhere in this annual report. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Risk Factors” and elsewhere in this annual report. Our consolidated financial statements are prepared in conformity with U.S. GAAP.

A.             Operating Results

Overview

We are the premier wireless backhaul specialist providing solutions that enable cellular operators and other wireless service providers to deliver voice and data services, enabling smart-phone applications such as Internet browsing, music and video applications. Our wireless backhaul solutions use microwave technology to transfer large amounts of telecommunication traffic between base stations and the core of the service provider’s network.

Designed to enable risk-free migration from legacy to next-generation backhaul networks, our solutions provide fiber-like connectivity for circuit-switched, or SONET/SDH, networks, next generation Ethernet/Internet Protocol, or IP-based, networks and hybrid networks that combine circuit-switched and IP-based networks. Our solutions support all wireless access technologies including GSM, CDMA, EV-DO HSPA, LTE and WiMAX. These solutions allow wireless service providers to cost-effectively and seamlessly evolve their network from circuit-switched and hybrid concepts to all IP thereby meeting the increasing demands by growing numbers of subscribers and the increasing demand for mobile data services.

 
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We also provide our solutions to businesses and public institutions that operate their own private communications networks. Our solutions are deployed by more than 230 service providers of all sizes, as well as in hundreds of private networks, in nearly 130 countries.

In September 2010, we acquired all the shares of the privately-held Elxys for total consideration of $1.6 million plus 200,000 restricted share units to Elxys founders who are now Ceragon employees.

In January 2011, we acquired all the shares of privately-held Nera, a former competitor of ours with significant global operations, from Eltek ASA for the consideration of approximately $48.5 million on a cash-free, debt-free basis.  In connection with the Nera acquisition, we entered into an agreement with Bank Hapoalim for a loan of approximately $35 million.  See Item 8 – Significant Changes, for more detailed discussion.   [The Nera Acquisition significantly increased our size (based on 2010 revenues and number of employees) and will materially impact our results of operations and financial condition in 2011 and thereafter.]

We have grown our revenues from $108.4 million for the year ended December 31, 2006 to $249.9 million for the year ended December 31, 2010, representing a 23% compound annual growth rate, or CAGR. Our revenues for 2010 represent an increase of 36% compared to our revenues for 2009.  In 2010, approximately 50% of our revenues were derived from customers in Asia Pacific and 27% from customers in Europe and Africa.

Industry Trends

Market trends have placed, and will continue to place, pressure on the selling prices for our products and on our gross margins. Our objective is to continue to meet the rising demand for our solutions while at the same time increasing our profitability. We seek to achieve this objective by constantly reviewing and improving our execution in, among others, development, manufacturing and sales and marketing. Set forth below is a more detailed discussion of the trends affecting our business:
 
 
Growing Number of Global Wireless Subscribers. Growth in the number of global wireless subscribers is being driven by the availability of inexpensive cellular phones and more affordable wireless service, particularly in developing countries and emerging markets, and is being addressed by expanding wireless networks and by building new networks.

 
Increasing Demand for Mobile Data Services. Cellular operators and other wireless service providers are facing increasing demand from subscribers to deliver voice and data services, including Internet browsing, music and video applications.

 
Transition to IP-based Networks. Cellular operators and other wireless service providers are beginning to deploy all-IP networks and upgrade their infrastructure to interface with an IP-based core network in order to increase network efficiency, lower operating costs and more effectively deliver high-bandwidth data services.

We are also experiencing pressure on our sale prices as a result of several factors:

 
Increased Competition: Our target market is characterized by vigorous, worldwide competition for market share and rapid technological development. These factors have resulted in aggressive pricing practices and downward pricing pressures, and growing competition from both start-up companies and well-capitalized telecommunication systems providers.

 
Regional Pricing Pressures: In recent years we have increased sales of our products in India and other parts of Asia Pacific in response to the rapid build-out of cellular networks in those regions. For the years ended December 31, 2008, 2009 and 2010,  52%, 37% and 50%, respectively, of our revenues were earned in the Asia Pacific region, the majority of which was derived from India. Sales of our products in these markets are generally at lower gross margins in comparison to other regions.
 
 
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Transaction Size: Competition for larger equipment orders is increasingly intense since the number of large equipment orders in any year is limited. Consequently, we generally experience greater pricing pressure when we compete for larger orders as a result of this increased competition and demand from purchasers for greater volume discounts. As an increasing portion of our revenues is derived from large orders, we believe that our business will be more susceptible to these pressures.

 
Sales through OEMs: Sales through our OEM relationships result in lower gross margins than sales directly to end-users through distributors and re-sellers. By selling our products to OEMs, we rely in part on the sales and marketing efforts of the OEMs, as well as on their post-sale support. For the year ended December 31, 2010, approximately 24% of our sales were to our three OEMs of wireless equipment, rather than directly to end users. We anticipate that sales to OEMs will continue to constitute a significant part of our business in the future.

Although we have successfully reduced the cost of producing our equipment and continue to focus on operational improvements, these price pressures may have a negative impact on our gross margins.

As we continue to expand our geographic footprint, we are increasingly engaged in supplying installation and other services for our customers, often in developing nations. In this context, we may act as prime contractor and equipment supplier for network build-out projects, providing installation, supervision and commissioning services required for these projects, or we may provide such services and equipment for projects handled by system integrators. In such cases, we typically bear the risks of loss and damage to our products until the customer has issued an acceptance certificate upon successful completion of acceptance tests. If our products are damaged or stolen, or if the network we install does not pass the acceptance tests, the end user or the system integrator, as the case may be, could delay payment to us and we would incur substantial costs, including fees owed to our installation subcontractors, increased insurance premiums, transportation costs and expenses related to repairing or manufacturing the products. Moreover, in such a case, we may not be able to repossess the equipment, thus suffering additional losses.

Finally, our revenues have grown rapidly over the last several years, except the slowdown in 2009 due to the general global economic condition at that time; we cannot assure you that we will be able to sustain the rapid rate of growth in future periods. . You should not rely on our revenue growth in any prior quarterly or annual period as an indication of our future revenue growth.

Results of Operations

Revenues. We generate revenues primarily from the sale of our products, and, to a lesser extent, services. The final price to the customer may vary based on various factors, including but not limited to the size of a given transaction, the geographic location of the customer, the specific application for which products are sold, the channel through which products are sold, the competitive environment and the results of negotiation.

Cost of Revenues. Our cost of revenues consists primarily of the prices we pay contract manufacturers for the products they manufacture for us, estimated warranty costs, costs related to management of our supply chain and shipping. In addition, we pay fees to subcontractors relating to installation services with respect to our products.

Significant Expenses

Research and Development Expenses. Our research and development expenses consist primarily of salaries and related costs for research and development personnel, subcontractors’ costs, costs of materials and depreciation of equipment. All of our research and development costs are expensed as incurred. We believe continued investment in research and development is essential to attaining our strategic objectives.

Selling and Marketing Expenses. Our selling and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, trade show and exhibit expenses, travel expenses, commissions and promotional materials.

 
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General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation and related costs for executive, finance, information system and human resources personnel, professional fees (including legal and accounting fees), insurance, provisions for doubtful accounts and other general corporate expenses.

Financial Income, Net.  Our financial income, net, consists primarily of interest earned on bank deposits and marketable securities, gains and losses arising from the remeasurement of transactions and balances denominated in non-dollar currencies into dollars, gains and losses from our currency hedging activity, amortization of marketable securities, premium net, and fees and commissions paid to banks.

Taxes.  Israeli companies are generally subject to corporate tax at the rate of 25% of their taxable income in 2010.  The rate is scheduled to decline to 24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016. However, the effective tax rate payable by a company that derives income from an “approved enterprise” or "beneficiary enterprise" designated as set forth under the Law for the Encouragement of Capital Investments, 1959, or the Investment Law, may be considerably less. As of December 31, 2010, the end of our last fiscal year, our net operating loss carry forwards amounted to approximately $33 million for Israeli tax purposes and $7 million for U.S. tax purposes.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make certain estimates, judgments and assumptions based upon information available at the time they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented.

Our management believes the accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements and which are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

 
Revenue recognition;

 
Inventory valuation;

 
Provision for doubtful accounts;

 
Stock-based compensation expense;

 
Deferred taxes; and

 
Marketable securities.

Revenue recognition.  We generate revenues from selling products to end users, distributors, system integrators and OEMs.

Revenues from product sales are recognized in accordance with ASC topic 605-10, "Revenue Recognition", when delivery has occurred, persuasive evidence of an arrangement exists, our fee is fixed or determinable, no future obligation exists and collectability is probable.

We generally do not grant a right of return to our customers. When a right of return exists, we create a provision for returns according to ASC topic 605, "Revenue Recognition When Right of Return Exists".

Revenue from certain arrangements includes the sale of products and post delivery installation services. We consider the sale of equipment and its installation to be two separate units of accounting in the arrangement, since the installation is not essential to the functionality of the equipment, the equipment has value to the customer on a standalone basis, and whenever fair value of the installation services exists. In such arrangement, revenues from the sale of equipments are recognized upon delivery, if all other revenue recognition criteria are met we defer the fair value of the installation service (but not less than the amount contingent upon completion of installation, if any) to the period in which such installation occurs.

 
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Our accounting policy complies with the requirements set forth in ASC 605-25, "Revenue Arrangements with Multiple Deliverables", relating to the separation of multiple deliverables into individual accounting units and revenue from such deliverables is recognized under ASC 605-10.

Inventory valuation.  Our inventories are stated at the lower of cost or market value. Cost is determined by using the moving average cost method. At each balance sheet date, we evaluate our inventory balance for excess quantities and obsolescence. This evaluation includes an analysis of slow-moving items and sales levels by product and projections of future demand. If needed, we write off inventories that are considered obsolete or excessive. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of revenues in the period the revision is made.

Provision for doubtful accounts.  We perform ongoing credit evaluations of our trade receivables and maintain an allowance for doubtful accounts, based upon our judgment as to our ability to collect outstanding receivables. Allowance for doubtful accounts is made based upon a specific review of all the outstanding invoices. In determining the provisions, we analyze our historical collection experience, current economic trends, the financial position of our customers and the payment guarantees (such as letters of credit) that we receive from our customers. We also insure certain trade receivables under credit insurance policies. If the financial condition of our customers deteriorates, resulting in their inability to make payments, additional allowances might be required. As of December 31, 2010, our allowance for doubtful accounts was $3.4 million and our trade receivables were $88.1 million. Historically, our provision for doubtful accounts has been sufficient to account for our bad debts.

Stock-based compensation expense.  ASC 718, “Compensation- Stock Compensation”, requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated income statement.

We selected the binomial option pricing model as the most appropriate fair value method for our share-option awards based on the market value of the underlying shares at the date of grant. We recognize compensation expenses for the value of our awards, which have graded vesting, based on the accelerated attribution method over the requisite service period, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures and on management’s estimates. If actual forfeitures differ from our estimates, stock-based compensation expense and our results of operations would be impacted.

Stock-based compensation expense recognized under ASC 718 was $2.6 million, $3.6 million and $4.2 million for the years ended December 31, 2008, 2009 and 2010, respectively.

Deferred Taxes.  We utilize the liability method of accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in the past. As a result of our cumulative losses and the utilization of our loss carry forward opportunities, we have recorded valuation allowances to reduce our net deferred tax assets to the amount we believe is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for any valuation allowance, in the event we were to determine that we will be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such a determination is made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to expenses in the period such a determination is made. During 2008, following our determination that it is more likely than not that we will be able to realize a portion of our deferred tax assets, we recorded a tax benefit of approximately $11.4 million, a tax benefit of approximately $0.3 million and $0.5 million in 2009 and 2010 respectively.

 
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Marketable Securities.  We account for investments in marketable securities in accordance with ASC topic 320, "Debt and Equity Securities", ("ASC 320"). Our management determines the appropriate classification of our investments in marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. In 2009 the marketable securities were classified as held-to-maturity as we previously had the intent and ability to hold the securities to maturity and were stated at amortized cost. During the last quarter of 2010, we classified our debt securities as available-for-sale in connection with the anticipated acquisition of Nera (see also item 8 – Significant changes). As a result of the acquisition, we did not have the intent to hold the securities until maturity; we changed the classification of our investments from held-to-maturity to available-for-sale.  Available for sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in “accumulated other comprehensive income (loss)” in shareholders’ equity. Realized gains and losses on sale of investments are included in “financial income, net” and are derived using the specific identification method for determining the cost of securities. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in “financial income, net”.   We periodically review our marketable securities for impairment. If we conclude that any of our investments are impaired, we determine whether such impairment is "other-than-temporary" as defined under ASC 320-10-35. During 2008, 2009 and 2010 no other-than-temporary impairments were identified.

Comparison of Period to Period Results of Operations

The following table presents consolidated statement of operations data for the periods indicated as a percentage of total revenues.

 
 
Year Ended December 31,
 
 
 
2008
   
2009
   
2010
 
Revenues
    100.0 %     100.0 %     100.0 %
Cost of revenues
    66.6       67.0       64.2  
Gross profit
    33.4       33.0       35.8  
Operating expenses:
                       
Research and development, net
    9.3       10.9       10.1  
Selling and marketing
    14.8       16.3       14.9  
General and administrative
    3.3       4.3       4.9  
Acquisition related costs
    -       -       0.3  
Total operating expenses
    27.4       31.5       30.2  
Operating income
    6.0       1.5       5.6  
Financial income, net
    1.0       0.8       0.5  
Tax benefit (tax on income)
    5.0       (0.3 )     0.5  
Net income
    12.0       2.0       5.6  

Year ended December 31, 2009 compared to year ended December 31, 2010

Revenues.  Revenues increased from $184.2 million for the year ended December 31, 2009 to $249.9 million for the year ended December 31, 2010, an increase of $65.7 million, or 36%. This increase was attributable primarily to increased sales of our products to wireless service providers, mainly within the Asia Pacific regions. Revenues in the Asia Pacific region increased to $123.8 million for the year ended December 31, 2010 as compared to $67.7 million for the year ended December 31, 2009. The increase in revenues in the Asia Pacific region was primarily due to recognition of revenues from turn key projects of  a leading mobile operator in India.  As a percentage of revenues, sales in the Asia Pacific region increased to 50% for the year ended December 31, 2010 from 37% for the year ended December 31, 2009.

Cost of Revenues.  Cost of revenues increased from $122.7 million for the year ended December 31, 2009 to $160.5 million for the year ended December 31, 2010, an increase of $37.8 million, or 31%. This increase was attributable mainly to increased purchases of products from our contract manufacturers, in line with the increase in our revenues.

 
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Gross Profit.  Gross profit as a percentage of revenues increased from 33.4% for the year ended December 31, 2009 to 35.8% for the year ended December 31, 2010. This increase was attributable mainly to cost reduction activities and the introduction of our new IP series products which have better cost position

Research and Development Expenses. Our research and development expenses increased from $19.0 million for the year ended December 31, 2009 to $25.1 million for the year ended December 31, 2010, an increase of $6.1 million, or 33%. The increase in our research and development expenses was attributable primarily to the increase in our number of research and development employees and subcontractors in our efforts to advance the launch of our new products.  Our research and development efforts are a key element of our strategy and are essential to our success.  We intend to maintain our commitment to research and development. . Our research and development efforts are a key element of our strategy and are essential to our success and we intend to maintain our commitment to research and development. An increase or a decrease in our total revenue would not necessarily result in a proportional increase or decrease in the levels of our research and development expenditures. As a percentage of revenues, research and development expenses slightly decreased to 10.1% in the year ended December 31, 2010 compared to 10.3% for the year ended December 31, 2009.

Selling and Marketing Expenses. Selling and marketing expenses increased from $29.3 million for the year ended December 31, 2009 to $37.2 million for the year ended December 31, 2010, an increase of $7.9 million, or 27%. This increase was attributable primarily to an increase in the number of employees in our subsidiaries resulting in an increase of payroll and payroll related expenses of approximately $ 3.2 million and our increase in travel and office expenses of $ 2.3 million.  As a percentage of revenues, selling and marketing expenses were 15% in the year ended December 31, 2010 and 16% in the year ended December 31, 2009.

General and Administrative Expenses. General and administrative expenses increased from $10.7 million for the year ended December 31, 2009 to $12.3 million for the year ended December 31, 2010, an increase of $1.6 million, or 15%. This increase was attributable primarily to an increase of $1.2 million in payroll and payroll related expenses as a result on increase in number of employees in our management information system department and, increase of $0.4 million of stock based compensation expenses. As a percentage of revenues, general and administrative expenses were 6% and 5% for the years ended December 31, 2009 and 2010 respectively.

Acquisition related costs. Acquisition related costs consist of expenses paid in relation to the acquisition of Nera.  Acquisition related expenses were $ 0.8 million in 2010.

Financial Income, Net. Financial income, net decreased from $1.5 million for the year ended December 31, 2009 to $1.3 million for the year ended December 31, 2010, a decrease of $0.2 million, or 16%. As a percentage of revenues, financial income, net decreased to 0.5% in the year ended December 31, 2010 compared to 0.8% for the year ended December 31, 2009. This decrease was attributed mainly to lower income on our short-term and long-term interest-bearing investments due to reduction of interest rates in the financial markets.

Taxes on income. Taxes on income increased from $0.5 million for the year ended December 31, 2009 to $1.2 million for the year ended December 31, 2010, an increase of $0.7 million, or 141%.   Our effective tax rate was 12% in 2009 and 8% in 2010.  This decrease was attributed mainly to a decrease in the statutory tax rate in Israel from 26% in 2009 to 25% in 2010 and a release in the valuation allowance offset by an increase in taxable income of certain of our foreign subsidiaries.

Net Income. Net income increased from $3.7 million for the year ended December 31, 2009 to $14.1 million for the year ended December 31, 2010. As a percentage of revenues, net income increased to 6% for the year ended December 31, 2010 from 2% for the year ended December 31, 2009. The increase in net income was attributable primarily to the increase in revenues and gross profit offset by an increase in operating expenses and decrease in interest income in 2010 compared to 2009.

Year ended December 31, 2008 compared to year ended December 31, 2009

Revenues.  Revenues decreased from $217.3 million for the year ended December 31, 2008 to $184.2 million for the year ended December 31, 2009, a decrease of $33.1 million, or 15%. This decrease was attributable primarily to decreased sales of our products to wireless service providers, in particular through our OEM channels, mainly within the Asia Pacific region. Revenues in the Asia Pacific region decreased to $67.7 million for the year ended December 31, 2009 as compared to $113.0 million for the year ended December 31, 2008. The decrease in revenues in the Asia Pacific region was primarily due to the downturn in macroeconomic conditions, which resulted in a lengthening of the sales cycles and planned timeline for new customer projects. In addition, during 2009 we entered into certain turnkey projects in which the cycle of the revenues recognition from those turnkey projects is longer.  As a percentage of revenues, sales in the Asia Pacific region decreased to 37% for the year ended December 31, 2009 from 52% for the year ended December 31, 2008.

 
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Cost of Revenues.  Cost of revenues decreased from $144.0 million for the year ended December 31, 2008 to $122.7 million for the year ended December 31, 2009, a decrease of $ 21.3 million, or 15%. This decrease was attributable mainly to decreased purchases of products from our contract manufacturers, in line with the decrease in our revenues.

Gross Profit.  Gross profit as a percentage of revenues decreased from 33.7% for the year ended December 31, 2008 to 33.4% for the year ended December 31, 2009.

Research and Development Expenses. Our research and development expenses slightly decreased from $19.4 million for the year ended December 31, 2008 to $19.0 million for the year ended December 31, 2009, a decrease of $ 0.4 million, or 2%. The decrease in our research and development expenses was attributable primarily to cost saving measures we took during 2009 which reduced our salaries expenses paid to our research personnel versus an increase related to expenses paid to subcontractors. Our research and development efforts are a key element of our strategy and are essential to our success and we intend to maintain our commitment to research and development. An increase or a decrease in our total revenue would not necessarily result in a proportional increase or decrease in the levels of our research and development expenditures. As a percentage of revenues, research and development expenses increased to 10% in the year ended December 31, 2009 compared to 9% for the year ended December 31, 2008.

Selling and Marketing Expenses. Selling and marketing expenses decreased from $ 31.7 million for the year ended December 31, 2008 to $ 29.3 million for the year ended December 31, 2009, a decrease of $ 2.4 million, or 8%. This decrease was attributable primarily to the effects of our cost savings programs in our sales activities, a decrease in commissions paid to our sales and marketing staff as a result of our decreased sales, and a decrease in our marketing expenses. As a percentage of revenues, selling and marketing expenses were 16% in the year ended December 31, 2009 and 15% in the year ended December 31, 2008.

General and Administrative Expenses. General and administrative expenses increased from $9.2 million for the year ended December 31, 2008 to $10.7 million year ended December 31, 2009. This increase was attributable primarily to $0.8 million of stock based compensation expenses and increase in professional services provided of $0.7 million, offset by a decrease in the provision made for doubtful debts in an aggregate amount of $0.6 million. As a percentage of revenues, general and administrative expenses were 4% and 6% for the years ended December 31, 2008 and 2009 respectively.

Financial Income, Net. Financial income, net decreased from $2.2 million for the year ended December 31, 2008 to $1.5 million for the year ended December 31, 2009, a decrease of $0.7 million, or 32%. As a percentage of revenues, financial income, net decreased to 0.8% in the year ended December 31, 2009 compared to1% for the year ended December 31, 2008. This decrease was attributed mainly to lower income on our short-term and long-term interest-bearing investments due to reduction of interest rates in the financial markets.

Tax Benefit (Expense), Net. In 2008, tax benefit was $10.8 million and in 2009 tax expenses were $0.5 million. In 2008 we recorded an income tax benefit, reversing a valuation allowance on deferred income tax assets of approximately $11.4 million.

Net Income. Net income decreased from $26.0 million for the year ended December 31, 2008 to $3.7 million for the year ended December 31, 2009. As a percentage of revenues, net income decreased to 2% for the year ended December 31, 2009 from 12% for the year ended December 31, 2008. The decrease in net income was attributable primarily to the decrease in revenues and the tax benefit of approximately of $11.4 million recorded in 2008.  In addition, net income was impacted by the decrease in interest income in 2009.

 
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Impact of Currency Fluctuations

We typically derive the majority of our revenues in U.S. dollars. Although the majority of our revenues were denominated in U.S. dollars, a significant portion of our expenses were denominated in NIS and to a significantly lesser extent in Euros. Our NIS-denominated expenses consist principally of salaries and related personnel expenses. We anticipate that a material portion of our expenses will continue to be denominated in NIS. Transactions and balances in currencies other than U.S. dollars are remeasured into U.S. dollars according to the principles in ASC topic 830, “Foreign Currency Matters”. Gains and losses arising from remeasurement are recorded as financial income or expense, as applicable.

The following table presents information about the exchange rate of the NIS against the dollar:

Year ended December 31,
 
NIS appreciation %
 
 
2006
    (8.2)  
 
2007
    (9.0)  
 
2008
    (1.1)  
 
2009
    (0.7)  
 
2010
    (6.0)  

Part of our revenues and expenses in Europe are received or incurred in Euros. We are exposed to the risk of an appreciation of the Euro if our expenses in Euros exceed our sales in Euros. In addition, if the Euro devaluates relative to the dollar and sales in Euros exceed expenses incurred in Euros, our operating profit may be negatively affected as a result of a decrease in the dollar value of our sales.

Since exchange rates between the NIS and the dollar, and between the Euro and the dollar, fluctuate continuously, exchange rate fluctuations would have an impact on our results and period-to-period comparisons of our results. We reduce this currency exposure by entering into hedging transactions. The effects of foreign currency re-measurements are reported in our consolidated financial statements of operations. For a discussion of our hedging transactions, please see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Effects of Government Regulations and Location on the Company’s Business

For a discussion of the effects of Israeli governmental regulation and our location in Israel on our business, see “Information on the Company – Business Overview – Conditions in Israel” in Item 4 and the “Risks Relating to our Location in Israel in Item 3, above.

B.            Liquidity and Capital Resources

Since our initial public offering in August 2000, we have financed our operations primarily through the proceeds of that initial public offering and a follow-on offering and through royalty-bearing grants from the OCS. In the initial public offering, we raised $97.8 million; and through December 31, 2006, we received a total of $18.5 million from the OCS. In a follow-on public offering completed in December 2007, we raised a net amount of $88.3 million.

As of December 31, 2010, we had approximately $81.5 million in cash and cash equivalents, short term bank deposits, and short- and long-term marketable securities.

As of December 31, 2010, our cash investments were comprised of the following: 46% consisted of short-term, highly liquid investments with original maturities of up to three months, and 38% consisted of short-term deposits and marketable securities with original maturities of up to one year, with a minimum credit rating of A/A1. The remaining balance of our liquid assets is invested in corporate and government debt securities, carrying a minimum rating of A/A1. Substantially all of these investments are in US dollars.

 
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Net cash used by operating activities was $10.7 million for the year ended December 31, 2010. Net cash provided by operating activities was $16.8 million for the year ended December 31, 2009 and $11.5 million for the year ended December 31, 2008.

In 2010, our cash used by operating activities was affected by the following principal factors:

 
our net income of $14.1 million;

 
a $3.3 million increase in other accounts payable and accrued expenses, primarily attributed to increase in employees accruals, increase in warranty provision and unrealized loss in open forward foreign exchange contracts;

 
a $2.1  million increase in deferred revenues paid in advance;

These factors were partially offset by:

 
a $19.6 million increase in trade receivables, which was primarily attributable to our increased revenues;

 
a $11.7 million decrease in trade payables which was primarily attributable to advances paid to our contract manufacturers; and
 
 
a $7.7 million increase in other accounts receivable and prepaid expenses which was primarily attributable to an increase of $5.6 million in advances paid to our contract manufacturers and an increase of $1.1 million in prepaid expenses mainly subcontractors expenses for installation services for our turnkey projects for which revenues have not yet recognized.

In 2009, our cash provided by operating activities was affected by the following principal factors:

 
our net income of $3.7 million;

 
a $12.8 million increase in trade payables, which was mostly attributable to increased purchases of products from our contract manufacturers primarily for turnkey projects for which revenues have not yet been recognized;

 
a $12.7 million increase in deferred revenues paid in advance; and

 
a $2.4 million decrease in trade receivables, which was primarily attributable to the decrease in our revenues.

These factors were partially offset by a $25.4 million increase in inventories, primarily resulting from an increase in turn key projects in which revenues are often recognized after products are installed and accepted by the customer.

In 2008, our cash used in operating activities was affected by:

 
a $30.3 million increase in trade receivables, which was primarily attributable to our increased revenues;

 
a $11.4 million increase in a deferred income tax asset, which was attributable to the creation for the first time of the deferred tax asset;

 
a $3.4 million increase in inventories, which was primarily attributable to an increase in finished goods; and
 
 
 
a $5.3 million decrease in other accounts payable and accrued expenses, which was primarily attributable to the retirement of the remaining debt to the OCS from the agreement reached in December 2006 and, in addition, a $4.7 million decrease in  long term payables as a result of retiring such debt. The total payment to the OCS was in the amount of $9 million.
 
 
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These factors were partially offset by:

 
our net income of $26.0 million; and

 
a $13.9 million increase in trade payables, which was primarily attributable to growth in the volume of our sales and related purchases of products from our contract manufacturers.
 
Net cash provided by investing activities was approximately $ 5.1 million for the year ended December 31, 2010, as compared to net cash provided by investing activities of approximately $2.5 million and net cash used by investing activities of approximately $ 11.3 million for the year ended December 31, 2008. In the year ended December 31, 2010, our proceeds from maturity of short-term bank deposits of $ 31.7 million and from maturities of marketable securities of $16.6 million were offset partially by investment in short and long-term bank deposits of $13.8 million and in marketable securities of $18.3 million.  In the year ended December 31, 2009, our proceeds from maturity of short-term bank deposits of $ 46.2 million and from maturities of held-to-maturity marketable securities of $11.8 million were offset partially by investment in short and long-term bank deposits of $ 44.0 million and in held-to-maturity marketable securities of $ 4.7 million. In the year ended December 31, 2008, our investments of $ 66.3 million in short-term and long-term bank deposits and $14.9 million in held to maturity marketable securities were partially offset by the proceeds of $13.5 million from held-to-maturity marketable securities and proceeds of $ 61.4 million from maturity of short- and long-term bank deposits. In addition, there was a purchase of property and equipment in a net amount of $ 5.0 million.

Net cash provided by financing activities was approximately $ 4.9 million for the year ended December 31, 2010 as compared to net cash used in financing activities of $ 9.2 million and $ 7.6 million for the years ended December 31, 2009 and 2008 respectively. The balance of the cash as of December 31, 2010, 2009 and 2008 consisted of proceeds from exercises of share options by employees of $ 4.9 million, $ 3.0 million and $ 0.7 million, respectively.  For the years ended December 31, 2009 and 2008, the Company used an amount of $12.2 million and $7.9 million, respectively to purchase treasury shares as part of the Company’s share repurchase program.

As of December 31, 2010, our principal commitments consisted of $7.1 million for obligations outstanding under non-cancelable operating leases.

In October 2008, we announced the adoption a share repurchase program under which the total amount to be paid for the repurchase of shares would not exceed $20 million. The share repurchase program was completed in 2009. As of December 31, 2010, we purchased 3,481,523 shares at a weighted average price per share of approximately $5.74 per share (excluding commission and broker fees).

In January 2011, we entered into a loan agreement with Bank Hapoalim Ltd. to finance the consideration of the Nera Acquisition.  See Item 8 – Significant Changes.

Our capital requirements are dependent on many factors, including working capital requirements to finance the growth of the Company, and the allocation of resources to our research and development efforts, as well as our marketing and sales activities. We anticipate continuing to engage in capital spending consistent with anticipated growth in our operations as a result, in part, from our increased participation in turnkey projects. We anticipate that our capital expenditures during 2011 will be primarily for the purchase of additional testing equipment and office equipment.

We believe that current cash and cash equivalent balances, short-term bank deposits and short-term marketable securities will be sufficient for our requirements through at least the next 12 months.

 
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C.            Research and Development

We place considerable emphasis on research and development to improve and expand the capabilities of our existing products, to develop new products, with particular emphasis on equipment for emerging IP-based networks, and to lower the cost of producing both existing and future products. We intend to continue to devote a significant portion of our personnel and financial resources to research and development. As part of our product development process, we maintain close relationships with our customers to identify market needs and to define appropriate product specifications. In addition, we intend to continue to comply with industry standards and, in order to participate in the formulation of European standards, we are full members of the European Telecommunications Standards Institute.

Our research and development activities are conducted at our facilities in Tel Aviv, Israel and Greece. As of December 31, 2010, our research, development and engineering staff consisted of 166 employees. Our research and development team includes highly specialized engineers and technicians with expertise in the fields of millimeter wave design, modem and signal processing, data communications, system management and networking solutions.

Our research and development department provides us with the ability to design and develop most of the aspects of our proprietary solutions, from the chip-level, including both ASICs and RFICs, to full system integration. We leverage our research and development capabilities through the use of specialized outside design firms. Our research and development projects currently in process include extensions to our emerging IP-based networking product lines and development of new technologies to support future product concepts. In addition, our engineers continually work to redesign our products with the goal of improving their manufacturability and testability while reducing costs.

Our research and development expenses were approximately $ 25.1 million or 10% of sales in 2010, $ 19.0 million or 10% of sales in 2009, and $19.4 million or 9% of sales in 2008.

Intellectual Property

See: “Item 4. History and Development of the Company–Intellectual Property.”

D.            Trend Information

See discussion in Parts A and B of Item 5 “Operating Results and Financial Review and Prospects.”

E.             Off Balance Sheet Arrangements

We are not party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent liabilities.

F.             Tabular Disclosure of Contractual Obligations

 
 
Payments due by period (in thousands of dollars)
 
 
Contractual Obligations
 
 
Total
   
Less than 1
year
   
 
1-3 years
   
 
4-5 years
   
More than
5 years
 
Operating lease obligations1 
    7,084       3,387       3,418       279       --  
Purchase obligations2 
    62,157       62,157       --       --       --  
Other long-term commitment3 
    2,561       --       --       --       2,561  
Uncertain income tax positions4
    673                                  
Total
    72,475       65,544       3,418       279       2,561  
____________
(1) 
Consists of operating leases for our facilities and for vehicles.
 
(2)
Consists of all outstanding purchase orders for our products from our suppliers.
 
(3)
Our obligation for accrued severance pay under Israel’s Severance Pay Law as of December 31, 2010 was approximately   $ 8.6 million, of which approximately $ 6.0 million was funded through deposits in severance pay funds, leaving a net obligation of approximately $ 2.6 million.
 
(4)
Uncertain income tax position under ASC 740-10, “Income Taxes,” are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 10j of our Consolidated Financial Statements for further information regarding the Company’s liability under ASC 740-10.
 
 
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Effect of Recent Accounting Pronouncements

In December 2010, the EITF issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations codified in ASC 805, "Business Combinations". This ASU responds to diversity in practice about the interpretation of the pro forma disclosure requirements for business combinations. When a public entity’s business combinations are material on an individual or aggregate basis, the notes to its financial statements must provide pro forma revenue and earnings of the combined entity as if the acquisition date(s) had occurred as of the beginning of the annual reporting period. The ASU clarifies that if comparative financial statements are presented, the pro forma disclosures for both periods presented (the year in which the acquisition occurred and the prior year) should be reported as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only and not as if it had occurred at the beginning of the current annual reporting period. The ASU also expands the supplemental pro forma disclosure requirements to include a description of the nature and amount of any material non-recurring adjustments that are directly attributable to the business combination. The guidance in the ASU is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15 2010, and should be applied prospectively. We believe that the adoption could have an impact on its Pro Forma information in future periods.

In April 2010, the EITF issued ASU 2010-13, an amendment to ASC No. 718 "Compensation - Stock Compensation. This ASU clarifies employee stock options that have exercise prices denominated in the currency of any market in which a substantial portion of the entity’s equity securities trade. These should be classified as equity, assuming all other criteria for equity classification are met. The amendments in the ASU do not contain any disclosure requirements incremental to those required by ASC 718. The guidance is effective in 2011. The adoption of the new guidance will not have a material impact on our consolidated financial statements.

 In February 2010, the FASB issued ASU 2010-09, an amendments to certain recognition and disclosure requirements of Subsequent Events codified in ASC 855, "Subsequent Events". This update removes the requirement to disclose the date through which subsequent events were evaluated in both originally issued and reissued financial statements for "SEC Filers." The adoption of the new guidance did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, updating the "Fair Value Measurements Disclosures" codified in ASC 820. This update requires (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value, and require disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. As applicable to us, this update became effective in these annual financial statements. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

In October 2009, the FASB issued an update to ASC 605-25, "Revenue Recognition - Multiple-Element Arrangements", that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements to: (i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;  (ii) require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have VSOE of selling price  or third-party evidence of selling price; (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method and (iv) require expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance. The update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or retrospectively, for all periods presented. Mandatory adoption is for January 1, 2011. We are currently evaluating the impact on our consolidated results of operations and financial condition.

 
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In October 2009, the FASB issued an update to ASC 985-605, "Software-Revenue Recognition". In accordance with the update to the ASC, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the scope of the software revenue recognition guidance. In addition, hardware components of a tangible product containing software component are always excluded from the software revenue guidance. The update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or retrospectively, for all periods presented.  We are currently evaluating the impact on our consolidated results of operations and financial condition.
ITEM 6.                      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
Directors and Senior Management
 
The following table lists our current directors and senior management:
 
Name
 
Age
 
Position
Zohar Zisapel
 
62
 
Chairman of the Board of Directors
Ira Palti
 
53
 
President and Chief Executive Officer
Tsipi Kagan
 
45
 
Executive Vice President & Chief Financial Officer
Gil Solovey
 
42
 
Executive Vice President, Global Operations
Eran Westman
 
40
 
Executive Vice President, Global Business
Sharon Ganot
 
42
 
Vice President, Human Resources
Udi Gordon
 
44
 
Executive Vice President, Corporate Marketing and Business Development
Donna Gershowitz
 
47
 
Vice President and General Counsel and Corporate Secretary
Hagai Zyss
 
39
 
General Manager of the Short Haul Business Unit
Eyal Assa
 
39
 
General Manager of the Long Haul Business Unit
Per Arne Henes
 
47
 
Executive Vice President, PMI
Ole Lars Oye
 
49
 
VP Global Projects & Services
Joseph Atsmon
 
62
 
Director
Yael Langer
 
46
 
Director
Yair E. Orgler
 
71
 
Director
Avi Patir
 
62
 
Director
 
Zohar Zisapel has served as the Chairman of our board of directors since we were incorporated in 1996.  Mr. Zisapel is also a founder and a director of RAD Data Communications Ltd., of which he served as CEO from January 1982 until January 1998 and has served as chairman since 1998.  Mr. Zisapel serves as chairman of two other public companies – RADVision Ltd. and RADCOM Ltd. – and as chairman or director of several private companies. Since July 2008, Mr. Zisapel has been a director of Amdocs Limited, a public company.  Mr. Zisapel received a B.Sc. and an M.Sc. in electrical engineering from the Technion, Israel Institute of Technology (“Technion”) and an M.B.A. from Tel Aviv University.
 
Ira Palti has been our President and Chief Executive Officer since August 2005. From January 2003 to August 2005, Mr. Palti was Chief Executive Officer of Seabridge Ltd., a Siemens company that is a global leader in the area of broadband services and networks. Prior to joining Seabridge, he was the Chief Operating Officer of VocalTec Communications Ltd., responsible for sales, marketing, customer support and product development. Among the positions he held before joining VocalTec was founder of Rosh Intelligent Systems, a company providing software maintenance and AI diagnostic solutions and one of the first startups in Israel. Mr. Palti received a B.Sc. in mathematics and computer science (magna cum laude) from Tel Aviv University.
 
 
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Tsipi Kagan joined Ceragon as Executive Vice President and Chief Financial Officer effective November 1, 2010.  Prior to joining Ceragon, from 2008 to September 2010, Ms. Kagan served as Chief Financial Officer of Xjet, Ltd. developer and manufacturer of inkjet based deposition systems.  Prior to joining Xjet Ltd., from 2003 to 2008, Ms. Kagan served as Chief Financial Officer of RADVision Ltd., a leading provider of products and technologies for unified visual communications.  Prior to joining RADVision, from 2000 to 2003, Ms. Kagan served as Chief Financial Officer of Phone-Or ltd., a leader in advanced optical microphones and sensors.  Prior thereto and from September 1994, Ms. Kagan served as senior manager for Ernst & Young in Israel and from February 1991 to August 1994, as a Certified Public Accountant (CPA) for Miller, Kaplan, Arase & Co., an accounting firm in Los Angeles.  Ms. Kagan holds a B.A. degree in Accounting and Economics from Tel Aviv University and is a licensed CPA in Israel.

Gil Solovey joined Ceragon on May 2010. In his last position, Mr. Solovey served as VP Operations and a member of the management at Orbit Technology Group, an Israeli company that develops, manufactures and supplies communication equipment solutions. Prior to joining Orbit, Mr. Solovey served various position in HP Scitex, a pioneer and a leading worldwide developer of format printing equipment, including as VP Operations and managed the global supply chain group in HP Scitex. Before joining HP Scitex in 2004, Mr. Solovey managed the purchasing, Logistics and planning division at Applied Materials Israel. Mr. Solovey holds a B.Sc. in Mechanical Engineering from the Technion, and an MBA in marketing from Herriot Watt University in Scotland (Israel branch).

Eran Westman has served as our Executive Vice President, Global Operations since October 2008. From January 2004 to September 2008, Mr. Westman served as President Asia Pacific, and from July 2001 to December 2003, he was Vice President Sales for Europe, the Middle East and Africa. Mr. Westman holds a LL.B degree from the Herzog Faculty of Law at Bar Ilan University.
 
Sharon Ganot has served as our Vice President, Human Resources since March 2000.  From December 1999 until March 2000, Ms. Ganot was the manager of our human resources department.  From April 1994 until December 1999, she was a personnel recruiter and training manager with RAD Data Communications Ltd.  Ms. Ganot received a B.A. in psychology and an M.A. in industrial studies from Tel Aviv University.
 
Udi Gordon has served as our Executive Vice President Marketing & Business Development since June 2009.  From October 2008 through May 2009, Mr. Gordon served as our Vice President, Business Development. From 2003 to 2008, Mr. Gordon headed our research and development department, his most recent position being Executive Vice President R&D. From 1997 until June 2003, he served as a senior manager in our research and development department.    Mr. Gordon received a B.Sc. in electrical engineering from the Technion (cum laude) and an M.B.A. from Bar-Ilan University.
 
Donna Gershowitz has served as our VP & General Counsel and Corporate Secretary since June 2009.  Prior to joining Ceragon, Ms. Gershowitz served as the General Counsel of Elron Electronic Industries Ltd. from March 2008 through April 2009, as the Regional General Counsel of SanDisk Corporation from November 2006 through March 2008 and as the VP & General Counsel of msystems Ltd. (prior to its acquisition by SanDisk Corporation) from June 2004 through November 2006.  Ms. Gershowitz has also held positions as legal counsel in other Israeli high tech companies.  Ms. Gershowitz holds a B.A. in Politics from Brandeis University and a J.D. from Boalt Hall School of Law, University of California, at Berkeley. Ms. Gershowitz is a member of the Israeli Bar and the California Bar. 
 
Hagai Zyss has served as our General Manager of the Short Haul Business Unit since March, 2011.  Prior thereto, Mr. Zyss served as our Vice President, Research and Development since October 2008. Previously, Mr. Zyss served in our research and development from June 2000, his most recent position being Vice President Next Generation Networks. Mr. Zyss received B.Sc. and M.Sc. degrees (cum laude) in electrical engineering and electronics from Tel-Aviv University.
 
Eyal Assa has served as our General Manager of the Long Haul Business Unit since March, 2011.   Prior thereto, Mr. Assa served in various positions at Ceragon including as our Chief Operating Officer, Sales since 2008 and prior thereto as VP Business Development and OEM Relations.  From August 1998, Mr. Assa held several senior R&D positions at Seabridge Ltd., a Siemens company, the last one being Vice President of Research and Development.  Mr. Assa holds a B.Sc. in Mathematics and Statistics (cum laude) and M.Sc. in Computer Science (summa cum laude), both from Tel-Aviv University.
 
 
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Per Arne Henes has served as our EVP PMI since January 2011.  Prior to the Nera Acquisition, Mr. Henes served as the CEO of Nera since February 2008 and as Senior Vice President of Sales of Nera from 2006 to 2008. Prior to joining Nera, Mr. Henæs worked for Siemens from 1992 to 2006 in various positions including serving as Head of Communication Division.  Mr. Henæs holds a M.Sc.degree in Electronic Engineering from the Norwegian University of Science and Technology.
 
Ole Lars Oye  has served as our VP Global Projects & Services since January 2011.  Prior to the Nera Acquisition, Mr. Oye has served as Senior Vice President, Global Projects, of Nera since September 2009. Previously, Mr. Oye served in various positions at Nera, which he joined in 1987, including as VP Sales North Europe of Nera Networks, General Director of Nera Networks s.r.o. in Slovakia, VP Supply and Technical Director Americas.  Mr. Oye holds a B.Sc degree in Electronics/Telecommunication from Gjovik ingeniorhogskole in Norway.
 
Joseph Atsmon has served as a director since July 2001. Mr. Atsmon has also served as a director of Nice Systems Ltd. since July 2001 and of RADVision Ltd. since June 2003. From November 2005 until December 2008, Mr. Atsmon was a director of VocalTec Communications Ltd. From April 2001 until October 2002, he served as Chairman of Discretix Ltd.  From 1995 until 2000, he served as Chief Executive Officer of Teledata Communications Ltd., a public company acquired by ADC Telecommunications Inc. in 1998.  From 1986 until 1995, Mr. Atsmon served in various positions at Tadiran Ltd., among them a division president and Corporate Vice President for business development.  Mr. Atsmon received a B.Sc. in electrical engineering (summa cum laude) from the Technion.  Mr. Atsmon is one of our independent directors for the purposes of the Nasdaq Rules and is our audit committee chairman and financial expert.
 
Yael Langer has served as a director since December 2000.  Ms. Langer served as our general counsel from July 1998 until December 2000.  Ms. Langer is General Counsel and Secretary of RAD Data Communications Ltd. and other companies in the RAD-BYNET group.  Since July 2009, Ms. Langer serves as a director in RADWARE Ltd. From December 1995 to July 1998, Ms. Langer served as Assistant General Counsel to companies in the RAD-BYNET group.  From September 1993 until July 1995, Ms. Langer was a member of the legal department of Poalim Capital Markets and Investments Ltd. Ms. Langer received an LL.B. from the Hebrew University in Jerusalem.
 
Yair E. Orgler has served as an external director since March 2007. Prof. Orgler is Professor Emeritus at the Leon Recanati Graduate School of Business Administration, Tel Aviv University (the “Recanati School”). From 1996 to June 2006, Prof. Orgler was Chairman of the Board of the Tel-Aviv Stock Exchange. From 2001 to 2004, he was President of the International Options Markets Association (IOMA). Prof. Orgler serves as a director at Discount Investment Corporation Ltd., Israel Chemicals Ltd., Atidim-High Tech Industrial Park Ltd., ICL-IP Co. Ltd., ICL-IP Ltd., Itamar Medical Ltd. and Gazit-Globe Ltd. Other public positions held by Prof. Orgler in recent years include: Director at Bank Hapoalim, B.M., Founder and Chairman of “Maalot”, Israel’s first securities rating company; Chairman of the Wage Committee of the Association of University Heads in Israel; Chairman of the Executive Council of the Academic College of Tel-Aviv-Yaffo; and member of the Board of the United States-Israel Educational Foundation (USIEF). Previous academic positions held by Prof. Orgler include: Vice Rector of Tel-Aviv University and before that Dean of the Recanati School. For over 20 years he was the incumbent of the Goldreich Chair in International Banking at Tel-Aviv University and served frequently as a Visiting Professor of Finance at the Kellogg Graduate School of Management, Northwestern University. Prof. Orgler holds a Ph.D. and Master’s degree in industrial administration from Carnegie Mellon University, an M.Sc. in industrial engineering from University of Southern California and a B.Sc. in industrial engineering from the Technion. Prof. Orgler is one of our independent directors for the purposes of the Nasdaq Rules and one of our external directors for purposes of the Companies Law.
 
Avi Patir has served as an external director since March 2007. Mr. Patir is President for Mobile Broadband and CTO at MIRS Communications Ltd., a wholly-owned subsidiary of Motorola Israel Ltd.  From 2004 to 2006, Mr. Patir served as the Group COO and Head of the Wireline Division of “Bezeq” – The Israel Telecommunication Corp. Limited (“Bezeq”), Israel’s national telecommunications provider. From 2003 to 2004, Mr. Patir was President and CEO of American Israel Paper Mills Ltd., the leading Israeli manufacturer and marketer of paper and paper products. From 1996 to 2003, he was the President and CEO of Barak International Telecommunication Corporation Ltd., a leading provider of international telecommunications services in Israel, and from 1992 to 1996, he was Executive Vice President Engineering and Operations at Bezeq. Mr. Patir has been a board member of, among others, Bezeq International, Pelephone Communications Ltd. and Satlink Communications Ltd.  Mr. Patir holds an M.Sc. in electrical and electronic engineering from Columbia University and a B.Sc. in electrical and electronic engineering from the Technion. He is, in addition, a graduate of the Kellogg-Recanati executive management program. Mr. Patir is one of our independent directors for the purposes of the Nasdaq Rules and one of our external directors for purposes of the Companies Law.
 
 
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Compensation of Directors and Senior Management
 
The following table presents all compensation we paid to all of our directors and senior management as a group for the year ended December 31, 2010.  The table does not include any amounts we paid to reimburse any of such persons for costs incurred in providing us with services during this period.
 
   
Salaries, fees, commissions and bonuses
   
Pension, retirement and other similar benefits
 
All directors and senior management as a group, consisting of 161 persons
  $ 4,685,000     $ 302,000  

1The group includes two former members of senior management whose employment with the Company ceased during 2010.
 
During 2010, we granted to our directors and senior management 552,500 options to purchase ordinary shares, in the aggregate, with exercise prices of  $10.71  per share. The options expire 10 years after grant.
 
Other than payment of fees to our external directors as required by the Companies Law, reimbursement for expenses and the award of stock options, we do not compensate our directors for serving on our board of directors.  For more information, please see “Remuneration of Directors” and “The 2003 Share Option Plan” below and Note 9 to our Consolidated Financial Statements included as Item 18 in this annual report.
 
Board Practices
 
Our Articles of Association authorize our board of directors to consist of a minimum of five and a maximum of nine members. Our board of directors presently consists of five members. The board retains all the powers in running our company that are not specifically granted to the shareholders. The board may make decisions to borrow money for our company, and may set aside reserves out of our profits, for whatever purposes it thinks fit.

The board may pass a resolution when a quorum is present, and each resolution must be passed by a vote of at least a majority of the directors present when the resolution is put to vote and voting thereon. According to our Articles of Association, unless otherwise unanimously decided by our board of directors, a quorum of directors is at least a majority of the directors then in office who are lawfully entitled to participate in the meeting and conclusively determined by the chairman of the Audit Committee and in the absence of such determination, by the Chairman of the Board.  (but not less than two directors). Our board of directors may elect one director to serve as the chairman of the board to preside at the meetings of the board of directors, and may also remove such director as chairman. Minutes of the meetings are recorded and kept at our offices.

Terms of Directors

Our Articles of Association provide that directors, other than our external directors described below, are elected at our annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented at that meeting and voting thereon. In accordance with the provisions of the Companies Law, each of our external directors, as further described below, serves a three-year term, which may be extended by additional three-year terms. At the annual general meeting of shareholders in September 2004, our Articles of Association were amended to provide for a classified board of directors. The board of directors is presently divided into two classes: Class I and Class II. Each director (other than an external director), when and however elected, will be designated as a member of one of the two classes of directors. The director (other than a director elected to fill a vacancy as permitted under our Articles of Association) will serve for a term ending on the date of the third annual general meeting following the annual general meeting at which such director was elected. Ms. Langer is currently our Class I director, serving for a term ending at the 2011 annual general meeting. Messrs. Zisapel and Atsmon are currently our Class II directors, serving for a term ending at the 2012 annual general meeting of the shareholders.

 
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If any directors are appointed by the board of directors to fill any vacancy, their appointment must be ratified by the shareholders at the next shareholders’ meeting following the appointment. Our shareholders may remove a director from office, in certain circumstances subject to the Companies Law. There is no requirement that a director own shares of our company. Directors may appoint alternative directors in their stead, subject to the Companies law and our Articles of Association.

According to an amendment to the Companies Law adopted in 2008, a person who does not possess the skills required and the ability to devote the appropriate time to the performance of the office of director in a company, taking into consideration, among other things, the special requirements and size of that company, shall neither be appointed as director nor shall serve as director in a public company. A public company shall not summon a general assembly whose agenda includes the appointment of a director, and a director shall not be appointed, unless the candidate has submitted a declaration that he or she possesses the skills required and the ability to devote the appropriate time to the performance of the office of director in the company, that sets forth the aforementioned skills and further states that the limitations set forth in the Companies Law regarding the appointment of a director do not apply in respect of such candidate.
 
A director who ceases to possess any qualification required under the Companies Law for holding the office of director or who becomes subject to any ground for termination of his/her office must inform the company immediately and his/her office shall terminate on such notice.
 
As a company organized in Israel whose ordinary shares are listed for quotation on the Nasdaq Global Select Market, we are required to comply with the rules of the SEC and the Nasdaq Rules applicable to listed companies, as well as with the Companies Law, which is applicable to all Israeli companies. Under the Nasdaq Rules, a majority of our directors is required to be independent and, under the Israeli Companies Law, we are required to appoint at least two external directors. According to an amendment to the Companies Law adopted in 2008, a public company may provide in its articles that independent directors (as defined in the Companies Law) in such minimal number as shall be determined by the company shall serve in its board of directors. According to the Companies Law, an independent director is a director who meets the qualifications required for the appointment of such director as an external director in the company, other than the requirement for possession of “accounting and financial expertise” or “professional qualifications”, as shall be approved by audit committee, and who has not served as a director on the board of directors of the company for more than nine consecutive years. We did not amend our articles of association to provide for the appointment of independent directors according to the Companies Law.

Independent Directors

The independence standard under the Nasdaq Rules excludes, among others, any person who is a current or former (at any time during the past three years) employee of a company or its affiliates as well as the immediate family members of an executive officer (at any time during the past three years) of a company or its affiliates. Messrs. Joseph Atsmon, Yair Orgler and Avi Patir currently serve as our independent directors.

External Directors

Under the 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 external directors. A person may not be appointed as an external director if he or she or his or her relative, partner, employer, any person to whom such person is directly or indirectly subject to, or any entity under his or her control has, as of the date of the person’s appointment to serve as an external director, or had, during the two years preceding that date, any affiliation with:

      the company;

      any entity controlling the company at the date of such person’s appointment; or

 
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any entity controlled, at the date of such person’s appointment or during the two years preceding that date, by the company or by its controlling shareholder.

The term “affiliation” includes:

•      an employment relationship;

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

•      control; and

•      service as an office holder.

The Companies Law defines the term “office holder” of a company to include a director, the chief executive officer, the chief business manager, a vice general manager, deputy general manager and any officer that reports directly to the chief executive officer or any other person fulfilling any of the foregoing positions (even if such person’s title is different).

According to regulations promulgated under the Companies Law:

 
A public company may appoint an external director to serve as director in its wholly owned and controlled subsidiaries, subject to certain conditions;

 
A person who served as an external director in a target company which was merged into the acquiring company shall not be deemed to have an affiliation with the acquiring company;

 
A person who had an affiliation with a corporation (other than the public company or other corporation under its control) which is under the control of the controlling shareholder of a public company, only in such period in which such controlling shareholder was not the controlling shareholder of the public company, shall not be deemed to have an affiliation during the two years period preceding the date of appointment;

 
A business or professional relationship shall not be deemed as an affiliation if all of the following conditions are met: (i) the relationship is negligible for both the person who is the nominee to be appointed as an external director and the company; (ii) the relationship commenced prior to such person’s appointment; (iii) the audit committee resolved, prior to the appointment, based on facts presented to it, that the condition detailed in clause (i) is fulfilled; and (iv) the existence of a business or professional relationship and the approval of the audit committee were brought to the attention of the shareholders meeting prior to the approval of the appointment.

An external director who ceases to possess any qualification required under the Companies Law for holding the office of an external director must inform the company immediately and his/her office shall terminate upon such notice.

Yair Orgler and Avi Patir were initially appointed in 2006 as our external directors. Their terms began in March 2007 and in December 2009, at the annual meeting of shareholders, Messrs. Orgler and Patir were appointed for a second terms as external directors.  Their second terms will expire in March 2013.

Pursuant to an amendment to the Companies Law, (1) each external director must have either “accounting and financial expertise” or “professional qualifications” and (2) at least one of the external directors must have “accounting and financial expertise”.

A director with “accounting and financial expertise” is a director whose education, experience and qualifications qualifies him or her to be highly proficient in understanding business and accounting matters and to thoroughly understand the company’s financial statements and to stimulate discussion regarding the manner in which financial data is presented. A director with “professional qualifications” must either (i) have an academic degree in economics, business management, accounting, law, public administration or other academic degree or high education in the company’s main field of business or which is relevant to his or her office; or (ii) have at least five years’ experience in one or more of the following: senior position in the business management of a corporation with substantial business activities, senior public servant, or other seniority in the company’s main fields of business.

 
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Our board of directors has determined that Prof. Orgler has the “accounting and financial expertise” required by the Companies Law, and that Mr. Patir has the required “professional qualifications.”

No person can serve as an external director if the person’s position or other business creates, or may create, conflicts of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director.

A director in a public company shall not be appointed as an external director in another public company if at the time of appointment a person who serves as a director of the other public company also serves as an external director of the first public company.

A company may not engage an external director as an office holder and may not employ or receive services from that person for consideration, either directly or indirectly, including through a corporation controlled by that person, for a period of two years from the termination of his or her service as an external director.

Election of External Directors

External directors are elected by a majority vote at a shareholders’ meeting, provided that either:

 
at least one third of the shares of non-controlling shareholders voted at the meeting, not taking into account any abstentions, vote in favor of the election; or

 
the total number of shares voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company.

The initial term of an external director is three years with respect to a company such as ours may be extended for additional three-year terms by the shareholders, if certain conditions are met. An external director can be removed from office only by the same majority of shareholders that is required to elect an external director, or by a court (if the external director ceases to meet the statutory qualifications with respect to his or her appointment, or if he or she violates his or her duty of loyalty to the company). Each committee of a company’s board of directors which is authorized to exercise the board of directors’ authorities is required to include at least one external director, except for the audit committee, which is required to include all external directors.

In a company in which, at the date of appointment of an external director, all the directors are of the same gender, the external director to be appointed shall be of the other gender.

Audit Committee

Nasdaq Requirements

Under the Nasdaq Rules, we are required to have an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has been determined by the board to be the audit committee financial expert. We have adopted an audit committee charter as required by the Nasdaq Rules. The responsibilities of the audit committee under the Nasdaq Rules include evaluating the independence of a company’s outside auditors. Currently, Messrs. Joseph Atsmon, Yair Orgler and Avi Patir serve on our audit committee, each of whom has been determined by the board to be independent. Mr. Atsmon is the chairman of the audit committee and its financial expert.

The Nasdaq Rules require that director nominees be selected or recommended for the board’s selection either by a nominations committee composed solely of independent directors or by a majority of independent directors, in a vote in which only independent directors participate, subject to certain exceptions. Similarly, the compensation payable to a company’s chief executive officer and other executive officers must be determined or recommended to the board for determination either by a majority of the independent directors on the board, in a vote in which only independent directors participate, or a compensation committee comprised solely of independent directors, subject to certain exceptions. In October 2010, our board of directors determined that the compensation committee would carry out these functions.

 
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Companies Law Requirements

Under the Companies Law, the board of directors of any Israeli company whose shares are publicly traded must appoint an audit committee, comprised of at least three directors including all of the external directors, but excluding:

 
the chairman of the board of directors;

 
any controlling shareholder or any relative of a controlling shareholder; and

 
any director employed by the company or who provides services to the company on a regular basis.

The role of our audit committee is to identify irregularities in the management of our business, in consultation with the internal auditor our independent auditors, and to suggest appropriate courses of action to amend such irregularities. In addition, the approval of our audit committee is required under the Companies Law to effect certain related-party transactions.

The composition of our audit committee satisfies both the Nasdaq Rules and the Companies Law requirements.

Approval of Certain Transactions

The approval of the audit committee is required (and thereafter, the approval of the board of directors and in certain cases — the approval of the shareholders), under the Companies Law to effect specified actions and extraordinary transactions with office holders, third parties (where an office holder has a personal interest in the transaction), extraordinary transactions with controlling parties, and extraordinary transactions with a third party (where a controlling party has a personal interest in the transaction), including a private placement in which the controlling shareholder has a personal interest, or any transaction with the controlling shareholder or his relative regarding terms of service and employment. A “relative” is defined in the Companies Law as spouse, sibling, parent, grandparent, descendant, spouse’s descendant and the spouse of any of the foregoing.

In addition, the approval of the audit committee is required (and thereafter, the approval of the board of directors and of the shareholders, in that order) under the Companies Law, to effect a private placement of securities, in which either (i) 20% or more of the company’s outstanding share capital prior to the placement are offered, and the payment for which (in whole or in part) is not in cash, in tradable securities registered in a stock exchange or not under market terms, and which will result in an increase of the holdings of a shareholder that holds 5% or more of the company’s outstanding share capital or voting rights or will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital or voting rights or (ii) a person will become a controlling shareholder of the company.

A “controlling party” is defined in the Companies Law for purposes of the provisions governing related party transactions as a person with the ability to direct the actions of a company, or a person who holds 25% or more of the voting power in a public company if no other shareholder owns more than 50% of the voting power in the company, but excluding a person whose power derives solely from his or her position as a director of the company or any other position with the company, provided that two or more persons holding voting rights in the company, who each have a personal interest in the approval of the same transaction, shall be deemed to be one holder.

The audit committee may not approve an action or a transaction discussed above unless at the time of approval the two external directors are serving as members of the audit committee and at least one of them is present at the meeting in which an approval was granted.

 
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Audit committee approval is also required (and thereafter, the approval of the board of directors and in certain cases – the approval of the shareholders) to approve the grant of an exemption from the responsibility for a breach of the duty of care towards the company, or for the provision of insurance or an undertaking to indemnify any office holder of the company. In addition, any contract between the company and any of its directors relating to the service or employment of the director must be approved by the audit committee, the board of directors and, unless certain conditions specified by regulations promulgated under the Companies Law are met, the shareholders, in such order.

Remuneration of Directors

Directors’ remuneration requires the approval of the audit committee, the board of directors and the shareholders (in that order). However, according to regulations promulgated under the Companies Law with respect to the remuneration of external directors, the audit committee and shareholder’s approval may be waived if the remuneration to be paid to the external directors is between the fixed and maximum amounts set forth in the regulations, as further detailed below.
 
According to the regulations promulgated under the Companies Law concerning the remuneration of external directors (the “Remuneration Regulations”), external directors are generally entitled to an annual fee, a participation fee for each meeting of the board of directors or any committee of the board on which he or she serves as a member and reimbursement of travel expenses for participation in a meeting which is held outside of the external director’ place of residence. The minimum, fixed and maximum amounts of the annual and participation fees are set forth in the Remuneration Regulations, based on the classification of the company according to the amount of its capital. According to the Remuneration Regulations, the audit committee and shareholder’s approval may be waived if the annual and participation fees to be paid to the external directors are within the range of the fixed annual fee or the fixed participation fee and the maximum annual fee or the maximum participation fee for the company’s level, respectively.  However, remuneration of an external director in an amount which less than the fixed annual fee or the fixed participation fee, respectively, requires the approval of the audit committee, the board of directors and the shareholders (in that order). The remuneration of external directors must be made known to the candidate for such office prior to his/her appointment and, subject to certain exceptions, will not be amended throughout the three-year period during which he or she is in office. A company may compensate an external director in shares or rights to purchase shares, other than convertible debentures which may be converted into shares, in addition to the annual remuneration, the participation award and the reimbursement of expenses, subject to certain limitations set forth in the External Directors Remuneration Regulations. We pay our external directors a fixed annual fee, a fixed participation fee and reimbursement of expenses. In addition we have granted our external directors options to purchase the Company’s shares.
 
Additionally, according to other regulations promulgated under the Companies Law, shareholders’ approval for directors’ compensation and employment arrangements is not required if both the audit committee and the board of directors resolve that either (i) the directors’ compensation and employment arrangements are solely for the benefit of the company or (ii) the remuneration to be paid to any such director does not exceed the maximum amounts set forth in the regulations promulgated under the Companies Law regarding remuneration of external directors; provided however that no holder of 1% or more of the issued and outstanding share capital or voting rights in the company objects to such exemption from the shareholders’ approval requirement such objection to be submitted to the company in writing not later than fourteen days from the date the company notifies its shareholders regarding the adoption of such resolution by the company. If such objection is duly and timely submitted, then the remuneration arrangement of the directors will require shareholders’ approval as detailed above.
 
Neither we nor any of our subsidiaries has entered into a service contract with any of our current directors that provide for benefits upon termination of their service as directors.

Compensation Committee

In October 2010, our board determined that the former option committee would be renamed the “compensation committee.”   Our compensation committee is to administer our 1996 Key Employee Share Incentive Plan, our 1997 Affiliate Employee Option Plan and our 2003 Share Option Plan. In addition, our compensation committee is to approve and recommend to the audit committee and the board, as relevant, compensation of all members of senior management.

 
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The members of the compensation committee are Messrs. Zisapel and Patir. The board of directors has delegated to the compensation committee the authority to grant options under the 1996, 1997 and 2003 option plans, and to act as the share incentive committee pursuant to those plans, provided that such grants are within the framework determined by the board.
 
Dividends

Dividends may be paid only out of accumulated retained earnings, as defined in the Companies Law, as of the end of the most recent fiscal period or as accrued over a period of two years, whichever is higher, and out of surplus derived from net profit and other surplus that is neither share capital nor premium, all as determined under the Companies Law (the “Profit Test”), in each case provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Notwithstanding the foregoing, dividends may be paid with the approval of a court even if the Profit Test is not met, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Dividends may be paid in cash, assets, shares or debentures. For further information, please see “Financial Information – Dividends.”  In connection with the loan agreement entered into with Bank HaPoalim Ltd (the "Bank") to finance the Nera Acquisition, we undertook not to distribute dividends (unless certain terms are met) without the Bank’s prior written consent. See Item 8 – Significant Changes.
 
Internal Auditor

Under the Companies Law, the board of directors of a public company must appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine, among other things, whether the company’s conduct complies with applicable law, integrity and orderly business procedure. The internal auditor has the right to request that the chairman of the audit committee convene an audit committee meeting, and the internal auditor may participate in all audit committee meetings. Under the Companies Law, the internal auditor may be an employee of the company but may not be an interested party, an office holder or a relative of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative.

We have appointed the firm of Chaikin, Cohen, Rubin & Co., Certified Public Accountants (Isr.) as our internal auditor.

Fiduciary Duties of Office Holders

The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company, including directors and officers. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means to obtain:

 
information regarding the advisability of a given action submitted for his or her approval or performed by him or her by virtue of his or her position; and

 
all other important information pertaining to these actions.

The duty of loyalty of an office holder is a duty to act in good faith and for the benefit of the company, and includes a duty to:

 
refrain from any conflict of interest between the performance of his or her duties in the company and any other of his or her other duties or his or her personal affairs;
 
 
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refrain from any activity that is competitive with the company;

 
refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and

 
disclose to the company any information or documents relating to a company’s affairs which the office holder has received due to his or her position as an office holder.

The company may approve an action by an office holder from which the office holder would otherwise have to refrain due to its violation of the office holder’s duty of loyalty (as described above) if:

 
the office holder acts in good faith and the act or its approval does not cause harm to the company; and

 
the office holder discloses the nature of his or her interest in the transaction to the company in a reasonable time before the company’s approval.

Each person listed in the table under “—Directors and Senior Management” above is considered an office holder under the Companies Law.

Disclosure of Personal Interests of an Office Holder

The Companies Law requires that an office holder of a company disclose to the company, promptly, and, in any event, not later than the first board meeting at which the transaction is discussed, any direct or indirect personal interest that he or she may have and all related material information and documents known to him or her relating to any existing or proposed transaction by the company. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by:

 
the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of these people; or

 
any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager.

Under the Companies Law, an extraordinary transaction is a transaction:

 
other than in the ordinary course of business;

 
otherwise than on market terms; or

 
that is likely to have a material impact on the company’s profitability, assets or liabilities.

The Companies Law does not specify to whom within the company nor the manner in which required disclosures are to be made. We require our office holders to make such disclosures to our board of directors.

Under the Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party where the office holder has a personal interest in the transaction, unless the articles of association provide otherwise. A transaction that is adverse to the company’s interest may not be approved.

If the transaction is an extraordinary transaction, first the audit committee and then the board of directors, in that order, must approve the transaction. Under specific circumstances, shareholder approval may also be required. A director who has a personal interest in a transaction, which is considered at a meeting of the board of directors or the audit committee, generally may not be present at this meeting or vote on this matter, unless a majority of the board of directors or the audit committee, as the case may be, has a personal interest. If a majority of the board of directors has a personal interest, then shareholders’ approval is also required.

 
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Disclosure of Personal Interests of a Controlling Shareholder

Under the Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, and the engagement of a controlling shareholder or a relative as an office holder or employee, require the approval of the audit committee, the board of directors and the majority of the voting power of the shareholders present and voting at the general meeting of the company (not including abstentions), provided that either:

 
at least one-third of the shares of shareholders who have no personal interest in the transaction and who are present and voting (in person or by proxy or written ballot), vote in favor; or

 
shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than one percent of the aggregate voting rights in the company.

With respect to the aforementioned transaction, any shareholder participating in the vote must inform the company prior to the voting whether or not he or she has a personal interest in the approval of the transaction, and if he or she fails to do so, his or her vote will be disregarded.

In accordance with regulations promulgated under the Companies Law, certain extraordinary transactions between a public company and its controlling shareholder(s) do not require shareholders’ approval, subject to the existence of one of the following circumstances, which existence was approved by the audit committee and then by the board of directors, such circumstances exist when a contemplated transaction: (i) may involve the extension of an existing transaction that was duly approved in accordance with the provisions of the Companies Law and does not involve any significant change in the terms of the existing transaction and other related circumstances or the change is solely for the benefit of the company; (ii) is solely for the benefit of the company; (iii) is with the controlling shareholder or another person in which the controlling shareholder has an interest and the transaction is in accordance with the terms of a framework transaction that was duly approved under the provisions of the Companies Law, such framework transaction allowing the company to execute transactions, in the ordinary course of business, of similar type, period and such other terms detailed in the framework transaction; (iv) is with the controlling shareholder or another person in which the controlling shareholder has an interest, the purpose of which is a transaction with a third party or a joint proposal to enter into a transaction with a third party, and the terms of the transaction that apply to the company are not materially different from the terms that apply to the controlling shareholder or an entity controlled by him or her (while taking into account the extent of their respective involvement in the transaction); or (v) is among companies under the common control of a controlling shareholder, or between a public company and the controlling shareholder or another person in which the controlling shareholder has a personal interest, and the transaction is on market terms, within the ordinary course of business and does not harm the company. Additionally, employment and compensation arrangements for an office holder that is a controlling shareholder in a public company and the purchase of an insurance policy for such controlling shareholder or his relative do not require shareholders’ approval if certain criteria are met, as approved by the audit committee and the board of directors. The foregoing exemptions from shareholders’ approval will not apply if one or more shareholders holding at least 1% of the issued and outstanding share capital of a public company or of such company’s voting rights, objects to the use of these exemptions provided that such objection is submitted to the company in writing not later than fourteen days from the date the company notifies its shareholders regarding the adoption of such resolution by the company. If such objection is duly and timely submitted, then the transaction or compensation arrangement of the directors will require shareholders’ approval as detailed above.

In addition, under the Companies Law, each shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations toward the company and other shareholders and to refrain from abusing his power in the company, such as shareholder votes. Further, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that he or she possesses the power to determine the outcome of a shareholders’ vote, and any shareholder who, pursuant to the provisions of the Articles of Association, has the power to appoint or to prevent the appointment of an office holder or any other power toward the company. However, the Companies Law does not define the substance of this duty of fairness.

 
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Exculpation, Insurance and Indemnification of Directors and Officers

Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his or her duty of loyalty, but may exempt in advance an office holder from his or her liability to the company, in whole or in part, for a breach of his or her duty of care (except in connection with distributions), provided that the Articles of Association allow it to do so. Our Articles of Association allow us to exempt our office holders to the fullest extent permitted by law.

Office Holders’ Insurance

Our Articles of Association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders concerning an act performed by him or her in his or her capacity as an office holder for:

 
a breach of his or her duty of care to us or to another person;

 
a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice our interests; or

 
a financial liability imposed upon him or her in favor of another person.

Exculpation and Indemnification of Office Holders

Our Articles of Association provide that, subject to the provisions of the Companies Law, we may indemnify any of our office holders against an act performed in his or her capacity as an office holder, including indemnity for the following:

 
a financial liability imposed on him or her in favor of another person by any judgment, including a settlement or an arbitration award approved by a court. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that our undertaking to indemnify is limited to events that our board of directors believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a sum or criterion that our board of directors determines to be reasonable under the circumstances, provided, that such event, sum or criterion shall be detailed in the undertaking;

 
reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (i) concluded without the imposition of any financial liability in lieu of criminal proceedings or (ii) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; and

 
reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him or her by a court, resulting from the following: proceedings we institute against him or her or instituted on our behalf or by another person; a criminal indictment from which he or she was acquitted; or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of intent.

 
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Limitations on Insurance and Indemnification

The Companies Law provides that a company may not exculpate or indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following:

 
a breach by the office holder of his or her duty of loyalty, except that the company may enter into an insurance contract or indemnify an office holder if the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

 
a breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly, unless it was committed only negligently;

 
any act or omission done with the intent to derive an illegal personal benefit; or

 
any fine levied against the office holder.

In addition, under the Companies Law, exculpation and indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors and, with respect to an office holder who is also a controlling shareholder or a director, also by our shareholders (unless the exemptions discussed above apply).

We indemnify our office holders to the fullest extent permitted under the Companies Law. We currently hold directors and officers liability insurance for the benefit of our office holders, which includes directors. This policy was approved by our board of directors and by our shareholders. Insofar as indemnification for liabilities arising under the United States Securities Act of 1933, as amended, may be permitted to our directors, officers and controlling persons, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Mergers and Acquisitions under Israeli Law

The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to the merger have the transaction approved by its board of directors and a vote of the majority of its shares. However, with respect to companies such as Ceragon, which were incorporated prior to the Companies Law coming into effect, shareholders’ approval must be obtained by holders of at least 75% of the shares participating at the shareholders’ meeting and voting thereon, not taking into account any abstentions. In accordance with the Companies Law, a shareholders’ meeting may resolve that a lower majority will be required for the approval of a merger, provided that such resolution is approved by holders of at least 75% of the shares participating at the shareholders’ meeting and voting thereon, not taking into account any abstentions.

The board of directors of any merging company contemplating whether to approve a merger must determine, in light of the financial condition of the merging companies, whether in its opinion exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. If such reasonable concern exists, the board of directors will not authorize the merger.

For purposes of the shareholders vote of each party, the merger will not be deemed approved if shares, representing a majority of the voting power present at the shareholders’ meeting and which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power or the right to appoint 25% or more of the directors of the other party), vote against the merger (the “dissenting shares”). If a person holds at least 25% of the voting shares or 25% of the rights to appoint directors in both merging companies, the aforementioned limitation shall apply with respect to both merging companies. If the transaction would have been approved but for the objection of the dissenting shares, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the valuation of each of the parties to the merger and the consideration offered to the shareholders.

Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposals for approval of the merger were filed with the Israeli Registrar of Companies by each merging company and (ii) 30 days have passed since the merger was approved by the shareholders of each merging company.

 
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A merger is not subject to shareholders’ approval (i) of the target company — if such target company is a wholly-owned subsidiary of the acquiring company; (ii) of the acquiring company – if (a) the merger does not involve an amendment to the acquiring company’s articles of association or memorandum of association, and (b) the acquiring company does not issue within the framework of the merger more than 20% of voting rights (for that matter only – any securities held by such person which may be converted or exercised into shares shall be deemed to be converted or exercised, as applicable), and no person will become, as a result of any issuance of securities in the acquiring company within the framework of the merger, a controlling shareholder, and (c) if no circumstances which enable the dissenting shareholders to deny approval of the merger (as detailed above) exist.

If the target company shares are divided into more than one class of shares, the merger is also conditioned upon approval by the shareholders participating in all such class meetings. Notwithstanding the lack of such approval by all such class meetings, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the valuation of each of the parties to the merger and the consideration offered to the shareholders.

Special Tender Offer. The Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 25% or more of the voting power in the company. This rule does not apply if there is already another holder of 25% or more of the voting power in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 45% or more of the voting power in the company, unless there is already a holder of 45% or more of the voting power in the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholders’ approval (including approval of the purchaser becoming a holder of 25% or more, or 45% or more, of the voting power in the company, unless there is already a holder of 25% or more or 45% or more, respectively, of the voting power in the company), (2) was from a holder of 25% or more of the voting power in the company which resulted in the acquirer becoming a holder of 25% or more of the voting power in the company, or (3) was from a holder of 45% or more of the voting power in the company which resulted in the acquirer becoming a holder of 45% or more of the voting power in the company. The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.

Full Tender Offer. The Companies Law also provides that if, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company’s outstanding shares or the voting rights in the company, the acquisition must be made by means of a tender offer for all of the outstanding shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer. The Companies Law provides for appraisal rights if any shareholder who was an offeree in the tender offer files a request in court within three months following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares. Shares acquired in violation of these provisions become dormant and cease to confer any rights upon their holder as long as the shares are held by the acquirer.

Regular Tender Offer. According to regulations promulgated under the Israeli Securities Law, an action of an offeror which is intended to persuade the public to sell to the offeror securities, including securities which may be converted or exercised into shares of a public company, constituting more than 5% of such registered securities, within any 6 month period, but excluding the acquisition of such securities on a stock exchange, must be made by a way of a tender offer directed to all such securities holders on equal terms.

Any tender offer must be made by a written document and meet specific requirements set forth in the regulations promulgated under the Israeli Securities Law. However, such regulations set forth that, with respect to a tender offer which is subject to, in addition the Israeli regulations, the law of a foreign state, including the rules and guidelines applicable to an exchange on which such company’s shares are registered for trade, the tender offer may be exempt from any provision of the regulations if the chairman of the Israeli Securities Authority concludes that such provision may be detriment to the tender offer and the waiver of such provision will not be detriment to a reasonable offeree.

 
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Israel tax law treats share-for-share acquisitions between an Israeli company and another company less favorably than does U.S. tax law. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his or her ordinary shares for shares in another corporation to taxation prior to the sale of the shares received for such share-for-share swap.

Employees
 
As of December 31, 2010, we had 580 employees worldwide, of whom 166 were employed in research, development and engineering, 316 in sales and marketing, 46 in management and administration and 52 in operations.  Of these employees, 319 were based in Israel, 34 were based in the United States, 34 were based in EMEA (not including Israel), 28 were based in Latin America and 165 were based in Asia Pacific.  Following the Nera Acquisition, we have increased the number of our employees significantly.  For the number of Nera employees as of January 2011, see Item 8 – Significant Changes.  In March 2011, we announced that we have begun a process to optimize our organizational structure following the Nera Acquisition.  In connection with this process, we will reduce our workforce by approximately 200 full-time positions worldwide.
 
As of December 31, 2009, we had 508 employees worldwide, of whom 129 were employed in research, development and engineering, 293in sales and marketing, 35 in management and administration and 51 in operations.  Of these employees, 269 were based in Israel, 25 were based in the United States, 33 were based in Europe, 22 were based in Latin America and 159 were based in Asia Pacific.
 
As of December 31, 2008, we had 444 employees worldwide, of whom 127 were employed in research, development and engineering, 245 in sales and marketing, 35 in management and administration and 37 in operations.  Of these employees, 265 were based in Israel, 24 were based in the United States, 19 were based in Europe, 20 were based in Latin America and 116 were based in Asia Pacific.
 
We and our employees are not parties to any collective bargaining agreements. However, with respect to our Israeli employees, we are subject to Israeli labor laws, regulations and collective bargaining agreements between the Histadrut, the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists Association, by extension orders of the Israeli Ministry of Labor and Welfare, as are in effect from time to time with respect to our Israeli employees. These laws and regulations principally concern matters such as paid annual vacation, paid sick days, length of the workday and work week, minimum wages, payment for overtime, payment during reserve duty, insurance for work-related accidents, severance payments and other conditions of employment. Generally, we provide our employees with benefits and working conditions above the legally required minimums.

Israeli law generally requires severance pay upon the retirement or death of an employee or termination without due cause. We currently fund a partial amount of the severance obligations to our employees (other than temporary employees) by making monthly payments in the amount of 8.33% of an employee’s monthly wages to approved pension funds or insurance policies.  New employees of ours (other than temporary employees), under a specific statutory provision, are generally entitled to the severance sums accrued in their pension funds or insurance policies in any event of termination without due cause (including in case of resignation) and said severance sums fully satisfies our severance obligation towards said employees.

Furthermore, we and our employees are required to make payments to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Such amounts also include payments by the employee for mandatory health insurance. The total payments to the National Insurance Institute are equal to approximately 17.43% of an employee’s salary (up to a maximum amount), of which the employee contributes approximately 12.00% and the employer contributes approximately 5.43% of the salary.

Following the Nera Acquisition, the percentage of employees in Israel as compared to our total number of employees worldwide has decreased significantly.  See Item 8 – Significant Changes.

 
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Substantially all of our employment agreements include employees’ undertakings with respect to non-competition, assignment to us of intellectual property rights developed in the course of employment and confidentiality. However, it should be noted that the enforceability of non- competition undertakings is rather limited under Israeli law.

Our employees are covered by a “managers insurance”, which provides life and pension insurance coverage with customary benefits to employees, including retirement and severance benefits. We contribute 13.33% of our permanent employee’s base salary (which includes a severance amount) to “managers insurance” fund and the employees contribute 5.00% of their base salary to such funds. In addition, our employees are entitled to an “advanced education fund”. We contribute 7.50% of the employees’ base salary and the employees contribute 2.50% of their base salary to such fund (up to a maximum amount).

Our employees are not represented by a labor union. To date, we have not experienced labor-related work stoppages and believe that our relations with our employees are good.

The employees of our subsidiaries are subject to local labor laws and regulations that vary from country to country.

Share Ownership
 
The following table sets forth certain information regarding the ordinary shares owned, and stock options held, by our directors and senior management as of March 15, 2011.  The percentage of outstanding ordinary shares is based on ordinary shares outstanding as of March 15, 2011.
 
Name
 
Number of Ordinary Shares(1)
   
Percentage of
Outstanding
Ordinary Shares
   
Number of Stock Options Held (2)
   
Range of exercise prices per share of stock options
 
Zohar Zisapel(3) 
    4,499,891       12.5       415,000     $ 2.00-$11.10  
Ira Palti
    651,247       1.8       780,000     $ 4.49-$11.79  
All directors and senior management as a group, consisting of 16 people (4)
    5,715,372       15.9             2,143,668     $     2.00-$11.84  
 
(1)
Consists of ordinary shares and options to purchase ordinary shares which are vested or shall become vested within 60 days of March 15, 2011.
 
(2)
Each stock option is exercisable into one ordinary share, and expires 10 years from the date of its grant.
 
(3)
The number of ordinary shares held Zohar Zisapel includes 9.467 shares held by RAD Data Communications Ltd., of which Mr. Zisapel is a principal shareholder and chairman of the board.
 
(4)
Each of the directors and senior managers other than Messrs. Zohar Zisapel and Ira Palti beneficially owns less than 1% of the outstanding ordinary shares as of March 15, 2011 (including options held by each such person and which are vested or shall become vested within 60 days of March 15, 2011) and have therefore not been separately disclosed.
 
 
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Stock Option Plans
 
1996 Key Employee Share Incentive Plan
 
In August 1996, we adopted our key employee share incentive plan. We ceased granting options under this plan as of December 31, 2002 in light of the adoption of our 2003 share option plan and a change in applicable Israeli tax laws, although options granted under this plan before December 31, 2002 are still valid subject to the plan. Employees of our company and our subsidiaries or affiliates belonging to the RAD-BYNET group were eligible to participate in the plan. The options expire ten years from the date of grant. The following table presents option grant information for this plan as of December 31, 2010:
 
Ordinary shares reserved
for option grants
 
Options outstanding
 
Weighted average
exercise price
134,824
 
134,824
 
$ 2.05

Affiliate Employees Option Plan
 
In May 1997, we adopted our affiliate employees option plan. We ceased granting options under this plan as of February 2003 in light of the adoption of our 2003 share option plan and a change in applicable Israeli tax laws, although options granted under this plan before February 2003 are still valid subject to the plan. This plan has terms that are substantially identical to the terms of the 1996 key employee share incentive plan. The options expire ten years from the date of grant. The following table presents option grant information for this plan as of December 31, 2010:
 
Ordinary shares reserved
for option grants
 
Options outstanding
 
Weighted average
exercise price
122,975
 
122,975
 
$ 1.92
 
In September 2003, our shareholders approved the transfer of all unissued shares previously reserved by our shareholders for option grants for which no options were granted under the 1996 key employee share incentive plan and the affiliate employees option plan for grants pursuant to the 2003 share option plan.
 
The 2003 Share Option Plan
 
In September 2003, our shareholders approved and adopted our 2003 share option plan. This plan complies with changes in Israeli tax law that was introduced in 2003 with respect to share options. The plan is designed to grant options pursuant to Section 102 or 3(i) of the Israeli Tax Ordinance (New Version), 1961. It is also intended to be a “qualified plan” as defined by U.S. tax law. Our worldwide employees, directors, consultants and contractors are eligible to participate in this plan. The compensation committee of our board of directors administers the plan. Generally, the options expire ten years from the date of grant. The compensation committee has authority to include in the notice of grant a provision regarding the acceleration of the vesting period of any option granted upon the occurrence of certain events. In addition, our board of directors has sole discretion to determine, in the event of a transaction with other corporation, as defined in the plan, that each option shall either: (i) be substituted for an option to purchase securities of the other corporation; (ii) be assumed by the other corporation; or (iii) automatically vest in full. In the event that all or substantially all of the issued and outstanding share capital of the company shall be sold, each option holder shall be obligated to participate in the sale and to sell his/her options at the price equal to that of any other share sold. In September, 2010, our board of directors amended the 2003 share option plan so as to enable to grant Restricted share Units ("RSUs") pursuant to such plan.  This plan has been approved by the Israeli Tax Authority as is required by applicable law. The following tables present option and RSUs grant information for this plan as of December 31, 2010.
 
 
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Cumulative Ordinary Shares Reserved for Option Grants
 
Remaining Reserved Shares Available for Option Grants
 
Options Outstanding
 
Weighted Average Exercise Price
15,290,389   464,853     4,470,437      $ 6.66
                                                                                                                                                    

Cumulative Ordinary Shares Reserved for RSU Grants
 
Remaining Reserved Shares Available for RSU Grants
 
RSUs Outstanding
 
Weighted Average Exercise Price
200,000    --   200,000     $ 0
                                                                                                              
The following table presents certain option and RSU grant information concerning the distribution of options and RSUs (granted under all three plans of the Company) among directors and employees of the Company as of December 31, 2010:

   
Options and RSUs Outstanding
   
Unvested Options and RSUs
 
             
Directors and senior management
    2,354,208       655,635  
                 
All other grantees
    2,574,028       1,080,493  

Amendment
 
Subject to applicable law, our board of directors may amend the plan, provided that any action by our board of directors which will alter or impair the rights or obligations of an option holder requires the prior consent of that option holder.
ITEM 7.                      MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
Major Shareholders
 
The following table sets forth stock ownership information as of March 15, 2011 (unless otherwise noted below) with respect to each person who is known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares, based on information provided to us by the holders or disclosed in public filings with the SEC.
 
Except where otherwise indicated, and except pursuant to community property laws, we believe, based on information furnished by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares.  The shareholders listed below do not have any different voting rights from any of our other shareholders.  We know of no arrangements which would, at a subsequent date, result in a change of control of our company.
 
Total shares beneficially owned in the table below include shares that may be acquired upon the exercise of options that are exercisable within 60 days.  The shares that may be issued under these options are treated as outstanding only for purposes of determining the percent owned by the person or group holding the options but not for the purpose of determining the percentage ownership of any other person or group.  Each of our directors and officers who is also a director or officer of an entity listed in the table below disclaims ownership of our ordinary shares owned by such entity.
 
 
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Name
 
Number of Ordinary Shares
   
Percentage of
Outstanding
Ordinary Shares(1)
 
Zohar Zisapel (2) 
    4,499,891       12.5  
Yehuda Zisapel (2) 
    2,247,467       6.3  
William Leland Edwards et al. (3) 
    2,048,441       5.7  
                 
(1)
Based on ordinary shares issued and outstanding as of March 15, 2011.
(2)
Yehuda Zisapel and Zohar Zisapel are brothers. Each shareholder’s address is 24 Raoul Wallenberg St., Tel Aviv 69719, Israel. The number of ordinary shares held by each of Yehuda Zisapel and Zohar Zisapel includes 9.467 shares held by RAD Data Communications Ltd., of which both Zisapels are principal shareholders and Zohar Zisapel serves as the chairman of its board.
(3)
Based on information provided in a Statement on Schedule 13G/A filed with the SEC on February 11, 2011 by William Leland Edwards, Anthony Joonkyoo Yun, MD, Palo Alto Investors, Palo Alto Investors LLC (“PAI”).  Palo Alto Investors is the manager of PAI.  William Leland Edwards is the controlling shareholder of Palo Alto Investors and has sole voting and dispositive power over 28,200 of the ordinary shares, and shared voting and dispositive power over 2,020,241 of the ordinary shares.  Anthony Joonkyoo Yun, MD, is the President of Palo Alto Investors and PAI.  Dr. Yun, Palo Alto Investors and PAI have shared voting and dispositive power over 2,020,241of the ordinary shares. Since providing a Statement on Schedule 13G filed with the SEC on February 16, 2010 by Mr. Edwards, Dr. Yun, Palo Alto Investors and PAI, each has decreased their shared voting and dispositive power from 2,572,924 to 2,020,241ordinary shares, or 7.2% to 5.6%.  The principal business office of the shareholder is 470 University Avenue, Palo Alto, California, 94301.

As of March 15, 2011, approximately 86.6% of our ordinary shares were held in the United States and there were 39 record holders with addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor are they representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 86.5% of our outstanding ordinary shares as of said date).
 
Related Party Transactions
 
The RAD-BYNET Group of Companies
 
Yehuda Zisapel is a principal shareholder who, as of March15, 2011, beneficially owns 6.3% of our ordinary shares. Zohar Zisapel, the Chairman of our board of directors and a principal shareholder of our company, beneficially owns 12.5% of our ordinary shares as of March 15, 2011.  They are brothers who do not vote as a group and do not have a voting agreement.  Individually or together, they are also founders, directors or principal shareholders of several other companies which, together with us and the other affiliates, are known as the RAD-BYNET group.  These corporations include the following, as well as several other real estate, holding, biotech and pharmaceutical companies:
 
AB-NET Communications Ltd.