20-F 1 v109542_20f.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
 
(Mark One)
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2007
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from __________ to __________
 
OR
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  Date of event requiring this shell company report _____________
 
Commission file number 0-30628
 
Alvarion Ltd.
(Exact name of Registrant as specified in its charter)
 
Israel
(Jurisdiction of incorporation or organization)
 
21A HaBarzel Street, Tel Aviv 69710, Israel
(Address of principal executive offices)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Ordinary Shares, NIS 0.01 par value per share
 
NASDAQ Global Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 
As of December 31, 2007, there were 63,049,257 Ordinary Shares, NIS 0.01 par value per share, outstanding.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes   x No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes   x No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 in the Exchange Act. (Check one).
Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o
 

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

U.S. GAAP x

International Financial Reporting Standards as issued by the International Accounting Standards
 
Board o
 
Other o
 
Indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17   x Item 18
 
If  “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17   x Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes   x No
 

 
INTRODUCTION
 
Alvarion Ltd. (the “Company,” “we,” “our” or “us”) concentrates resources on a single line of business - wireless broadband. We supply top-tier carriers, Internet Service Providers (“ISPs”) and private network operators with solutions based on the Worldwide Interoperability for Microwave Access (“WiMAX”) standard as well as other wireless broadband solutions. We are a leading provider of WiMAX and non-WiMAX wireless broadband systems having launched over 200 commercial WiMAX deployments worldwide. Our solutions are designed to cover the full range of frequency bands with fixed, portable and mobile applications, to enable the delivery of Personal Broadband services, business and residential broadband access, corporate virtual private network (“VPN”), toll quality telephony, mobile base station feeding, hotspot coverage extension, community interconnection and public safety communications. Currently, our business is mainly focused on solutions based on the WiMAX standard that are used for primary wireless broadband access. In addition, we continue to sell our non-WiMAX products. Most of our solutions provide high-speed wireless “last mile” connection to the Internet for homes and businesses in both developed and emerging markets. When we refer in this annual report to “emerging markets”, we mean markets in newly industrialized countries whose economies have not yet reached first world status but have, in a macroeconomic sense, outpaced their developing counterparts. In 2007, we shipped our first mobile WiMAX solutions for personal broadband applications, mainly for trials.
 
Our strategy is to leverage our experience and leadership in both non-standard broadband wireless access (“BWA”) and current WiMAX markets, together with our brand strength, broad customer base and innovative technology, in order to play an important role in the WiMAX-based personal broadband market as well.
 
We were incorporated in September 1992 under the laws of the State of Israel. Since our inception, we have devoted substantially all of our resources to the design, development, manufacturing and marketing of wireless products. On August 1, 2001, Floware Wireless Systems Ltd., a company incorporated under the laws of the State of Israel (“Floware”), merged with and into us. As a result of the merger, we continued as the surviving company, and Floware’s separate existence ceased. Upon the closing of the merger, we changed our name from BreezeCOM Ltd. to Alvarion Ltd. On April 1, 2003, we acquired most of the assets and assumed the related liabilities of InnoWave Wireless Systems Ltd. (“InnoWave”). In December 2004, we completed the amalgamation of interWAVE Communications International Ltd. (“interWAVE”), and most of the interWAVE operations became our Cellular Mobile business unit. In November 2006, we sold our Cellular Mobile business unit (“CMU”) to LGC Wireless, Inc. (“LGC”), a privately-held supplier of wireless networking solutions in exchange for promissory notes and convertible notes of LGC. In September 2007, LGC converted our convertible notes into LGC shares and thus we became a shareholder of LGC. In November 2007, ADC Telecommunication Inc. (“ADC”) acquired all of LGC shares in a cash transaction. For more information, see "Item 5—Operating and Financial Review and Prospects—Operating Results".
 
This annual report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our business, financial condition and results of operations. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all or any of the risks discussed in “Item 3—Key Information—Risk Factors” and elsewhere in this annual report.
 
i

 
In some cases, you can identify forward-looking statements by terms such as "may", "might", "will", "should", "could", "would", "expect", "believe", "intend", "plan", "anticipate", "project", "estimate", "predict", "potential" or the negative of these terms, and similar expressions intended to identify forward-looking statements.
 
These statements reflect our current views with respect to future events and are based on current assumptions, expectations, estimates and projections and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by applicable law, including the securities laws of the United States, we do not undertake any obligation nor intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
As used in this annual report, the terms “we,” “us,” “our,” “our Company,” and “Alvarion” mean Alvarion Ltd. and its subsidiaries, unless otherwise indicated. ALVARION, ALVARION & Design, WE’RE ON YOUR WAVELENGTH, BreezeCOM, BreezeLINK, BreezeMAX, BreezeACCESS, BreezeNET, BreezeLITE, BreezePHONE, WALKair, WALKnet, EASYBRIDGE, 4Motion, OPEN, SentieM, InnoWave Wireless Systems (Design), INTERWAVE, INTERWAVE & Design, INTERWAVE COMMUNICATIONS, WaveGain and INTERWAVE THE MICROCELLULAR NETWORKS COMPANY are trademarks or registered trademarks of Alvarion. All other trademarks and trade names appearing in this annual report are owned by their respective holders.
 
ii

 
TABLE OF CONTENTS
 
        
  Page
 
PART I
         
1
 
               
ITEM 1.
   
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
   
1
 
               
ITEM 2.
   
OFFER STATISTICS AND EXPECTED TIMETABLE
   
1
 
               
ITEM 3.
   
KEY INFORMATION
   
1
 
               
A.
   
SELECTED FINANCIAL DATA
   
1
 
     
 
       
B.
   
CAPITALIZATION AND INDEBTEDNESS
   
2
 
     
 
       
C.
   
REASONS FOR THE OFFER AND USE OF PROCEEDS
   
2
 
               
D.
   
RISK FACTORS
   
3
 
               
ITEM 4.
   
INFORMATION ON THE COMPANY
   
24
 
               
A.
   
HISTORY AND DEVELOPMENT OF THE COMPANY
   
24
 
               
B.
   
BUSINESS OVERVIEW
   
24
 
               
C.
   
ORGANIZATIONAL STRUCTURE
   
46
 
               
D.
   
PROPERTY, PLANTS AND EQUIPMENT
   
47
 
               
ITEM 4A.
   
UNRESOLVED STAFF COMMENTS
   
47
 
               
ITEM 5.
   
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
   
47
 
               
A.
   
OPERATING RESULTS
   
47
 
               
B.
   
LIQUIDITY AND CAPITAL RESOURCES
   
61
 
               
C.
   
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
   
68
 
               
D.
   
TREND INFORMATION
   
68
 
               
E.
   
OFF-BALANCE SHEET ARRANGEMENTS
   
68
 
               
F.
   
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
   
68
 
               
ITEM 6.
   
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
   
69
 
               
A.
   
DIRECTORS AND SENIOR MANAGEMENT
   
69
 
 
iii

 
B.
   
COMPENSATION OF DIRECTORS AND OFFICERS
   
73
 
               
C.
   
BOARD PRACTICES
   
74
 
               
D.
   
EMPLOYEES
   
81
 
               
E.
   
SHARE OWNERSHIP
   
82
 
               
ITEM 7.
   
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
   
85
 
               
A.
   
MAJOR SHAREHOLDERS
   
85
 
               
B.
   
RELATED PARTY TRANSACTIONS
   
85
 
               
C.
   
INTERESTS OF EXPERTS AND COUNSEL
   
85
 
               
ITEM 8.
   
FINANCIAL INFORMATION
   
86
 
 
             
A.
   
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
   
86
 
               
B.
   
SIGNIFICANT CHANGES
   
87
 
               
ITEM 9.
   
THE OFFER AND LISTING
   
88
 
               
A.
   
OFFER AND LISTING DETAILS
   
88
 
               
B.
   
PLAN OF DISTRIBUTION
   
89
 
               
C.
   
MARKETS
   
89
 
               
D.
   
SELLING SHAREHOLDERS
   
89
 
               
E.
   
DILUTION
   
89
 
               
F.
   
EXPENSES OF THE ISSUE
   
89
 
               
ITEM 10.
   
ADDITIONAL INFORMATION
   
90
 
               
A.
   
SHARE CAPITAL
   
90
 
               
B.
   
MEMORANDUM AND ARTICLES OF ASSOCIATION
   
90
 
               
C.
   
MATERIAL CONTRACTS
   
92
 
               
D.
   
EXCHANGE CONTROLS
   
92
 
               
E.
   
TAXATION
   
92
 
               
F.
   
DIVIDENDS AND PAYING AGENTS
   
102
 
               
G.
   
STATEMENT BY EXPERTS
   
102
 
 
iv

 
H.
   
DOCUMENTS ON DISPLAY
   
102
 
               
I.
   
SUBSIDIARY INFORMATION
   
103
 
               
ITEM 11.
   
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
103
 
               
ITEM 12.
   
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
   
103
 
               
PART II
   
 
   
104
 
               
ITEM 13.
   
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
   
104
 
               
ITEM 14.
   
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
   
104
 
               
ITEM 15.
   
CONTROLS AND PROCEDURES
   
104
 
               
ITEM 16A.
   
AUDIT COMMITTEE FINANCIAL EXPERT
   
106
 
               
ITEM 16B.
   
CODE OF ETHICS
   
106
 
               
ITEM 16C.
   
PRINCIPAL ACCOUNTANT FEES AND SERVICES
   
106
 
               
ITEM 16D.
   
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
   
107
 
               
ITEM 16E.
   
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   
107
 
               
PART III
         
107
 
               
ITEM 17.
   
FINANCIAL STATEMENTS
   
107
 
               
ITEM 18.
   
FINANCIAL STATEMENTS
   
107
 
               
ITEM 19.
   
EXHIBITS
   
108
 
 
v

 
PART I
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3. KEY INFORMATION
 
A. SELECTED FINANCIAL DATA
 
We have derived the following selected consolidated financial data presented below as of December 31, 2006 and 2007 and for each of the years ended December 31, 2005, 2006 and 2007 from our audited consolidated financial statements and related notes included in this annual report. We have derived the selected consolidated financial data as of December 31, 2003, 2004 and 2005 and for each of the years ended December 31, 2003 and 2004 from our audited consolidated financial statements and related notes not included in this annual report. The consolidated financial data for the year ended December 31, 2003 include the results of operations of the assets and assumed liabilities of the InnoWave business from April 1, 2003. The consolidated financial data for the year ended December 31, 2004 include the results of operations of the former interWAVE Communications International business, referred to as the Cellular Mobile Unit, from December 9, 2004. Following the sale of net assets of CMU on November 21, 2006, the results of the CMU activities for the years ended December 31, 2004, 2005, 2006 and 2007 were reclassified to one line item in the statement of operations as “Income (loss) from discontinued operations” below the results from continuing operations. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). You should read the selected consolidated financial data together with the section of this annual report entitled, “Item 5—Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included elsewhere in this annual report.    
 
   
Year Ended December 31,
 
   
2003
 
2004
 
2005
 
2006(*) 
 
2007(*) 
 
   
(in thousands except per share data)
 
Statement of Operations Data:
                     
Sales
 
$
127,208
 
$
200,051
 
$
176,927
 
$
181,594
 
$
236,573
 
Cost of sales
   
68,595
   
101,169
   
85,817
   
80,410
   
114,099
 
Write-off of excess inventory and provision for inventory purchase commitments
   
6,562
   
11,412
   
7,338
   
9,472
   
4,762
 
Gross profit
   
52,051
   
87,470
   
83,772
   
91,712
   
117,712
 
                                 
Operating costs and expenses:
                               
Research and development, gross
   
27,612
   
31,231
   
32,772
   
42,042
   
54,967
 
Less grants
   
3,846
   
3,897
   
3,062
   
3,235
   
3,578
 
Research and development, net
   
23,766
   
27,334
   
29,710
   
38,807
   
51,389
 
Selling and marketing
   
33,000
   
38,748
   
39,900
   
44,929
   
55,943
 
General and administrative
   
6,417
   
9,385
   
9,602
   
13,680
   
15,426
 
Merger and acquisition related
expenses
   
2,201
   
-
   
-
   
-
   
-
 
Amortization of intangible assets
   
2,606
   
2,676
   
2,685
   
2,676
   
2,544
 
Total operating costs and expenses
   
67,990
   
78,143
   
81,897
   
100,092
   
125,302
 
Operating profit (loss)
   
(15,939
)
 
9,327
   
1,875
   
(8,380
)
 
(7,590
)
Other income
   
-
   
-
   
-
   
-
   
8,265
 
Financial income, net
   
4,127
   
3,821
   
2,551
   
3,796
   
6,453
 
Income (loss) from continuing operations
   
(11,812
)
 
13,148
   
4,426
   
(4,584
)
 
7,128
 
Income (loss) from discontinued operations, net
   
-
   
(12,297
)
 
(17,044
)
 
(36,167
)
 
5,413
 
Net income (loss)
 
$
(11,812
)
$
851
 
$
(12,618
)
$
(40,751
)
$
12,541
 
                                 
Net earnings (loss) per share:
                               
Basic:
                               
Continuing operations
 
$
(0.23
)
$
0.23
 
$
0.08
 
$
(0.08
)
$
0.11
 
Discontinued operations
   
-
   
(0.21
)
 
(0.30
)
 
(0.59
)
 
0.09
 
Total
 
$
(0.23
)
$
0.02
 
$
(0.22
)
$
(0.67
)
$
0.20
 
Weighted average number of shares used in computing basic net earnings (loss) per share
   
52,127
   
56,549
   
58,688
   
60,841
   
62,345
 
Diluted:
                               
Continuing operations
 
$
(0.23
)
$
0.20
 
$
0.07
 
$
(0.08
)
$
0.11
 
Discontinued operations
   
-
   
(0.19
)
 
(0.27
)
 
(0.59
)
 
0.08
 
Total
 
$
(0.23
)
$
0.01
 
$
(0.20
)
$
(0.67
)
$
0.19
 
Weighted average number of shares used in computing diluted net earnings (loss) per share
   
52,127
   
63,754
   
63,561
   
60,841
   
64,626
 

(*) Includes charges for stock-based compensation of $6.9 million and $7.4 million as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) 123(R), “Share-Based Payment” (“SFAS 123(R)”) for the years ended December 31, 2006 and 2007 respectively.
 
1


   
As of December 31,
 
   
2003
 
2004
 
2005
 
2006
 
2007
 
Working capital
 
$
90,359
 
$
53,341
 
$
101,713
 
$
97,169
 
$
109,290
 
Total assets
 
$
284,957
 
$
328,535
 
$
318,002
 
$
280,063
 
$
313,143
 
Shareholders’ equity
 
$
220,202
 
$
232,812
 
$
224,333
 
$
195,301
 
$
220,553
 
Capital Stock
 
$
376,309
 
$
388,418
 
$
391,957
 
$
403,708
 
$
415,213
 
 
B. CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
2

 
 
D. RISK FACTORS 
 
Our business, financial condition and results of operations could be seriously harmed due to any of the following risks, among others. If we do not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results of operations and financial condition, and our share price may decline. We cannot assure you that we will successfully address any of these risks.
 
Risks Related to Our Business and Our Industry
 
We have incurred losses in the past. We may incur losses in the near term, and we may continue to incur losses in the future.
 
In 2007, our operating loss from continuing operations and net income was approximately $(7.6) million and $12.5 million, respectively. In 2006, our operating loss from continuing operations and net loss was approximately $(8.4) million and $(40.8) million, respectively. In 2005, our operating profit from continuing operations and net loss was approximately $1.9 million and $(12.6) million, respectively. We may continue to incur operating losses and incur net losses in the future. Continuing losses could have a material adverse effect on our business, financial condition and results of operations, and on the value and market price of our ordinary shares.
 
Adverse conditions in the telecommunications industry and in the telecommunications equipment market may decrease demand for our products and may harm our business, financial condition and results of operations.
 
Our systems are used by telecom carriers and service providers. Some carriers and service providers using wireless broadband are emerging companies with unproven business models. Adverse market conditions in the last couple of years caused our customers and potential customers to be conservative in their spending, and this could continue in the future. The markets that we participate in may not grow as we expect or at all. While our goal is to increase our sales by expanding the number of carrier customers that we address, there can be no assurance that we will succeed in doing so. The number of carriers and service providers who are our potential customers is relatively small and may not grow because of the limited number of licenses granted in each country and the substantial comparative capital requirements involved in establishing networks. As a result, our revenues may decline and increase our losses. Our systems are also used in vertical market applications (such as surveillance, monitoring and connectivity) by private network operators such as government, municipalities and large enterprises. Our products are integrated in a complete solution, which provide an answer to specific application requirements. The demand for our systems in such vertical market applications could be less than expected and the alternative technologies may strongly compete against us. As a result, our revenues may decline and increase our losses.
 
New markets we attempt to penetrate may not become substantial commercial markets. In addition, if we do not maintain or increase the share we expect of the wireless broadband equipment market, our business will suffer.
 
The Personal Broadband market and any other new markets we attempt to penetrate may not become substantial commercial markets or may not evolve in a manner that will enable our products to achieve market acceptance. Mobile WiMAX technology targets fourth generation ("4G"), type of services and therefore directly competes with other technologies such as Long Term Evolution ("LTE"), and Ultra Mobile Broadband ("UMB"). WiMAX technology may not be adopted by communication operators as their chosen 4G technology. For example, WiMAX market acceptance may be hampered by competing technologies or intellectual property rights (IPR) disputes.
 
3

 
In addition, in order to maintain or increase the share we expect of the markets we participate in, we must:
 
 
·
continue to innovate and differentiate our technology position in designing, developing and manufacturing broadband wireless access products;
 
 
·
develop and cultivate additional sales channels, including original equipment manufacturer (“OEM”) agreements, regional local partners or other strategic arrangements with leading manufacturers of access equipment to market our wireless broadband products to prospective customers, such as local exchange carriers, cellular operators, Internet and application service providers, municipalities and local telephone companies;
 
 
·
effectively establish and support relationships with customers, including local exchange carriers, Internet and application service providers, public fixed or mobile telephone service providers and private network operators; and
 
 
·
effectively develop and market our OPEN WiMAX strategy in our broadband mobile solution, together with our current and potential partners.
 
Our efforts in these markets may not succeed.
 
Intense competition in the markets for our products may have an adverse effect on our sales and profitability.
 
Many companies compete with us in the wireless broadband equipment market in which we sell our products. We expect that competition from large vendors as well as new market vendors will increase in the future, including both with respect to products that we currently offer and products that we intend to introduce in the future. As the market transitions toward standardization, it increasingly becomes more challenging for us to compete. In addition, some or all of the systems integrators and other strategic partners to which we sell our wireless broadband products could develop the capability to manufacture systems similar to our wireless broadband products. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that may supplant or provide lower cost alternatives to our products or products with better performance. We are also facing additional and new competition from large telecommunications equipment vendors, such as Alcatel-Lucent, Cisco Systems (specifically after acquiring Navini Networks), Huawei Technologies, Motorola, NEC Corporation, Nokia Siemens Networks, Nortel Networks, Samsung and ZTE Corporation and we expect this competition to grow, especially with respect to the mobile WiMAX-based products. Tier One operators, such as Sprint Nextel, may prefer to purchase products from these large vendors. There has been a trend towards consolidation in the telecommunications equipment market. This trend may continue in the future and result in larger competitors with enhanced resources, financial and otherwise. This may intensify the competitive nature of the markets in which we operate. Furthermore, this consolidation process, such as the merger of Alcatel and Lucent, Cisco's acquisition of Navini and the merger of Nokia and Siemens limits and may further reduce the potential variety of our customers and partners.
 
In addition, as the market grows, we may face competition from aggressive start-ups in different markets. We expect that we will also face competition from alternative wireline and wireless technologies including copper wires, fiber-optic cable, digital subscriber lines (“DSL”), cable modems, satellite, Wi-Fi and other broadband access technologies, such as long-term evolution (“LTE”) and Ultra Mobile Broadband ("UMB") technologies.
 
We expect these competitors to continue to improve their technologies and products, which may cause us to lose some of our customers or prevent us from penetrating into new markets. Some of our existing and potential competitors, including large competitors arising from the continued consolidation in the telecommunications equipment market, have substantially greater resources, including financial, technological, manufacturing and marketing, and distribution capabilities, and enjoy greater market recognition than we do. Increased competition, direct and indirect, has resulted in, and is likely to continue to result in, reductions of average selling prices, shorter product life cycles, reduced gross margins, longer sales cycles and loss of market share and, consequently, could adversely affect our sales and profitability.
 
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We may not be able to differentiate our products from those of our competitors, successfully develop or introduce new products that are less costly, offer better performance than those of our competitors, or offer our customers payment or other commercial terms as favorable as those offered by our competitors. In addition, we may not be able to offer our products as part of integrated systems or solutions to the same extent as our competitors. A failure to accomplish one or more of these objectives could materially adversely affect our sales and profitability, harming our financial condition and results of operations.
 
Existing and potential industry standards may have an adverse affect on our competitiveness and market position, on our relations with our customers and on our revenues.
 
We have developed and continue to develop our products with a view to compliance with existing standards and anticipated future standards. We expended, and intend to continue to expend, substantial resources in developing products and product features that are designed to conform to such standards. In addition, although we developed our products with a view to compliance with existing standards and anticipated compliance with future standards, we may not be able to introduce on a timely basis products that comply with industry standards. Since the WiMAX industry is currently at early stages, we are requested to invest significant resources in interoperability testing ("IOT") with other significant WiMAX manufacturers. The broad demand of manufacturers and operators for IOT, as well as the length of the IOT process and its success may have a significant impact on our relationships with our customers and on our revenues and expenses.
 
Certain standards on which we base our products and technology - such as Institute of Electrical and Electronic Engineers (“IEEE”) 802.16d-2004 and IEEE 802.16e-2005 - may not continue to be, or will not be, broadly adopted which could significantly limit our market opportunity and harm our business. In general, IEEE has expressed interest in collaborating with an international consortium to develop open access publishing mode. In addition, our focus on anticipated future standards, including the IEEE 802.16e-2005 certified standard, may lead to delays in introducing products designed for current standards and may have an adverse affect on our competitiveness and market position , on our relations with our customers and on our revenues.
 
Our strategy of seeking to anticipate and comply with industry standards is subject to the following additional risks, among others:
 
 
·
the standards ultimately adopted by the industry may vary from those anticipated by us, causing our products (which were designed to meet anticipated standards) to fail to comply with established standards;
 
 
·
even if our products do comply with established standards, these standards are not mandatory and consumers may prefer to purchase products that do not comply with them or that comply with new or competing standards;
 
 
·
product standardization may have the effect of lowering barriers to entry in the markets in which we seek to sell our products, by diminishing product differentiation and causing competition to be based upon criteria such as the relative size and marketing skills of competitors in which we believe we have less of a competitive advantage than on the basis of product differentiation;
 
 
·
the market transition to product standardization could significantly delay the time we recognize revenue, shifting from the date of shipping of existing products to the date of achievement of product certification and fulfillment of all revenue recognition criteria;
 
 
·
standardization of product features may increase the number of competitive product offerings;
 
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·
our competitors may attempt to influence the adoption of standards that are not compatible with our products; and
 
 
·
standardization may also result in lower average selling prices.
 
These risks, among others, may harm our sales and, consequently, our results of operations.
 
Our products under development, including our IEEE 802.16e-2005 standards- compliant WiMAX-certified products, may not be available on our planned timetable. If customers refrain from buying our current products in order to wait for such products, our business will suffer.
 
In the past, we experienced delays in orders for, and decreasing revenues from, both non-WiMAX products and products based on IEEE 802.16d standards. These delays were primarily due to the market transition to WiMAX certified products based on 802.16e Time Division Duplex (“TDD”) systems. We may continue to suffer from the market transition to IEEE 802.16e-2005 WiMAX certified products or to any other new WiMAX standards as customers continue to slow or cease their purchases of our commercially available products in order to wait for such products. In addition, we may also be subject to delays in development due to third party vendors, such as chip- vendors. If such products are not available on our planned timetable, and if our planned timetable lags behind our competitors, our customers may seek other providers to fulfill their wireless needs and our revenues could decrease.
 
Some of our standards-compliant WiMAX ready products may not receive the certification that we expect, which may affect our future business.
 
We rely on WiMAX technology. Products based on this technology may not receive certification in the time frame we expect, or at all, and may therefore not achieve the wide acceptance that we are seeking. Market changes could render this technology obsolete or subject to intense competition by alternative technologies. This may harm the sales of our standards compliant products, and consequently, our results of operations.
 
Rapid technological change may have an adverse effect on the market acceptance for our products and may adversely affect our results of operations.
 
The markets for our products and the technologies utilized in the industry in which we operate evolve rapidly. We rely on key technologies, including wireless local area network (“LAN”), wireless packet data, orthogonal frequency division multiplexing (“OFDM”), orthogonal frequency division multiple access (“OFDMA”), time division multiplexing, modem and radio technologies and other technologies, which we have been selling for several years, as well as WiMAX, multiple-input multiple-output communications (“MIMO”), Sub Channelization, beam forming, high power base station and other technologies. These technologies may be replaced with alternative technologies or may otherwise not achieve the wide acceptance that we are seeking. In particular, there is a substantial risk that the wireless broadband technologies underlying our products may not achieve market acceptance for use in access applications. As a result, our results of operations may be adversely affected.
 
In addition, market changes could render our products and technologies obsolete or subject them to intense competition by alternative products or technologies or by improvements in existing products or technologies. For example, the wireless broadband equipment market may stop growing as a result of the deployment of alternative technologies that are constantly improving, such as DSL, cable modem, fiber optic, coaxial cable, satellite systems, Wi-Fi technology, third or fourth generation cellular systems, or otherwise high-speed packet access (“HSPA”) and LTE technologies. New or enhanced products developed by other companies may be technologically superior to our products, may limit our target markets or may render our products obsolete, thus adversely affecting our results of operations.
 
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The success of our technology depends on the following factors, among others:
 
 
·
acceptance of new and innovative technologies;
 
 
·
acceptance of standards for wireless broadband products;
 
 
·
timely availability and maturity of technology from technology suppliers and chip-vendors, such as Intel;
 
 
·
capacity to handle growing demands for faster transmission of increasing amounts of data and voice;
 
 
·
cost-effectiveness and performance compared to other fixed and other broadband wireless technologies;
 
 
·
reliability and security;
 
 
·
Acceptance of new WiMAX ecosystem;
 
 
·
suitability for a sufficient number of geographic regions;
 
 
·
the availability of sufficient frequencies and site locations for carriers to deploy and install products at commercially reasonable rates; and
 
 
·
safety and environmental concerns regarding wireless broadband transmissions.
 
We may experience difficulties or delays in the introduction of new or enhanced products, which could result in reduced sales, unexpected expenses or delays in the launch of new or enhanced products.
 
The development of new or enhanced products is a complex and uncertain process. We are engaged in the development of very advanced technologies. We may experience design, manufacturing, marketing and other difficulties due to delays in our development and/or due to delays by third party vendors that could delay or prevent our development, introduction or marketing of new products or product enhancements and intensified competition. The difficulties could result in reduced sales, unexpected expenses or delays in the launch of new or enhanced products or inability to timely introduce to the market the appropriate products, all which may adversely affect our results of operations.
 
Our recent collaboration with Accton Technology Corporation to form Accton Wireless Broadband (“AWB”) may not achieve our expectations to build our market position in the WiMAX Consumer Electronic Devices market.
 
In January 2007, we began to collaborate with AWB to develop mass market cost-effective WiMAX consumer electronic devices. These devices are intended to complement our WiMAX offerings while facilitating the availability of WiMAX-based Personal Broadband services. These efforts may not result in the achievement of market acceptance or in the anticipation of product capabilities in a timely fashion or at all, and may prevent us from maintaining or expanding our position in the WiMAX market. Each of these outcomes could have a material adverse effect on our results of operations.

We engaged and may continue to engage in mergers and acquisitions which could harm our business, results of operations and financial condition, and dilute our shareholders’ equity.
 
We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies. We are unable to predict whether or when any other prospective acquisition will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations. Past and future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing. Past and future acquisitions by us could result, without limitation, in the following, any of which could seriously harm our results of operations or the price of our ordinary shares:
 
 
·
issuance of equity securities that would dilute our current shareholders’ percentages of ownership;
 
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·
large write-offs;
 
 
·
the incurrence of debt and contingent liabilities;
 
 
·
difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies;
 
 
·
diversion of management’s attention from other business concerns;
 
 
·
contractual disputes;
 
 
·
risks of entering geographic and business markets in which we have no or only limited prior experience;
 
 
·
potential loss of key employees of acquired organizations; and
 
 
·
potential effects on our cash reserve.
 
We have experienced in the past, and may experience in the future, quarterly and annual fluctuations in our results of operations. This may cause volatility in the market price of our ordinary shares.
 
We have experienced, and may continue to experience, significant fluctuations in our quarterly and annual results of operations. Any fluctuations may cause our results of operations to fall below the expectations of securities analysts and investors. This would likely affect the market price of our ordinary shares.
 
Our quarterly and annual results of operations may vary significantly in the future for a variety of reasons, many of which are outside of our control, including the following:
 
 
·
the uneven pace of spectrum licensing to carriers and service providers;
 
 
·
adoption of new standards in our industry;
 
 
·
the size and timing of orders and the timing of large scale deployments;
 
 
·
the fulfillment of all revenue recognition criteria;
 
 
·
customer deferral of orders in anticipation of new products, product features or price reductions;
 
 
·
the timing of our product introductions or enhancements or those of our competitors or of providers of complementary products;
 
 
·
the purchasing patterns of our customers and end users, as well as the budget cycles of customers for our products;
 
 
·
seasonality, including the relatively low level of general business activity in the first and third quarters of each year;
 
 
·
disruption in, or changes in the quality of, our sources of supply;
 
 
·
changes in the mix of products sold by us;
 
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·
the extensive marketing and organizational efforts that carriers are required to make to develop their subscriber base following the deployment of the network infrastructure, creating a gap between the time carriers purchase base stations for network infrastructure deployment and the time they purchase terminal stations for connection of subscribers to the network;
 
 
·
mergers or acquisitions, by us, our competitors and exiting and potential customers, if any;
 
 
·
one-time charges such as asset impairment and restructuring;
 
 
·
fluctuations in the exchange rate of the New Israeli Shekel (the “NIS”) against the dollar;
 
 
·
adoption of new financial accounting standards; and
 
 
·
general economic conditions, including the changing economic conditions in the United States and worldwide.
 
Our customers ordinarily require the delivery of products promptly after their orders are accepted. Our business historically does not have a significant backlog of accepted orders. Consequently, revenues in any quarter depend primarily on orders received and accepted in that quarter. The deferral of the placing and acceptance of any large order from one quarter to another could materially adversely affect our results of operations for the previous quarter. If revenues from our business in any quarter remain in the same level or decline in comparison to any previous quarter, our results of operations could be harmed.
 
In addition, our operating expenses may increase significantly. If revenues in any quarter do not increase correspondingly or at a higher rate, or if we do not reduce our expenses in a timely manner in response to lower level or declining revenues, our results of operations for that quarter would be materially adversely affected. Because of the variations that we have experienced in our quarterly results of operations, we do not believe quarter-to-quarter comparisons of our results of operations are necessarily meaningful and you should not rely on results of operations in any particular quarter as an indication of future performance.
 
Our products have long and unpredictable sales cycles. This could adversely impact our revenues and results of operations.
 
The sales cycle for most of our products encompasses significant technical evaluation and testing by each potential purchaser and a commitment of significant cash and other resources. The sales cycle can extend for as long as one year or more from initial contact with a carrier to receipt of a purchase order. This time frame may be extended due to, among other reasons, a carrier’s will to ensure that the systems works for a long period with increased number of subscribers’ coverage and capacity, a carrier’s need to obtain financing to purchase systems incorporating our products, the regulatory authorization of competition in local services, delays in the licensing of spectrum for these services and other regulatory hurdles.
 
As a result of the length of this sales cycle, revenues from our products may fluctuate from quarter to quarter and fail to correspond with associated expenses, which are largely based on anticipated revenues. In addition, the delays inherent in the sales cycle of our products raise additional risks of customers canceling or changing their product plans. Our revenues will be adversely affected if a significant customer, or significant potential customer, reduces delays or cancels orders during the sales cycle of the products or chooses not to deploy networks incorporating our products. Any such fluctuation in revenue or cancellation of orders may have an adverse affect on our business and may affect the market price of our ordinary shares.
 
We may fail to deliver “turn-key” solutions to our customers
 
We are experiencing an increasing demand from existing and potential customers to provide a complete operational or “turn key” solution for their deployment needs where we are responsible for third-party deliverables. In addition, our new OPEN WiMAX strategy is designed to enable multiple telecom vendors to build a best-of-breed telecom access network in an open standard architecture. This new strategy enables communication service providers to choose the combination of vendors and partners that best fits their specific requirements in large telecom projects. These solutions require us to integrate subcontractors’ technologies, equipment and services. Relying on these third parties increases our responsibilities towards these customers. If we or any of our subcontractors fail to fully comply with the customers’ requirements, it may adversely affect our results of operations.
 
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Our business is dependent upon the success of distributors who are under no obligation to purchase our products.
 
A significant portion of our revenues is derived from sales to independent distributors. These distributors then resell the products to others, who further resell those products to end users. Changes in the distribution and sales channels of our products, a loss of a major distributor or their loss of a major end-user, or our inability to establish effective distribution and sales channels for new products may impact our ability to sell our products and result in a loss of revenues. We are dependent upon the acceptance of our products by the market through our distributors’ efforts in marketing and sales. In some cases, arrangements with our distributors do not prevent them from selling competitive products and those arrangements do not contain minimum sales or marketing performance requirements. These distributors may not give a high priority to marketing and supporting our products. Changes in the financial condition, business or marketing strategies of these distributors could have a material adverse effect on our results of operations. Any of these changes could occur suddenly and rapidly.
 
We are dependent upon the success of our direct sales efforts.
 
Direct sales accounted for a total of approximately 41% of our sales in 2007, 40% of our sales in 2006 and 48% of our sales in 2005.  Direct sales customers are not under any obligation to purchase our products. Some of these customers do not have long business histories and have encountered, and may continue to encounter, financial difficulty, including difficulty in obtaining credit to purchase our products. These customers typically purchase our products and solutions on a project-by-project basis, so that continuity of purchases by these customers is not assured. We do not necessarily retain sales personnel with carrier sales or project sales and management expertise. We may also face difficulties locating and retaining carrier customers who purchase directly from us. If we are unable to effectively continue our direct sales efforts of our products, our results of operations could be materially adversely affected. Any such change could occur suddenly and rapidly.
 
Our business depends in part on Original Equipment Manufacturers ("OEM") and systems integrators.
 
The success of the sales of our wireless broadband products currently depends in part on existing relationships with OEMs or other system integrators. A portion of our systems is sold to and through telecommunications systems integrators for integration into their systems, rather than directly to carriers. The sale of our wireless broadband products depends in part on the OEMs’ and systems integrators’ active marketing and sales efforts as well as the quality of their integration efforts and post-sales support. Sales through the OEM and system integrator channels exposes this business to a number of risks, each of which could result in a reduction in the sales of our products.
 
We face the risks of termination of these relationships, or consolidation of some of these OEMs and system integrators or financial problems they might face, as well as the promotion of competing products or emphasis on alternative technologies by these OEMs and systems integrators turning them into competitors rather than our partners, all that may result in decline in the purchase of our products. In addition, our efforts to increase sales may suffer from the lack of brand visibility resulting from OEMs’ and systems integrators’ integration of these products into more comprehensive systems. If any of these risks materializes, we will need to develop alternative methods of marketing these products. Until we do so, sales of our wireless broadband products may decline.
 
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If our days- sales-outstanding (“DSO”) increase and our revenues decrease, we may suffer from a cash shortfall.
 
Recently we have experienced a shortening of our DSOs. However we expect that over time, our DSOs may increase and will range between 60 to 70 days. We may experience an increase in DSOs and a decline in revenues in the future, resulting in a cash shortfall.
 
We may experience a decrease in our gross margin levels in the future, which may adversely affect our financial results.
 
We believe that several market developments have caused, and may continue to cause, a decline in our gross margin. Such developments include the following: (i) increased competition in the regions in which we currently operate; (ii) the mix of our products, such as an increase in the volume of sale of lower-margin Customer Premise Equipment (“CPEs”); (iii) the entry of new, large operators into our markets; and (iv) changes in the market demand of some of our existing and potential products. We expect this decline in gross margin to continue over time. If our revenues do not increase and our operating expenses remain the same or increase, the decline in gross margin will have a negative impact on our results of operations.
 
Our products are complex and may have errors or defects that are detected only after deployment in complex networks.
 
Some of our products are highly complex and are designed to be deployed in complex networks. Although our products are tested during manufacturing and prior to deployment, our customers may discover errors after the products have been fully deployed. If we are unable to fix errors or other problems that may be identified in full deployment, including problems related to the site survey, radio planning and other problems that are not necessarily related to product functionality but to the associated services, we could experience:
 
 
·
costs associated with the remediation of any problems;
 
 
·
loss of or delay in revenues;
 
 
·
loss of customers;
 
 
·
failure to achieve market acceptance and loss of market share;
 
 
·
diversion of deployment resources;
 
 
·
diversion of research and development resources to fix errors in the field;
 
 
·
increased service and warranty costs;
 
 
·
legal actions or demands for compensation by our customers; and
 
 
·
increased insurance costs.
 
In addition, our products are often integrated with other network components. There may be incompatibilities between these components and our products that could significantly harm the service provider or its subscribers. Product problems in the field could require us to incur costs or divert resources to remedy the problems and subject us to liability for damages caused by the problems or delay in research and development projects because of the diversion of resources. These problems could also harm our reputation and competitive position in the industry.
 
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We could be subject to warranty claims and product recalls, which could be very expensive and harm our financial condition.
 
Products like ours sometimes contain undetected errors. These errors can cause delays in product introductions or require design modifications. In addition, we are dependent on unaffiliated suppliers for key components incorporated into our products. Defects in systems in which our products are deployed, whether resulting from faults in our products or products supplied by others, from faulty installation or from any other cause, may result in customer dissatisfaction. We are continually marketing several new products. The risk of errors in these new products, as in any new product, may be greater than the risk of errors in established products. The warranties for our products permit customers to return for repair, within a period ranging from 12 to 36 months of purchase, any defective products. Any failure of a system in which our products are deployed (whether or not these products are the cause), any product recall and any associated negative publicity could result in the loss of, or delay in, market acceptance of our products and harm our business, financial condition and results of operations. Although we attempt to limit our liability for product defects to product replacements, we may not be successful, and customers may sue us or claim liability for the defective products and for related claims arising therefrom. A successful product liability claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on our financial condition and results of operations.
 
We must be able to manage expenses and inventory risks associated with meeting the demand of our customers.
 
To ensure that we are able to meet customer demand for our products, we place orders with our subcontractors and suppliers based on our estimates of future sales. If actual sales differ materially from these estimates, our inventory levels may be too high, and inventory may become obsolete and/or over-stated on our balance sheet. This result would require us to write off inventory, which could adversely affect our results of operations. In 2005, 2006 and 2007, we wrote off inventory in the amounts of $7.3 million, $9.5 million and $4.8 million, respectively.
 
We depend on a number of manufacturing subcontractors with limited manufacturing capacity, and these manufacturers may be unable to fill our orders on a timely basis or with the quality specifications we require. As a result, we may not meet our customers’ demands, harming our business and results of operations.
 
We currently depend on a number of contract manufacturers with limited manufacturing capacity to manufacture our products. The assembly of certain of our finished products, the manufacture of custom printed circuit boards utilized in electronic subassemblies and related services are also performed by these independent subcontractors. In addition, we rely on third-party “turn-key” manufacturers to manufacture certain sub-systems for our products.
 
Reliance on third-party manufacturers exposes us to significant risks, including risks resulting from:
 
 
·
potential lack of manufacturing capacity;
 
 
·
limited control over delivery schedules;
 
 
·
quality assurance and control;
 
 
·
manufacturing yields and production costs;
 
 
·
voluntary or involuntary termination of their relationship with us;
 
 
·
difficulty in, and timeliness of, substituting any of our contract manufacturers, which could take as long as six months or more;
 
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·
the economic and political conditions in their environment; and
 
 
·
their financial strength.
 
If the operations of our contract manufacturers are halted, even temporarily, or if they are unable to operate at full capacity for an extended period of time, we may experience business interruption, increased costs, loss of goodwill and loss of customers.
 
In addition, we are required to place manufacturing orders well in advance of the time we expect to sell products, and this may result in us ordering greater or lesser amount of these products than required. In the event that we order the manufacture of a greater or lesser amount of these products, then we may be required to purchase the surplus products or to forego or delay the sale or delivery of the products that we did not order in advance. In either case, our business and results of operations may be adversely affected. Any of these risks could result in manufacturing delays or increases in manufacturing costs and expenses. For example, in 2005, 2006 and 2007, as a result of an over-estimation of our sales, we recorded in our balance sheet an allowance for irrevocable inventory purchase commitments in an aggregate amount of approximately $2.4 million, $2.6 million and $0.9 million, respectively. If we experience manufacturing delays, we could lose orders for our products and, as a result, lose customers. There may be an adverse affect on our profitability and consequently, on our results of operations if we incur increased costs.
 
Our dependence on limited sources for key components of our products may lead to disruptions in the delivery and cost of our products, harming our business and results of operations.
 
We currently obtain key components for our products from a limited number of suppliers, and in some instances from a single supplier. In addition, some of the components that we purchase from single suppliers are custom-made. We cannot assure that we will not experience disruptions in the delivery and cost of our products. We do not have long-term supply contracts with most of these suppliers. In addition, there is global demand for some electrical components that are used in our systems and that are supplied by relatively few suppliers. Our dependency presents the following potential risks:
 
 
·
delays in delivery or shortages of components, especially for custom-made components or components with long delivery lead times, could interrupt and delay manufacturing and result in cancellations of orders for our products;
 
 
·
suppliers could increase component prices significantly and with immediate effect on the manufacturing costs for our products;
 
 
·
we may not be able to develop alternative sources for product components;
 
 
·
suppliers could discontinue the manufacture or supply of components used in our products which may require us to modify our products and which may cause delays in product shipments, increased manufacturing costs and increased product prices;
 
 
·
we may be required to hold more inventory for longer periods of time than we otherwise might in order to avoid problems from shortages or discontinuance; and
 
 
·
due to the political situation in the Middle East, we may not be able to import necessary components.
 
In the past, we experienced delays and shortages in the supply of components on more than one occasion. We may experience such delays in the future, harming our business and results of operations.
 
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Regulation, by governments or other public bodies, may increase our costs of doing business, limit our potential markets or require changes to our products that may be difficult and costly.
 
Our business is premised on the availability of certain radio frequencies for two-way broadband communications. Radio frequencies are subject to extensive regulation under the laws of each country and international treaties. Each country has different regulation and regulatory processes for wireless communications equipment and uses of radio frequencies. In addition, there are regulatory bodies that act to harmonize spectrum among countries, a factor that may influence our products that operate in a particular frequency.
 
In the United States, our products are subject to the Federal Communications Commission (“FCC”) rules and regulations. The 700MHz spectrum was regulated during the beginning of 2008 by the FCC for Broadband Wireless applications; however the spectrum may not be technology exclusive and therefore if and to the extent it is allocated, it may be used for technologies other than WiMAX. In other countries, our products are subject to national or regional radio authority rules and regulations. Current FCC regulations permit license-free operation in FCC-certified bands in the radio spectrum in the United States. In other countries the situation varies as to the spectrum, if any, that may be used without a license and as to the permitted purposes of such use.  Some of our products operate in license-free bands, while others operate in licensed bands. The regulatory environment in which we operate is subject to significant change, the results and timing of which are uncertain.
 
In many countries the unavailability of radio frequencies for two-way broadband communications has inhibited the growth of these networks. The process of establishing new regulations for wireless broadband frequencies and allocating these frequencies to operators is complex and lengthy. The frequency licensing regulation process may suffer from delays that may postpone the commercial deployment of products that operate in licensed bands in any country that experiences this delay.
 
Our current customers that commercially deploy our licensed band products have already been granted (when required) appropriate frequency licenses for their network operation. In some cases, the continued validity of these licenses may be conditional on the licensee complying with various conditions. Since WiMAX technologies evolve and enable new applications, such as mobile services, in countries that have already allocated spectrum, to other than WiMAX technology, governments may delay the granting of other spectrum, for mobile WiMAX or the usage of the spectrum for new application such as mobile WiMAX. Some countries still lag in the allocation of broadband wireless licenses, and this situation may continue in the allocation for spectrum for use by WiMAX mobile services. In addition to regulation of available frequencies, our products must conform to a variety of national and international regulations that require compliance with administrative and technical requirements as a condition to the operation of marketing or devices that emit radio frequency energy. These requirements were established, among other things, to avoid interference among users of radio frequencies and permit interconnection of equipment.
 
The regulatory environment in which we sell our products subjects us to several risks, including the following:
 
 
·
Our customers may not be able to obtain sufficient frequencies for their planned uses of our wireless broadband products.
 
 
·
Failure by the regulatory authorities to allocate suitable and sufficient radio frequencies in a timely manner could deter potential customers from ordering our wireless broadband products. Also, licenses to use certain frequencies and other regulations may include terms that affect the desirability of using our products and the ability of our customers to grow.
 
 
·
If our products operate in the license-free bands, FCC rules and similar rules in other countries require operators of radio frequency devices, such as our products, to cease operation of a device if its operation causes interference with authorized users of the spectrum and to accept interference caused by other users.
 
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·
If the use of our products interferes with authorized users, or if users of our products experience interference from other users, market acceptance of our products could be adversely affected.
 
 
·
Regulatory changes, including changes in the allocation of available frequency spectrum, may significantly impact our operations by rendering our current products obsolete or non-compliant, or by restricting the applications and markets served by our products.
 
 
·
Regulatory changes and restrictions imposed due to environmental concerns, such as restrictions imposed on the location of outdoor antennas.
 
 
·
We may not be able to comply with all applicable regulations in each of the countries where our products are sold and we may need to modify our products to meet local regulations.
 
 
·
Spectrum allocation may specify a particular technology, such as 3G, LTE or WiMAX rather than enabling the spectrum owner to determine the technology.
 
In addition, we are subject to export control laws and regulations with respect to all of our products and technology. We are subject to the risk that more stringent export control requirements could be imposed in the future on product classes that include products exported by us.
 
We may also be subject to certain European directives like the WEEE (Waste Electrical and Electronical Equipment) and the ROHS (Restriction of Hazardous Substances in Electrical and Electronic Equipment).
 
Our proprietary technology is difficult to protect and unauthorized use of it by third parties may impair our ability to compete effectively.
 
Our success and ability to compete depends and will continue to depend, to a large extent, on maintaining our proprietary rights and the rights that we currently license or will license in the future from third parties. We rely primarily on a combination of patents, trademarks, trade secrets and copyright law and on confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology. We have obtained several patents and have several patent applications pending that are associated with our products. We also have several trademark registrations associated with our name and some of our products.
 
These measures may not be adequate to protect our technology from third-party infringement. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Third-party patent applications filed earlier may block our patent applications or receive broader claim coverage. In addition, any patents issued to us, if issued at all, may not provide us with significant commercial protection. Third parties may also invalidate, circumvent, challenge or design around our patents or trade secrets, and our proprietary technology may otherwise become known or similar technology may be independently developed by competitors. Additionally, our products may be sold in foreign countries that provide less protection to intellectual property than that provided under U.S. or Israeli laws. Failure to successfully protect our intellectual property from infringement may damage our ability to compete effectively and harm our results of operations.
 
We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.
 
From time to time, the Company receives letters alleging it has infringed upon a patent, trademark or other proprietary right. As the Broadband Wireless Access market transitions toward standardization, we are more exposed to intellectual property litigation by third parties who claim to hold intellectual property rights related to such standards. In addition, based on the size and sophistication of our competitors and the history of rapid technological change in our industry, we anticipate that several competitors may have intellectual property rights that could relate to our products. Therefore, we may need to litigate to defend against claims of infringement or to determine the validity or scope of the proprietary rights of others. Similarly, we may need to litigate to enforce or uphold the validity of our patent, trademarks and other intellectual property rights. Other actions may involve ownership disputes over our intellectual property or the misappropriation of our trade secrets or proprietary technology. As a result of these actions, we may have to seek licenses to a third-party’s intellectual property rights, which may not be able to be successfully integrated into our products. These licenses may not be available to us on reasonable terms or at all. In addition, if we decide to litigate these claims, the litigation could be expensive and time consuming and could result in court orders preventing us from selling our then-current products or from operating our business. Any infringement claim, even if not meritorious, could result in the expenditure of significant financial and managerial resources and harm our business, financial condition and results of operations. We have no assurance that any such allegation will not have a material adverse effect on our business, financial condition or results of operations.
 
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If we are unable to maintain licenses to use certain technologies, we may not be able to develop and sell our products.
 
We license certain technologies from others for use in connection with some of our technologies. The loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost. We cannot assure you that we can maintain these licenses or obtain additional licenses, if we need them in the future, on commercially reasonable terms or at all. Also, some of our products utilize open source technologies.  These technologies are licensed to us on varying license structures.  This license and others like it pose a potential risk to products should they be inappropriately used.
 
Our failure to manage growth effectively, both through our core products and through acquisitions, could impair our business, financial condition and results of operations.
 
Our acquisitions in the past have significantly strained our management, operational and financial resources. Any future growth, including through mergers and acquisitions, may increase the strain on our management, operational and financial resources. If we do not succeed in managing future growth effectively, we may not be able to meet the demand, if any, for our products and we may lose sales or customers, harming our business, financial condition and results of operations
 
We depend on key personnel.
 
Our future success depends, in part, on the continued service of key personnel. We have experienced changes in several senior management personnel positions. We believe we were able to retain qualified replacements for such positions. However, there is no assurance that the new senior management personnel will provide the same or a better level of service to us. In addition, if one or more of our key technical, sales or senior management personnel terminates his or her employment and we are unable to retain a qualified replacement, our business and results of operations could be harmed.
 
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Our ability to achieve our strategic, operational and financial goals depends on our ability to hire, train and retain qualified employees.
 
Our success depends in large part on the continued contributions of our managerial, technical, and sales and marketing personnel. Substantially all of our employees are not obligated to remain employed by us for any specific period.
 
The process of hiring, training and successfully integrating qualified personnel into our operations is a lengthy and expensive one. The market for the qualified personnel we require is very competitive. Our failure to hire and retain qualified employees could cause our revenues to decline and impair our ability to achieve our strategic, operational and financial goals.
 
We may be classified as a passive foreign investment company.
 
As a result of the combination of our substantial holdings of cash, cash equivalents and securities and the decline in the market price of our ordinary shares from its historical highs, there is a risk that we could be classified as a passive foreign investment company (“PFIC”) for United States federal income tax purposes. Based upon our market capitalization during 2004, 2005, 2006 and 2007 and each year prior to 2001, we do not believe that we were a PFIC for any such year and, based upon our valuation of our assets as of the end of each quarter of 2002 and 2003 and an independent valuation of our assets as of the end of each quarter of 2001, we do not believe that we were a PFIC for 2001, 2002 or 2003 despite the relatively low market price of our ordinary shares during some of those years. We cannot assure you, however, that the United States Internal Revenue Service (the “IRS”) or the courts would agree with our conclusion if they were to consider our situation. There is no assurance that we will not become a PFIC in 2008 or in subsequent years. If we were classified as a PFIC, U.S. taxpayers that own our ordinary shares at any time during a taxable year for which we were a PFIC would be subject to additional taxes upon certain distributions by us or upon gains recognized after a sale or disposition of our ordinary shares unless they appropriately elect to treat us as a “qualified electing fund” or to make a “mark to market election” under the U.S. Internal Revenue Code. This could also adversely affect the market price of our ordinary shares. For more information, see “Taxation—United States Federal Income Tax Considerations with Respect to the Acquisition, Ownership and Disposition of our Ordinary Shares—Passive Foreign Investment Company Status".
 
We are exposed to additional costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards.
 
As a public company, we spend an increased amount of management time and resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”), Securities and Exchange Commission (the “SEC”) regulations and the National Association of Securities Dealers Automated Quotations (“NASDAQ”) Global Market rules. In connection with our compliance with Section 404 and the other applicable provisions of the Sarbanes-Oxley Act of 2002, our management and other personnel devote a substantial amount of time, and may need to hire additional accounting and financial staff, to assure that we comply with these requirements. Compliance may also make some of our activities more time-consuming and costly. The additional management attention and costs relating to compliance with the Sarbanes-Oxley Act could materially and adversely affect our growth and financial results.
 
The trading price of our ordinary shares is subject to volatility.
 
The trading price of our ordinary shares has experienced significant volatility in the past and may continue to do so in the future. Since our initial public offering in March 2000, the sales prices of our ordinary shares on the NASDAQ Global Market have ranged from a high of $53.12 to a low of $1.55. On December 31, 2007 and March 11, 2008, the closing sale price of our ordinary shares on the NASDAQ Global Market was $9.50 and $6.25. We may continue to experience significant volatility in the future, based on the following factors, among others:
 
 
·
our prospects;
 
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·
actual or anticipated fluctuations in our sales and results of operations;
 
 
·
variations between our actual or anticipated results of operations and the published expectations of analysts;
 
 
·
general conditions in the wireless broadband products industry and general conditions in the telecommunications equipment industry;
 
 
·
announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures and capital commitments;
 
 
·
introduction of technologies or product enhancements or new industry substitute standards that reduce the need for our products;
 
 
·
general economic and political conditions, particularly in the United States and in South America on our operations and results; and
 
 
·
departures of key personnel.
 
We may be named defendants in securities class action lawsuits, or in other time- consuming and expensive litigation, that requires extensive management attention and resources and can be expensive, lengthy and disruptive. 
 
We were a defendant in a securities class action litigation that was recently dismissed as described in "Item 8—Financial Information—Legal Proceedings". We may be named in the future as a defendant in other securities class action lawsuits or in other time consuming and expensive litigation. Legal proceedings can be expensive, lengthy and disruptive to normal business operations, and can require extensive management attention and resources, regardless of their merit. Moreover, we cannot predict the results of legal proceedings, and an unfavorable resolution of a lawsuit or proceeding could materially adversely affect our business, results of operations and financial condition.
 
Operating in international markets exposes us to risks, which could cause our sales to decline and our operations to suffer and which could expose us to various legal, business, political and economic risks.
 
While we are headquartered in Israel, approximately 99% of our sales in recent years were generated elsewhere around the world. Our products are marketed internationally and we are, therefore, subject to certain risks associated with international sales, including, but not limited to the following:
 
 
·
trade restrictions, tariffs, and technology import and export license requirements, which may restrict our ability to export our products or make them less price-competitive;
 
 
·
adverse tax consequences;
 
 
·
greater difficulty in safeguarding intellectual property;
 
 
·
difficulties in managing our overseas subsidiaries and staffing multiple offices and multiple research and development centers, and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
 
 
·
difficulties in enforcing contracts and implementing our accounts receivable function, which introduces revenue recognition, translation, proximity and cultural challenges;
 
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·
political and economic instability, particularly in markets such as Africa and Latin America and other emerging markets;
 
 
·
reduced protection for intellectual property rights in some countries where we may seek to expand our sales in the future;
 
 
·
laws and business practices favoring local companies;
 
 
·
differing labor standards;
 
 
·
costs of localizing our products for foreign countries and the lack of acceptance of localized products in foreign countries; and
 
 
·
fluctuations in currency exchange rates and the implications on our financial statements.
 
We may encounter significant difficulties with the sale of our products in international markets as a result of one or more of these factors. As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
 
Downturns in general economic conditions could adversely affect our revenues, operating results and financial condition. 
 
Periods of economic slowdown or recession in the United States or other relevant regions or countries, such as the current global slowdown, or the public perception that these periods of economic slowdown or recession may occur, may reduce corporate and consumer spending and decrease the demand for our products. Furthermore, periods of economic slowdown or recession adversely affect the financial health of our subcontractors, partners, distributors and resellers. If general economic conditions fail to improve, or if they deteriorate, our revenues, operating results and financial condition could be adversely affected.
 
A continuing decline in interest rates and the recent capital market developments will reduce our interest-income, may decrease the value of assets and adversely affect our profitability.  
 
Our investment portfolio consists of held-to-maturity marketable securities. Our investments are exposed to market risk due to fluctuation in interest rates, which may affect our interest income.
 
Additionally, the performance of the capital markets affects the values of funds that are held in marketable securities. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below our projected return rates and will affect the fair market value of our investment portfolio. Due to recent credit crises and other market developments, including a series of rating agency downgrades the fair value of these marketable securities may decline which may adversely affect our profitability.
 
There may be health and safety risks relating to wireless products.
 
In recent years, there has been publicity regarding the potentially negative direct and indirect health and safety effects of electromagnetic emissions from cellular telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. Our wireless communications products emit electromagnetic radiation. Health and safety issues related to our products may arise that could lead to litigation or other actions against us or to additional regulation of our products. We may be required to modify our technology and may not be able to do so. We may also be required to pay damages that may reduce our profitability and adversely affect our financial condition. Even if these concerns prove to be baseless, the resulting negative publicity could affect our ability to market these products and, in turn, could harm our business and results of operations.
 
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Terrorist attacks, or the threat of such attacks, may negatively impact the global economy which may materially adversely affect our business, financial condition and results of operation and may cause our share price to decline.
 
The financial, political, economic and other uncertainties following terrorist attacks throughout the world have led to a worsening of the global economy. As a result, many of our customers and potential customers have become much more cautious in setting their capital expenditure budgets, thereby restricting their telecommunications procurement. Uncertainties related to the threat of terrorism have had a negative effect on global economy, causing businesses to continue slowing spending on telecommunications products and services and further lengthen already long sales cycles. Any escalation of these threats or similar future events may disrupt our operations or those of our customers, distributors and suppliers, which could adversely affect our business, financial condition and results of operations.
 
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Risks Relating to Our Location in Israel
 
Conducting business in Israel entails special risks.
 
We are incorporated under Israeli law and our principal offices and the majority of our manufacturing and research and development facilities are located in the State of Israel. Political, economic and military conditions in Israel directly affect our operations. We could be harmed by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel. In the event of war, we and our Israeli subcontractors and suppliers may cease operations which may cause delays in the development, manufacturing or shipment of our products. Additionally, several countries still restrict business with Israel and with Israeli companies. Since October 2000, terrorist violence in Israel has increased significantly. Recently, there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities along Israel's northern border with Lebanon in the summer of 2006, and extensive hostilities along Israel's border with the Gaza Strip since June 2007 when the Hamas effectively took control of the Gaza Strip. Further escalation has occurred during 2008.
 
Furthermore, there are a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or Israeli companies, and we are precluded from marketing our products to these countries.
 
We could be adversely affected by the continuation or deterioration of Israel’s conflict with the Palestinians or from restrictive laws or policies directed towards Israel or Israeli businesses.
 
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
 
Many of our officers and employees in Israel are obligated to perform annual military reserve duty until they reach age 45 and, in the event of a military conflict, could be called to active duty. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of military service of one or more of our key employees. A disruption could materially adversely affect our business, operating results and financial condition.
 
We currently benefit from government programs and tax benefits that may be discontinued or reduced.
 
We have received grants from the Government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor (“OCS”) for the financing of a portion of our research and development expenditures in Israel, pursuant to the provisions of The Encouragement of Industrial Research and Development Law, 1984, referred to as the “Research and Development Law.” Pursuant to our current arrangement with the OCS, the OCS will finance up to 20% of our research and development expenses by reimbursing us for up to 50% of the approved expenses related to our generic research and development projects. In addition, we obtain other grants from the OCS to partially fund certain other research and development projects. These programs currently restrict our ability to manufacture particular products or transfer particular technology outside of Israel. The Research and Development Law and related regulations permit the OCS to approve the transfer of manufacturing rights outside Israel subject to an approval of the research committee and in exchange for payment of higher royalties, for royaltybearing programs. Under the programs we need to comply with certain conditions. If we fail to comply with these conditions, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay additional amounts with respect to the grants received under these programs. The Government of Israel has reduced the benefits available under these programs in recent years, and these programs may be discontinued or curtailed in the future. If the Government of Israel discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of operations could be materially adversely affected.
 
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In addition, we have been granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”) for our production facilities in Israel. Such status enables us to obtain certain tax relief for a definitive period upon compliance with the Investment Law regulations. On April 1, 2005, an amendment to the Investment Law came into effect which significantly changed the provisions of the Investment Law. The amendment revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a “Privileged Enterprise” (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. However, the amendment provides that terms and benefits included in any certificate of approval granted prior to December 31, 2004 will remain subject to the provisions of the law as they were on the date of such approval. We believe that we are currently in compliance with these requirements. However, if we fail to comply with these conditions in the future, the tax benefits received could be canceled and we could be required to pay increased taxes in the future. 
 
We currently contemplate that a portion of our products will be manufactured outside of Israel. This could materially reduce the tax benefits to which we would otherwise be entitled. We cannot assure you that the Israeli tax authorities will not adversely modify the tax benefits that we could have enjoyed prior to these events.
 
We are adversely affected by the devaluation of the dollar against the New Israeli Shekel and could be adversely affected by the rate of inflation in Israel.
 
Substantially all of our revenues are generated in U.S. dollars. A significant portion of our expenses, primarily salaries, building leases and related personnel expenses is incurred in NIS. We anticipate that a significant portion of our expenses will continue to be denominated in Israeli shekels.
 
As a result, inflation in Israel and/or the devaluation of the U.S. dollar in relation to the NIS has and may continue to have the effect of increasing the cost in dollars of these expenses; hence, our dollar-measured results of operations are and may continue to be adversely affected. In order to manage the risks imposed by foreign currency exchange rate fluctuations, from time to time, we enter into currency forward contracts and put and call options to hedge some of our foreign currency exposure. We can provide no assurance that our hedging arrangements will be effective. In addition, if we wish to maintain the dollar-denominated value of our products in non-U.S. markets, devaluation in the local currencies of our customers relative to the U.S. dollar may cause our customers to cancel or decrease orders or default on payment.
 
Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations have an impact on our profitability and period-to-period comparisons of our results of operations. In 2007, the value of the dollar decreased in relation to the NIS by (9.0%), and the inflation rate in Israel was 3.4% and as such affected our results of operations in 2007. If this trend continues, it will continue to adversely affect our result of operations.
 
Provisions of Israeli law and our Articles of Association may delay, prevent or make difficult a merger or an acquisition of us, which could prevent a change of control and therefore depress the market price of our ordinary shares.
 
Our Articles of Association contain certain provisions that may delay or prevent a change of control, including a classified board of directors. In addition, Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving directors, officers or significant shareholders, and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential acquisition transactions unappealing to us or to some of our shareholders. For example, Israeli tax law may subject a shareholder who exchanges his or her ordinary shares for shares in a foreign corporation to taxation before disposition of the investment in the foreign corporation.
 
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It may be difficult to effect service of process and enforce U.S. judgments against our directors and officers in Israel or assert U.S. securities laws claims in Israel.
 
We are incorporated in Israel. Our executive officers and some of the directors are not residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to obtain a judgment in the United Stated or collect or get an Israeli court to enforce a judgment obtained in the United States against us or any of those persons. Furthermore, it may be difficult to assert U.S. securities law claims in original actions instituted in Israel.
 
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ITEM 4. INFORMATION ON THE COMPANY
 
A. HISTORY AND DEVELOPMENT OF THE COMPANY
 
We were incorporated in September 1992 under the laws of the State of Israel. Since our inception, we have devoted substantially all of our resources to the design, development, manufacturing and marketing of wireless products.
 
On August 1, 2001, Floware merged with and into us. As a result of the merger, we continued as the surviving company and Floware’s separate existence ceased. Upon the closing of the merger, we changed our name from BreezeCOM Ltd. to Alvarion Ltd. On April 1, 2003, we completed an acquisition of most of the assets and the assumption of related liabilities of InnoWave Wireless Systems Ltd. In December 2004, we completed the amalgamation of interWAVE Communications International Ltd., and the interWAVE operations became our Cellular Mobile business unit (“CMU”). In November 2006, we completed the sale of our CMU to LGC Wireless, Inc. (“LGC”), a privately-held supplier of wireless networking solutions in exchange for promissory and convertible notes of LGC. In September 2007, LGC converted our convertible notes into LGC shares and thus we became a shareholder of LGC. In November 2007, ADC Telecommunication Inc. (“ADC”) acquired LGC and we sold our LGC shares to ADC for approximately $7.3 million. See “Item 5—Operating and Financial Review and Prospects—Operating Results.”
 
Our principal executive offices are located at 21A HaBarzel Street, Tel Aviv 69710, Israel, and our telephone number is 972-3-645-6262. In 1995, we established a wholly-owned subsidiary in the United States, Alvarion, Inc., a Delaware corporation. Alvarion, Inc. is located at 2495 Leghorn Street, Mountain View, CA, 94043, and its telephone number is 650-314-2500. Alvarion, Inc. serves as our agent for service of process.
 
We also have several wholly owned subsidiaries worldwide that handle local support, promotion, sales and developing activities. For a discussion of our capital expenditures and divestitures, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
 
B. BUSINESS OVERVIEW
 
General
 
We concentrate our resources on a single line of business - wireless broadband. As a wireless broadband pioneer, we have been driving and delivering innovations for more than 10 years, from developing core technology to creating and promoting industry standards. Leveraging our key roles in the IEEE and HiperMAN standards committees and having experience in the deployment of OFDM-based systems, we have been in the forefront of the WiMAX Forum™ in its focus on increasing the widespread adoption of standards-based products in the wireless broadband market and leading the entire industry to mobile WiMAX solutions. The WiMAX standard is the outcome of the standardization work done by the WiMAX Forum™, widely based on the IEEE 802.16 standard working group.
 
Our primary business is to provide solutions based on the WiMAX standard and other broadband wireless technologies for three different market segments:
 
 
·
Primary Broadband: Primary Broadband services provide subscribers with home and business service connectivity to high-speed broadband networks for accessing Internet, Intranet, virtual private network (“VPN”) and Voice over Internet Protocol (“VoIP”) services. Solutions for Primary Broadband services provide high-speed wireless “last mile” connectivity to the Internet for homes and businesses in both developed and emerging markets. In the Primary Broadband market we currently continue to sell our non-WiMAX products in addition to our WiMAX standard products, which are growing in sales.
 
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·
Personal Broadband: Personal Broadband services enable subscribers to take their broadband connection with them anywhere and extend their mobile services to broadband speeds above 1 megabit per second (“Mbps”). We expect that Personal Broadband services based on WiMAX technology will be gradually introduced to the market by operators during the second half of 2008. Personal Broadband exists at the intersection of the fixed, mobile and multimedia broadband worlds, offering subscribers a unique combination of high-speed broadband and mobile services that are available anywhere. Personal Broadband is always-on, high-speed and all-IP-based, providing direct access to the mobile Internet and creating a dynamic market for various services and applications. Solutions for Personal Broadband services are entirely based on the WiMAX standard and provide anytime, anywhere broadband services access to individuals on personalized devices, such as notebook personal computers, personal digital assistants (“PDAs”) and smart handsets (which are hand-held devices providing multiple services such as telephony, data and digital services based on information technology ). Our solutions enable communication operators to offer broadband services of more than 1Mbps to their subscribers while connecting a number of consumer electronic devices, such as smart handsets, PDAs, PC's, cameras, media players and more to a radio access network. The Personal Broadband market realizes the broad vision of mobile broadband service consumption that changes consumers’ lifestyle and increases productivity and entertainment. Personal Broadband networks are converging several distinct services, such as mobile telephony, multi-media services and broadband data access that are provided with different access infrastructure into a single, all-IP network in a unified user device and/or in special purpose devices (such as consumer electronic devices).
 
 
·
Broadband wireless applications for vertical markets: Broadband wireless applications for vertical markets provide owners and operators of public networks, private networks, utility companies, municipalities and government institutions with broadband connectivity and applications that fulfill each organization's own communication needs rather than offering to subscribers' communication services like the two services above (Primary and Personal Broadband). Examples of such applications include government and municipal offices connectivity, security and surveillance services, campus-to-campus broadband connectivity, oil & gas and mining company applications, and many other machine-to-machine automated applications that require high-speed wireless access. In this market, we sell both WiMAX and non-WiMAX solutions, primarily in the license-exempt frequency bands.
 
With over 200 commercial WiMAX deployments worldwide we believe that we are the worldwide leader in providing WiMAX and wireless broadband access solutions. We supply top-tier carriers, ISPs, new communications service providers known as “Innovative Challengers,” and private network operators with solutions based on the WiMAX standard, as well as other wireless broadband solutions.
 
Our strategy is to leverage our business leadership, experience, market presence, leading brand in our industry, innovative technologies and broad customer base in Fixed and Mobile WiMAX technologies, as well as in other broadband wireless technologies, in order to grow our Company in each of the three markets discussed above: (i) the Primary Broadband market; (ii) the Personal Broadband market, based on mobile WiMAX standard and technologies; and (iii) the vertical markets.
 
Our products cover the full range of frequency bands, targeting fixed, nomadic and mobile applications, including business and residential broadband access, corporate VPNs, toll quality telephony, mobile base station feeding, hotspot coverage extension, community interconnection, public safety communications and, in the future, Personal Broadband services.
 
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INDUSTRY DYNAMICS
 
Our Existing Market: WiMAX and Wireless Broadband for Primary Broadband Access Services
 
The Early Demand for Wireless Broadband
 
In the late nineties, both consumers and businesses began to demand broadband - also known as high-speed Internet data services - thus accelerating the establishment of DSL and cable-based broadband networks (wired broadband infrastructure). These DSL and cable-based broadband networks involved high investment costs, so the access network infrastructure was not established everywhere the demand for broadband existed. Wireless broadband networks stepped in to meet this unserved need for broadband services, and meeting this unserved need has been the primary application of wireless broadband networks. The market for wireless broadband networks exists primarily in the rural and suburban areas in developed countries and in more developed areas in developing countries. By bridging the “digital divide” or providing both broadband and basic telephony services in areas where telecommunications infrastructure is poor or does not exist, wireless broadband has grown to comprise more than 5% of the world’s broadband networks.
 
The Evolution of Wireless Broadband
 
The wireless broadband market has grown over the last decade due to the acceptance of wireless equipment as a high performance, cost-efficient alternative to wireline infrastructure for broadband connectivity.
 
In developed countries, government financial support encourages operators to complete broadband coverage in rural and suburban areas with low-density populations, where the business model for wired infrastructure is less attractive. In developing countries, government financial support is provided to encourage operators to offer basic telephony services and Internet access based on wireless broadband infrastructure in order to meet the demand, mainly in urban and suburban areas. 
 
The worldwide success of broadband connectivity and services creates demand for additional broadband networks mainly in regions where broadband was not widely available. The accelerated proliferation of broadband services and networks around the world as well as commoditization of broadband devices and services has generated more demand for broadband in developing regions, often referred to as the world’s emerging markets. In these regions, wireline infrastructure is generally very poor and often non-existent, resulting in an accelerated widespread adoption of WiMAX networks.
 
Government Deregulation Creates Demand
 
Global telecom deregulation is opening up the telecommunications/Internet access industries to competition by new players. Unlike the built-in delivery systems of wireline infrastructure, wireless technology requires the use of frequencies contained within a given spectrum to transfer voice, multimedia and other data services. Usually, governments allocate a specific range of that spectrum, either licensed or license-exempt (“unlicensed”) bands, to incumbent and Innovative Challengers, alternative carriers, as well as to cellular operators, ISPs and other service providers, enabling such carriers and operators to launch a variety of broadband initiatives based exclusively on wireless networking solutions. During 2007, additional licensed and unlicensed spectrums were allocated in many regions around the world. Increased availability of licensed and unlicensed spectrums enables operators to address increasing demand for wireless broadband.
 
Additional Factors in the Widespread Adoption of Wireless Broadband
 
 
·
Over the last few years, wireless broadband networks have increasingly grown in popularity, due in part to the inability of wired infrastructure to meet demand, but also because of the following factors:
 
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·
competition among various types of telecommunications players to offer multiple services using a single network;
 
 
·
growing trend of public access providers to build infrastructures owned by municipalities;
 
 
·
rapid progression of standardization by international bodies, such as the WiMAX Forum™, combined with the wide adoption of these standards by equipment vendors and carriers;
 
 
·
attractiveness of the business model offered to operators that use high performance standardized and interoperable products;
 
 
·
convergence of fixed and mobile services; and
 
 
·
increasing availability of WiMAX ecosystem products, leading to reduction in the capital expenditures (CAPEX) and operating expenses (OPEX) of network deployment and the promotion of WiMAX operators’ competitiveness with traditional wireline broadband service providers, such as DSL and cable.
 
WiMAX Technology, Applications and Industry Advantages
 
WiMAX is a technology based on the IEEE 802.16 air interface standard and the ETSI HiperMAN wireless metropolitan area network (“MAN”) standard. WiMAX is the worldwide standard for wireless broadband access and personal mobile broadband applications. Solutions based on WiMAX technology enable fixed-line, cable, and mobile operators and new challengers to compete with each other in the anticipated market for higher Average Revenue Per User (“ARPU”) services. WiMAX technology has the capacity to deliver sufficient bandwidth to enable value-added applications, including live video broadcasting, high-speed data, toll-quality voice and multimedia content. Most importantly, the WiMAX (IEEE 802.16) standards were developed based on the concept of an "all IP Network". A complete set of IP-based functions and interfaces allow for high quality service delivery, while keeping end-to-end Quality of Service (“QoS”) and minimizes investment and operating costs for operators with its distributed architecture and efficient, packet-based air interface.
 
WiMAX offers two technological advantages to the operators relative to the existing commercial technologies: (i) a superior radio technology; and (ii) an open IP-based access network infrastructure.
 
 
·
Superior radio access technology: WiMAX benefits from advanced Non-Line-of-Sight (“NLOS”) radio and antenna technologies such as MIMO, Beam Forming, and Spatial Division Multiple Access (“SDMA”). These new technologies can be used in fixed, portable and mobile WiMAX networks and facilitate high spectral efficiency and obstacle penetration (e.g., walls) resulting in best network coverage, capacity , low latency and improved user experience. As a result, WiMAX offers lower infrastructure costs and reduced cost per subscriber for the operator, compared with any other wireless technology.
 
Utilizing its build-in strong QoS mechanisms, WiMAX technology has the capacity to deliver maximal service quality under the subscriber’s Service Level Agreement (SLA) to enable rich value-added applications, including high-speed data and Internet, live video multicasting, toll-quality voice and multimedia content in both download and streaming formats. These capabilities enable toll-quality delivery of differentiating services, coupled with enhanced subscriber Quality of Experience (“QoE”).
 
 
·
 Open IP-based access network infrastructure: The WiMAX (IEEE 802.16) standard was developed based on the concept of an open “all IP Network,” which allows WiMAX to leverage the vast IP-based telecom and enterprise industries. WiMAX, as an IP-based connectivity standard, is able to easily and smoothly interface with any IP-based equipment, device or network. This approach, following the success of the World-Wide-Web Internet adoption, (a) minimizes investment in introducing new applications, thereby creating new interfaces and interoperability connections, (b) enjoys the low prices and abundance of information and know-how of the IP-based equipment world and (c) may significantly reduce the operator’s capital and operational expenditures when deploying such service networks. Therefore, the advantage of WiMAX over other mobile networks is in offering a complete OPEN IP architecture. The formation of an industry based on OPEN IP architecture can leverage on best-of-breed IP network equipment and IP-based consumer electronics devices, thus creating an open Internet model of wireline data over the new wireless WiMAX network.
 
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The WiMAX standards are defined by the WiMAX Forum™. The WiMAX Forum™ is a non-profit organization focused on increasing the widespread adoption of standards-based products in the wireless broadband market and leading the industry to mobile WiMAX solutions. The WiMAX Forum™ members work to promote the interoperability of multiple vendors’ products in the wireless broadband market. Since its establishment, the WiMAX Forum™ members, working together with the IEEE, have established the first of the standards on which fixed wireless broadband systems will operate, namely the IEEE 802.16d-2004 standard and IEEE 802.16e-2005. These standards fully support fixed and nomadic broadband wireless applications.
 
The WiMAX Forum™ defines the following types of access to a wireless network:
 
 
·
fixed access, at a single stationary location for the duration of the network subscription;
 
 
·
nomadic access, at multiple stationary locations, allowing the user to change locations between sessions;
 
 
·
portability, at multiple locations at walking speed, within a limited network coverage area, with hard handoffs between cells;
 
 
·
simple mobility, at multiple locations at low vehicular speed, within a network coverage area, with hard handoffs between cells, enabling non-real time applications; and
 
 
·
mobility, at multiple locations at high vehicular speed, within network coverage area, with guaranteed handoffs between cells, enabling service continuity for all applications.
 
Our Next Developing Market: Mobile WiMAX and Mobile Broadband for Personal Broadband Access Service
 
We promote a new generation of Personal Broadband networks and services that would enable subscribers to take their broadband connection with them anywhere and add mobility to their broadband service at throughput above 1Mbps. Personal Broadband will unite the fixed, mobile and multimedia broadband worlds, offering subscribers a combination of high-speed broadband and mobile services that are available anywhere. Personal Broadband will offer always-on, high-speed and all- IP-based connectivity, providing direct access to the mobile Internet and creating a dynamic market for various services and applications.  
 
Personal Broadband capabilities are anticipated to be embedded in a wide range of computing, telephony and consumer electronics devices to optimize personal lifestyle and professional productivity. Following the adoption of the Personal Broadband service offering by telecommunications' operators, business applications once reserved for the office environment and media content previously available only through a residential broadband connection, are predicted to be available anywhere. These new Personal Broadband capabilities would enhance traditional service provider business models and create opportunities for new entrants to penetrate the market with alternative business strategies.   
 
However, for this next service level of Personal Broadband services to be adopted by consumers and businesses, the technology must offer tight security, reliability, high quality of service and broadband data speeds; in addition, vendors must offer diverse and innovative applications with the right devices to utilize the applications.
 
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To differentiate themselves and target subscribers with higher ARPU, operators are interested in providing what may be characterized as “mobile DSL” connectivity with the primary application of “mobilizing the Internet,” namely broadband Internet connectivity while on the go. So far, no technology has been able to technically or economically support this type of service, which would be targeted initially to highly developed, metropolitan areas.
 
We believe that WiMAX is currently the technology that is the most advanced and best suited to cost-effectively meet the requirements of Personal Broadband. WiMAX solutions, in addition to being standards-based, benefit from the open architecture of an all-IP network. Legacy wireline and wireless technologies are indeed standard but not entirely IP-based with an open architecture, as is WiMAX. The WiMAX industry, in contrast to other telecom standards and technologies, leverages the consumer electronics market capabilities, such as IP innovation, creativity, low cost and advanced services. Alvarion is aiming to be at the center of this dynamics via its position as a member of the WiMAX Forum and via its go-to-market strategy and business relationships with various partners.
 
COMPANY STRENGTHS
 
For more than 15 years, our primary business activity has been focused on fulfilling the growing demand for IP wireless broadband in the telecom industry by providing solutions and services to build wireless broadband networks. In addition, we have deployed through our customers fixed wireless broadband solutions for applications, such as toll quality telephony service, mobile base station feeding, hotspot coverage extension, municipal and community interconnection, utility company metering and monitoring applications, as well as public safety communications. The Company’s key strengths include:
 
·
Market Leadership and Brand Recognition: We believe we are the worldwide leading WiMAX vendor with a single business focus in broadband wireless access equipment and we enjoy a strong brand identity.
 
·
Customer Base: We have a broad customer base, with over 200 WiMAX commercial deployments and over 30 WiMAX trials (as of December 31, 2007) targeted to mobile applications. We believe our product offerings are the most extensive in the market.
 
·
Technology: We have 15 years of broadband wireless IP experience and have been the leader in broadband wireless access market for more than a decade. In addition, we have continued our leadership in the relevant standardization organizations (IEEE 802.16, WiMAX Forum™).
 
·
Execution Capabilities:
 
 
·
We have the ability to deliver and deploy a complete solution in terms of product, technology, network deployments and to build long-term customer satisfaction.
 
 
·
We believe we have the ability to compete with any other player in this industry, while keeping our flexibility and technology differentiators according to customer demands and needs.
 
·
Partnerships: We are actively partnering with industry and market leaders to create go-to-market partnerships and best-of-breed end-to-end wireless broadband network solutions.
 
Our Wireless Broadband Experience Enables Us to Leverage the Potential of WiMAX
 
Our wireless broadband experience enabled us to identify the potential of WiMAX in early 2002, ahead of most equipment vendors. As a result of this experience and early strategic decisions, by 2007, we led the market in the number of deployed WiMAX-based networks. We have been at the forefront of developments with WiMAX technology since its inception, at a Company and industry level. Examples of our active involvement include major roles in the standardization process through our work in the WiMAX Forum™ as a charter board member and by chairing key working groups. In addition, our employees are active in other related technology organizations, such as Wireless Communications Association, IEEE 802.16, ETSI BRAN-HiperMAN and ITU standards.
 
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Single Evolving WiMAX Platform
 
We believe that we hold a distinct advantage in the nascent market for Personal Broadband services. Our WiMAX platform was designed from the ground up according to the IEEE 802.16 standard and WiMAX Forum specifications to provide operators with Primary Broadband solutions, Personal Broadband solutions and a path of service growth required to extend the service offering from Primary to Personal Broadband services. With our single and evolving WiMAX platform, we strive to enable our customers to complement their business models with innovative service offerings.
 
STRATEGY FOR GROWTH
 
Our strategy for future growth is focused on providing complete end-to-end broadband wireless solutions, maintaining our current leadership position in existing Primary Broadband markets and growing along with the market demand for fixed and nomadic applications, while leveraging our strengths to become a significant participant in the Personal Broadband market.
 
Opportunities for Providing Personal Broadband Solutions Based on OPEN Architecture
 
The developing demand for Personal Broadband services has caused us to expand our focus to include a new set of users, both in terms of socioeconomic groups and geographic markets. The developing demand has also led us to target a different type of telecom operators. With our experience and knowledge of wireless technologies, we believe that WiMAX technology will be the one that best satisfies Personal Broadband needs. In addition to its high technical capacities, the interoperability and standardization of WiMAX-based products and networks are expected to offer lower-cost, volume-produced standard chips and systems. We believe that in turn, these low costs will be passed on to users, thus encouraging service adoption for Personal Broadband services.
 
Our goal is to become a major global WiMAX vendor of Primary Broadband and Personal Broadband solutions by being at the forefront of exploring and maximizing the benefits of open architecture characteristics of WiMAX to create a new operator-centric model based on best-of-breed solutions from a variety of OPEN WiMAX ecosystem partners.
 
The WiMAX Transformation to OPEN Architecture
 
The dynamics of WiMAX creates an all-IP open architecture, removing barriers to entry and facilitating rapid innovation. Designed from the start as an open standardized interoperable technology, OPEN WiMAX is a network strategy that enables a complete ecosystem, including radio access network equipment,, core network equipment, consumer electronics, service offerings and applications. This new strategy enables communication service providers to choose the combination of vendors and partners that best fit their specific requirements.
 
OPEN WiMAX is designed to enable multiple telecom vendors to build a best-of-breed telecom access network in an open standard architecture. It creates a telecom operator-centric offering/concept/culture as opposed to a vendor-centric approach historically used in large telecom projects.
 
OPEN WiMAX is open to innovation and is intended to enable an offering of mass-market consumer electronics combined with low cost and economies-of-scale. OPEN WiMAX is highly scalable and suitable for large, medium or small deployments that assist operators to optimize WiMAX network deployment costs, fit the expenditures to the desired services-centric network - both in terms of capital expenditures and operating expenses during the operation of the network. This “mix and match” multi-vendor approach may promote competition, which drives prices down and enhances the product offering. Innovative products and services for WiMAX, such as mobile TV and mobile gaming for personal use and Virtual Private Network and File Transfer for business use, enable vendors to distinguish themselves from the competition.
 
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Open networks in general, and OPEN WiMAX in particular, promote the long-term success of service providers in the highly competitive markets of broadband services, by offering the following:
 
 
·
superior performance combination (i.e., “best-of-breed”) of network equipment to meet service providers’ requirements;
     
 
·
wide variety of subscriber service and openness to enable future services and applications;
     
 
·
increased purchasing power to promote service providers business model; and
     
 
·
improved risk management, including sustainability against possible changes in vendors’ strategy, products and services, as the service provider is not limited to a single or only a few vendors.
 
We believe that, in the near future, operators will build open IP networks. WiMAX is based on open IP networks; therefore, the OPEN WiMAX strategy is a direct implementation of one of the strong WiMAX innovation fundamentals. We believe that pure players (meaning companies focused on a single field of activities that are not diversified), each an expert in its own field, will team to create best-of-breed offering. We believe that adopting our OPEN WiMAX strategy, differentiate us from our competitors and provide us with a competitive advantage over large telecom vendors, as we offer a best-of-breed one stop-shop rather than a-single offering from a single vendor.
 
An example of our expanding OPEN WiMAX ecosystem is our cooperation with Accton Technology Corporation of Taiwan with whom we formed AWB in January 2007, to develop mass market cost-effective WiMAX consumer electronic devices. These devices are intended to complement our WiMAX offerings while facilitating the availability of WiMAX- based Personal Broadband services. This cooperation is planned to augment Alvarion’s 4Motion™, our OPEN WiMAX solution, by including a variety of industry-standard, WiMAX-enabled devices and customer-premise equipment while enhancing the number and types of self-installable and outdoor WiMAX subscriber units. See “—Products—4Motion™ Solutions.”
 
PRODUCTS
 
BreezeMAX Platforms - our WiMAX Solutions for fixed, nomadic and mobile applications
 
Our WiMAX-based BreezeMAX Frequency Division Duplex ("FDD") and Time Division Duplex ("TDD") (“BreezeMAX”) platforms are designed from the ground-up according to the IEEE 802.16 standard. BreezeMAX platforms feature advanced OFDM and OFDMA  technologies to support NLOS operation, adaptive modulation up to QAM64 and the highest spectral efficiency available. Currently commercially available and operating in the 2.3, 2.3WCS, 2.5, 3.3, 3.5, 3.6 and 5.2 GHz licensed frequency bands, BreezeMAX meets the immediate customer demand for cost-effective, next generation broadband wireless systems with a platform designed around the implementation of the IEEE 802.16 and HiperMAN standards by the WiMAX Forum™. The BreezeMAX carrier-class design supports broadband speeds and QoS to enable carriers to offer quadruple play (meaning broadband data, voice, mobility and multi-media) services to thousands of subscribers in a single-base station.
 
BreezeMAX has quickly become a popular solution for operators offering fixed high-bandwidth, VoIP and data services to evolve their networks to industry-standard solutions with improved outdoor and indoor CPE economics. The platform includes an enhanced offering of primary voice services and allows the operator to leverage legacy voice infrastructure. The system’s features and cost-effective, versatile subscriber units make BreezeMAX a preferred broadband wireless solution for service providers who are interested in improving their business model.
 
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In July 2003, Intel Corporation announced its intention to develop an IEEE 802.16d-compliant silicon chip and by September 2005, we developed the subscriber unit that uses that chip. In June 2006, we introduced BreezeMAX Si, a self-installable ("Si"), indoor WiMAX CPE based on the IEEE 802.16-2004 standard and using the Intel® PRO/Wireless 5116 broadband interface (WiMAX chip). The BreezeMAX PRO CPE was the world’s first subscriber unit that integrated the Intel® PRO/Wireless 5116 broadband interface and marked an important step for the industry moving toward the widespread adoption of WiMAX standard products. 
 
From the last quarter of 2006, we have introduced commercially outdoor and indoor Si CPEs based on Intel last generation WiMAX chipset, Intel Connection 2250 (also called Rosedale 2). The advantage of these CPE is in supporting both standards of IEEE 802.16-2004 and 802.16-2005 as well as both duplex of FDD and TDD modes of operations in a single hardware. During last year, the BreezeMAX indoor Si CPE opened the door for Personal Broadband and Primary Broadband WiMAX standard-based solutions and enabled nomadic services via quick deployments based on a plug-and-play installation. In addition, the BreezeMAX indoor Si CPE enabled centrally provisioned, portable connectivity for subscribers to use the CPE in various points within the network coverage and reconnect to the service after moving from one location to another.
 
The BreezeMAX’s FDD platform was designed according to the IEEE 802.16-2004 standard, partially certified by the WiMAX Forum during 2006 for fixed and nomadic networks, for both Base Stations and CPEs. In early 2007, we introduced our TDD pre-certified IEEE 802.16-2005 platform that was designed for fixed and nomadic networks. Our new BreezeMAX platform, which is part of our 4Motion solution that is under development, is expected to provide support for fixed, nomadic and mobile WiMAX, and is being designed according to the IEEE 802.16e-2005 standard for portable and mobile networks.
 
IEEE 802.16e-2005 compliant technology enables portable and mobile networks to be IP-based, with a focus on open standards, end users and consumer devices. Portable access is defined according to the WiMAX Forum to apply to handsets, PDA, laptop Personal Computer Memory Card International Association ("PCMCIA") or mini cards at multiple locations, at least at walking speed, and enables a hard handoff of devices, in which the subscriber terminal is disconnected from one base station before connecting to the next base station. Mobile access ranges in scope from low to high vehicular speeds but adds PDAs and smart-phone devices, multiple locations and enables a soft handoff, in which the subscriber maintains a simultaneous connection with two or more base stations for a seamless handoff to the base station with the highest quality connection. Both consumer and business users have driven the demand for this technology that has resulted from the convergence of fixed broadband networks and mobile voice networks towards mobile broadband communications.
 
4Motion Solution
 
Our mobile WiMAX solution, called 4Motion, was introduced to the market during the second half of 2006 and is expected to be commercially available during 2008. This timeframe target is planned to coincide with the availability of mobile OPEN WiMAX, our Personal Broadband-enabled devices, which utilize chips currently at the end of the development phase. 4Motion™ is an end-to-end mobile WiMAX solution designed to comply with the IEEE 802.16e-2005 standard. The solution portfolio is developed in conjunction with leading providers of core network and IP technology, devices and integration services. 4Motion™ is expected to offer an open, end-to-end, carrier-class, scalable and cost-effective mobile broadband data solution that delivers Personal Broadband services of several Mbps per subscriber or more. Offering the benefits of the OPEN WiMAX approach to network strategy, our 4Motion™ solution is expected to provide operators with the flexibility to choose best-of-breed multi-vendor partners to add third-party IP services, while controlling costs.
 
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The 4Motion™ solution includes Radio Access Network ("RAN"), which is based on Alvarion’s BreezeMAX WiMAX base-station platform and includes third parties’ core network, radio and IP networking elements, end-user devices and subscriber applications.
 
We expect 4Motion™ to enable a wide range of deployment scenarios, such as (i) personal mobile and fixed broadband, (ii) wireless DSL, (iii) residential and business quadruple-play and (iv) municipal, public safety and video surveillance.
 
We also expect 4Motion™ to support broadband connectivity for both business and personal services such as mobile TV, online gaming, instant messaging (IM), VoIP, video conferencing, Internet browsing, mobile applications, location-based services ("LBS"), VPN and file transfers ("FTP").
 
Our Wireless Broadband Access Solutions (Non-WiMAX)
 
Although our primary focus is to provide solutions based on the WiMAX standard, we also continue to sell our non-WiMAX products in the short and mid-term. We provide a broad range of integrated fixed wireless broadband solutions, addressing different markets and frequency bands, designed for the various business models of carriers, service providers and private network operators. Our products are usually used in a point-to-multipoint architecture and address a wide scope of end-user profiles, including residential, small office/home office (“SOHO”), small/medium enterprises (“SME”), multi-tenant/multi-dwelling units (MTU/MDU) and large enterprises (corporate). Our products operate in licensed and license-free bands, ranging from 900 MHz to 28 GHz and comply with various industry standards. Our core technologies include spread spectrum radio, linear radio, digital signal processing, modems, MAC (media access control), IP-based mobile switches, networking protocols and very large systems integration (“VLSI”).
 
Our fixed wireless broadband solutions are based on OFDM technology with NLOS capabilities, creating more possibilities to cover a wireless access network.
 
We offer applications in which access to the end user is provided by wireless broadband systems. These access applications can be utilized by telecom operators, service providers and regional carriers based on the needs of their regions of operation. Fixed wireless broadband solutions are implemented in a modular infrastructure, enabling swift, cost-effective roll-out as needed. Sectorized base stations are deployed to provide radio coverage to the targeted area, and frequency channels are reused in non-adjacent base station sectors, making the most efficient use of the available spectrum. Base stations are connected to the operator’s central office, or point-of-presence, using wired or wireless point-to-point solutions. End users are provided with customer premises equipment, or CPE, typically consisting of an outdoor unit with a radio and an antenna connected to an indoor unit or indoor self-installed unit, who present voice and data interfaces to the customer network. The entire wireless broadband network is connected to the carrier backbone.
 
BreezeACCESS Products (BreezeACCESS II, XL, VL, OFDM)
 
BreezeACCESS enables fixed high-speed data and voice, point-to-multipoint wireless broadband applications. BreezeACCESS access products operate in several frequency bands to meet the needs of service providers and telecom operators worldwide. The BreezeACCESS product family consists of base stations, including access units, controllers and subscriber units, the latter of which operate optimally when connected to computers or computer networks utilizing the Internet Protocol. The subscriber units include subscriber units for data applications and subscriber units for data and telephony applications. BreezeACCESS is modular in design, allowing for a low initial investment, and is scalable for future growth.
 
BreezeACCESS OFDM products support fixed higher speed wireless broadband access products currently in the licensed 3.5 GHz band, and they provide gross data rates of up to 12 Mbps.
 
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BreezeACCESS VL, OFDM-based fixed products operate in the 0.9, 4.9, 5.2, 5.3, 5.4, 5.7 GHz bands, which are mostly unlicensed, and provide gross data rates of up to 54 Mbps. BreezeACCESS Wi2 combines the advantages of Wi-Fi access with the capabilities of BreezeACCESS VL systems to provide cost-effective solutions for Personal Broadband services today. With its design, BreezeACCESS Wi2 gateway solutions can be deployed almost anywhere to provide Personal Broadband to standard IEEE 802.11 b/g end user devices such as laptops, PDAs, smart-phones and portable gaming devices. BreezeACCESS Wi2 solutions are ideal for operators, municipalities and communities looking to build metropolitan broadband networks or to integrate Wi-Fi hot zone capabilities into their existing broadband wireless access networks. This solution provides Personal Broadband services ranging from public Internet access to public safety and Intranet applications.
 
OFDM technology, on which BreezeACCESS OFDM and BreezeACCESS VL are based, enables higher data rates, up to 12 Mbps in the case of BreezeACCESS OFDM, and up to 54 Mbps in the case of BreezeACCESS VL, by utilizing the available radio spectrum in an efficient manner. In addition, OFDM technology enables NLOS operation with robust resistance to interference. OFDM-based products enable carriers to use the technology in applications where a high data rate is required, including serving medium to large enterprises and high-speed backbone applications. The BreezeACCESS VL OFDM-based system, which utilizes our proprietary air protocol and broad set of features along with a high power radio, uses our “open platform” architecture and may be used with other BreezeACCESS band versions (BreezeACCESS II, XL, V or OFDM), giving operators the flexibility to use one band for service provisioning to residential, SOHO and SME customers, while reserving high bandwidth for large enterprises and MTUs.
 
BreezeACCESS wireless DSL products include BreezeACCESS II, BreezeACCESS XL, BreezeACCESS VL and BreezeACCESS OFDM.
 
BreezeACCESS II products operate in the unlicensed 2.4 GHz ISM band and provide gross data rates of up to 3 Mbps.
 
BreezeNET B Product
 
Our BreezeNET B products are designed to provide highly reliable, building-to-building bridging solutions, support mobile connectivity and provide individuals or small groups of users with wireless access to a LAN.
 
BreezeNET B products function as a wireless bridge system that provides high-capacity, high-speed point-to-point connectivity. The BreezeNET B system operates in the unlicensed 5GHz band and enables operation in near and non-line-of-sight environments such as buildings, foliage or ridgelines. The system also features adaptive modulation for automatic selection of modulation schemes to maximize data rate and improve spectral efficiency. BreezeNET B supports security sensitive applications through optional use of authentication and/or data encryption. The system supports Virtual Local Networks (“VLANs”), which enable secure operation, and VPN services, which allow tele-workers or remote offices to conveniently access their enterprise network.
 
eMGW Products
 
The enhanced MultiGain (eMGW) solutions are cost-effective, rapidly deployable, point-to-multipoint fixed wireless access systems that provide data and voice services for both residential and small business users, mainly in suburban and rural environments. Utilizing radio links instead of copper lines to bridge the last mile, the eMGW products enable rapid deployment of quality services to residential or SOHO customers. The products ensure the optimal utilization of the available spectrum and minimum interference, regardless of topography.
 
eMGW provides fast Internet access, corporate access and carrier-class telephony in a single system. It also enables LAN-to-LAN connectivity over IP-VPN tunnels for businesses, fax (G3) and dial-up modem (v.92/56Kbps) services for residential subscribers and leased line services. eMGW operates in a broad range of licensed and unlicensed (ISM) bands, from 1.5 to 5.7 GHz. eMGW provides coverage of up to 25 kilometers in very challenging environments and operates in NLOS installation scenarios. The eMGW is the optimal price / performance fixed wireless access system for operators who need to: provide coverage to subscribers in green fields, upgrade existing networks with advanced data services and provide wireless DSL services in low and medium subscriber density areas.
 
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eMGW, which has a scalable and modular architecture, is comprised of an indoor base station controller, an outdoor base station radio, an indoor subscriber interface and an outdoor subscriber terminal. It also includes a network planning tool and a network management system featuring fault, configuration, performance and security management.
 
eMGW is based on our frequency hopping Code Division Multiple Access ("CDMA") technology and utilizes our innovative “hybrid switching” transmission technology, combining circuit switching for toll quality voice and packet switching for fast data services, optimizing the utilization of spectrum resources. This “hybrid switching” concept provides a solution for the economic and technological challenges facing network operators today.
 
WALKair Products
 
The WALKair system is a wireless broadband system that enables carriers to provide high-speed Internet access, other data services and voice services primarily to SMEs.  WALKair’s high spectral efficiency, dynamic bandwidth allocation, effective frequency reuse plan and high coverage capacity enable carriers to connect last-mile business subscribers to their network in an efficient and cost-effective manner.
 
Our WALKair products consist of WALKair 1000 that operates in the 3.5, 10.5 and 26 GHz licensed bands, and WALKair 3000 that operates in the 3.5, 10.5, 26 and 28 GHz bands.
 
WALKair products are based on time division multiplexing (TDM) technology.  WALKair systems support a complement of value-added classes of services including VPN, VLAN and QoS, based on per-user allocation of committed data rate and maximum data rate.
 
WALKair 3000 accommodates carriers’ requirements for broader bandwidth, primarily driven by the growing use of data-intensive Internet applications.  It also enables carriers to efficiently connect multiple subscribers in multi-tenant buildings by a single terminal station.  WALKair 3000 supports significantly broader bandwidth for each customer and increased capacity for each cell, increasing the peak speed of transmission of each terminal station to up to 36 Mbps.  WALKair 3000 integrates smoothly with WALKair 1000, which enables carriers to deploy both systems on the same base station, serving a variety of subscribers with different needs for communication services, within the same cell.
 
Network Management Solutions for Both WiMAX and Non-WiMAX Wireless Broadband
 
We provide advanced management applications for our wireless solutions. Our network management applications are equipped with graphics-based user interfaces and provide a set of tools for configuring, monitoring and effectively managing our wireless broadband networks. Our flagship carrier-class Network Management System is the AlvariSTAR, fully compliant with Telecommunications Management Network (TMN) standards and simplifies network deployment and maintenance for networks of every scale. AlvariSTAR can be used to manage multiple Alvarion solutions, including BreezeMAX, 4MotionTM, BreezeACCESS VL and BreezeNET B.
 
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Our full portfolio of network management products include:
 
AlvariSTAR, which configures, monitors and manages our BreezeMAX, 4Motion and BreezeACCESS products;
 
WALKnet, which configures, monitors and manages our WALKair products; and
 
IMS, which configures, monitors and manages our eMGW product.
 
AlvariSTAR, WALKnet and IMS are multi-platform simple network management protocol (SNMP) applications. Using standard and private SNMP agents incorporated in the products, these applications, operating under the HP Open View network management platform, enable configuring, managing faults and monitoring performance of all system components from a central management station.
 
Accessories Offered by Alvarion
 
In order to support our products and provide comprehensive solutions to our customers, we provide a family of accessories designed to extend the range of our BreezeMAX, 4Motion, BreezeACCESS, WALKair and BreezeNET solutions. These accessories include antennas, cables, surge arrestors, amplifiers and other components.
 
Our Geographic Markets
 
Until now, our network installations have been typically found in developing regions in developed countries and in emerging markets.
 
Within developed countries (defined as countries with overall high levels of economic prosperity), there are rural or suburban regions with low-density populations, often extending over vast distances, that have limited telecommunications infrastructures. WiMAX and wireless broadband have made inroads in these areas due to the business opportunities, robust equipment, extensive coverage and non line-of-sight capabilities. In addition, government assistance in “closing the digital divide” in these countries has served as an incentive for alternative operators to consider WiMAX systems for providing broadband services. Examples of these locations have been identified in the United States, Western and Eastern Europe, Asia Pacific and South America.
 
We believe that wireless broadband service providers in emerging markets have found that deploying wireless broadband and new WiMAX solutions where telecommunication coverage is lacking due to poor infrastructure is an affordable means to provide broadband and telephony services. Emerging markets are countries where basic voice services combined with broadband data remain scarce. Examples of these locations are in Africa, Commonwealth of Independent States, former USSR ("CIS"), Latin America, Central America and Asia Pacific.
 
In 2007, the industry continued to show additional WiMAX penetration and a growing interest primarily in emerging markets and developing regions within developed countries. In addition, the WiMAX industry began to provide cost-effective infrastructure that can compete with broadband DSL and cable operators in the developed countries. In 2007, the industry showed signs of adoption of WiMAX for Personal Broadband services. We are increasing our sales and marketing efforts in certain regions in developed countries by offering our nomadic and portable solutions and our Personal Broadband and mobile applications in highly populated areas.
 
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We hope to continue to benefit from the expected evolution of WiMAX, building from nomadic and portable, to fully mobile services, enabling us to penetrate the high-end, metropolitan consumer and business user groups.
 
Geographic Breakdown of Our Revenue
 
   
2005
 
2006
 
2007
 
     
In thousands
 
North America
 
$
29,564
   
16.7
%
$
25,047
   
13.8
%
$
32,767
   
13.8
%
Latin America
   
32,946
   
18.6
%
 
30,857
   
17.0
%
 
50,982
   
21.5
%
Europe, Middle East and Africa
   
102,685
   
58.0
%
 
111,959
   
61.6
%
 
132,883
   
56.2
%
Asia Pacific
   
11,732
   
6.7
%
 
13,731
   
7.6
%
 
19,941
   
8.5
%
   
$
176,927
   
100.0
%
$
181,594
   
100.0
%
$
236,573
   
100.0
%
 
General - Industry Market Segments and Players
 
The operators in the wireless broadband market fall within the following categories, as determined by the industry:
 
(i) Communications Service Providers: Tier One and Tier Two Operators
 
Tier One and Tier Two carriers - both Fixed Network Operators ("FNOs") and Mobile Network Operators ("MNOs") - form the largest and most established telecom operators, with nationwide or global presence, serving tens of million of users. These carriers are a primary focus for our WiMAX equipment since these carriers have a strong, strategic interest in deploying WiMAX in their network. Tier One and Tier Two carriers are looking for the technology to keep them at the front line of communications business within their home countries, as well as to quickly expand their business by providing telecommunications services in neighboring countries. Examples of Tier One and Tier Two carriers that have publicly indicated their strategy include: Telkom South Africa Ltd., Cable & Wireless International, Telenor, Sviaz Invest ,Nippon Telegraph and Telephone West Corporation (NTT West), AT&T, France Telecom, Eircom, Bharti Tele-Ventures Limited (Airtel Enterprise Services) and Telefonos de Mexico S.A. de C.V. Historically, such operators have shifted slowly to new technologies, although many of them are involved in trials with our WiMAX equipment.
 
In addition, cellular operators are able to leverage their infrastructure, radio base-station sites and customer base, together with their marketing, services and billing platforms and customer support investments, to offer media centric, Personal Broadband services and competitive broadband Internet access services to their existing customers or new customers. Examples of operators in this group include Orange, Vodafone, Vodacom, Digicel, T-Mobile, Cegetel, Megafone, Meditel, MTN, China Mobile and Entel (Chile).
 
Innovative Challengers
 
Innovative Challengers are the broadband service providers that are building their business model primarily on WiMAX solutions, while providing in many cases improved services compared to legacy telecommunication operators. Innovative Challengers are expected to constitute a greater portion of the WiMAX market in the future. Examples of service providers belonging to this category include Clearwire USA and Clearwire International, Bolloré Telecom (France), Digital Bridge (USA), WiMAX Telekom (Austria), Enforta (Russia), Free (France), Iberbanda in Spain (a subsidiary of Telefonica de Espana), WorldMAX (Holland), Irish Broadband and Ertach (Argentina). We also expect Innovative Challengers to become early adopters of WiMAX portable and mobile services.
 
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CLECs & Regional Carriers
 
Competitive Local Exchange Carriers (“CLECs”) seek to compete effectively with the Incumbent Local Exchange Carriers (“ILECs”). Wireless broadband is an attractive and cost-effective last-mile alternative to wired access solutions. CLECs are deploying our products to provide voice and broadband services in rural and suburban areas where wireline infrastructure does not exist or does not support the demand. In addition, in the areas of landline infrastructure in developed countries, wireless broadband systems offer carriers the ability to reach otherwise inaccessible customers, while providing increased bandwidth flexibility and service differentiation, surpassing the inherent limitations in wireline infrastructure.
 
CLECs have constituted an important part of our focus in our fixed wireless access product line and have increasingly exhibited an interest in WiMAX. The reduced installation costs, rapid roll-out potential and modular architecture, coupled with high network capacity and coverage and enhanced service options, present an attractive alternative to service providers and regional carriers seeking to supply their customers with reliable comprehensive data and voice solutions. Examples of these operators include Euskaltel (Spain), Finnet (Finland), TDS (USA), Czech on line, Altitude (France), KDN (Kenya), Millicom and Peterstar (Russia).
 
Government, Municipalities, Communities and Private Network Operators
 
Private and government sectors that operate private networks for business management and operations are in constant need of deploying technologies to support their operational requirements. Examples of such requirements are enterprises that require leased line replacement for cost-effective connectivity to provide VoIP and data services; metropolitan area networks for broadband connectivity; metering and monitoring applications used by utility companies to collect information and supervise operations; and cost-effective access within communities, municipalities and educational institutions. Another area that has leveraged broadband wireless very effectively has been surveillance, public safety and municipal applications. Government authorities and private bodies with government sponsored funds have begun to deploy broadband wireless systems to support remote video surveillance, traffic flow management, back-up for disaster recovery, leased line replacement, various forms of backhaul and other public safety uses. Examples may be found in various U.S. communities such as Lenexa, Kansas and Corpus Christi, Texas, and many others in the Silicon Valley.
 
2007 Partial Customer List for WiMAX and Other Fixed Wireless Broadband Systems
 
Telecom carriers and service providers using our products include, among others:
 
· AIRCEL, INDIA
 
· ALLEGRO NETWORKS, AUSTRALIA
 
· ALLTEL, USA
 
· ALTITUDE TELECOM, FRANCE
 
· ASIA PACIFIC TELECOM GROUP (APTG), TAIWAN
 
· BHARTI TELE-VENTURES LIMITED ( AIRTEL ENTERPRISE SERVICES), INDIA
 
· BUTLERNETWORKS, DENMARK
 
· CABLE & WIRELESS, Worldwide
 
· CENTER TELECOM, RUSSIA
 
· CHUNGWA TELECOM, TAIWAN
 
· DIGICEL, CARIBBEAN
 
· DIGITAL BRIDGE COMMUNICATIONS, USA
 
· EMTEL, MAURITIUS
 
· ENFORTA, RUSSIA
 
· ENTEL CHILE SA, CHILE
 
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· ERTACH SA (formerly MILLICOM), ARGENTINA
 
· FINNET GROUP, FINLAND
 
· GHANA TELECOM, GHANA
 
· IBERBANDA, S.A., SPAIN
 
· IRISH BROADBAND INTERNET, IRELAND
 
· JSC COMSTAR - UNITED TELESYSTEMS, RUSSIA
 
· MEGAFONE, RUSSIA
 
· MONACO TELECOM, MONACO
 
· MONARCH COMMUNICATIONS, NIGERIA
 
· MTN UGANDA, UGANDA
 
· NETIA S.A., POLAND
 
· NGI, ITALY
 
· NTT WEST, JAPAN
 
· RACSA, COSTA RICA
 
· SOVINTEL, RUSSIA
 
· TELECOM NAMIBIA, NAMIBIA
 
· TELEFONICA CELULAR DEL PARAGUAY
 
· TELEKOM SERBIA, SERBIA
 
· TELKOM SOUTH AFRICA LTD., SOUTH AFRICA
 
· TPSA POLAND, POLAND
 
· TRANS TELEKOMUNIKACJA POLSKA S.A., BULGARY
 
· UKRANIAN HIGH TECHNOLOGIES, UKRAIN
 
· VODAFONE ROMANIA S.A., ROMANIA

TECHNOLOGIES UNDERLYING OUR PRODUCTS
 
We use internally developed core technologies and continue to invest heavily in augmenting our expertise in networking, radio and digital signal processing (“DSP”) modem technologies. We also participate as active members in international standards committees.
 
Networking Technology
 
To support the OPEN WiMAX concept and our 4Motion solution as well as our BreezeMAX and other products, we have developed or otherwise acquired, and continue to invest in, networking expertise in the areas of IP Access Mobile IP that is particularly adapted for mobile WiMAX networks, Access Service Networks Gate Ways (“ASN-GW”), Point-to-Point Protocol Over Ethernet (“PPPoE”) tunneling, VPN and VoIP, based on industry standards such as H.323, SIP and MGCP, and other Internet standards and protocols. To support the SentieM™ technologies embedded in our 4Motion solution as well as our BreezeMAX and other products, we have developed or otherwise acquired, and continue to invest in, distributed radio architecture and hierarchical ASN-GW network architecture. We have also developed, and are continuing to develop, know-how to satisfy market requirements with respect to quality of service, classes of services, committed information rate, maximum information rate, virtual LAN management and prioritization. We are developing access technology based on the IEEE 802.16-2004 (16d) and the IEEE 802.16e-2005 (16e) standards, as well as the WiMAX Forum™ technical specifications for both radio access and networking to further support the needs of customers using WiMAX. We have also developed a network management system that provides network surveillance, monitoring and configuration capabilities for all our products.
 
The PSTN FWA MGW system was extended to provide additional data services to wireless subscribers. The eMGW system was specially designed to support the modern wholesale network model for carriers. PPPoE, remote and local Dynamic Host Configuration Protocol ("DHCP") network tools give the network access provider the ability for fast and inexpensive IP network configuration and interfacing to the billing systems.
 
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Radio Technology
 
We have in-house radio development capabilities to address the diverse frequency bands and modulation methods of our products. The frequency bands include, among others, 900 MHz, 2.4 GHz, 2.3, 2.5-2.7 GHz, or MMDS, 3.3-3.8 GHz, 4.9-6 GHz, 10.5 GHz and 26 and 28 GHz. The modulation methods include Frequency Hopping Spread Spectrum (FHSS), Gaussian Frequency Shift Keying (GFSK), Direct Sequence Spread Spectrum (DSSS), Single Carrier QAM and OFDM, OFDMA. Our products include both TDD and FDD radios.
 
Our radio teams specialize in low cost, mass-production oriented radio design. The system level capability is software-assisted radio auto-calibration, which allows for reduced manufacturing costs and compensates for components’ parameter spread and instability, temperature-related changes and aging of components.
 
Our internal radio expertise enables us to attract customers by addressing promptly new needs, such as new frequency bands.
 
Digital Signal Processing ("DSP") Modem Technology
 
We maintain strong expertise in DSP and in modem design. Our capabilities include a hardware oriented design, as well as programmable DSP oriented design. Our modem design hinges on the Software Defined Radio paradigm. The extensive configurability of our base station modems, through Field Programmable Gate-Array (FPGA) and DSP reprogramming, allows us to readily introduce advanced features to our products and to follow amendments to emerging standards, including capability to upgrade deployed networks by downloading only software. Similarly, our CPE designs allow for upgradeability through over the air s/w download, simplifying our customer’s operations.
 
We have developed the BreezeMAX base station platform, which is designed to support the WiMAX (IEEE 802.16 and HIPERMAN) air interface specification. The platform supports the multiple antenna elements per sector to exploit the smart-antenna signal processing techniques for improved coverage and network capacity. The programmable DSP-based architecture of the BreezeMAX platform enables us to support the IEEE 802.16-2004 standard, as well as the IEEE 802.16e-2005 standard for broadband mobile, while enjoying the benefits of OFDMA and smart-antenna processing. The base station architecture and capabilities are closely aligned and synchronized with the CPE application-specific integrated circuit (“ASIC”) and reference design developed by Intel resulting from our collaboration, which began in 2003, to ensure optimum performance in future WiMAX deployments.
 
To support the SentieM™ technologies embedded in our 4MotionTM solution, as well as our BreezeMAX and other products, we have developed or otherwise acquired, and continue to invest in MIMO and beam forming, SDMA and radio resource management technologies.
 
We have also developed mixed signal ASICs containing DSP cores. Inclusion on-chip of analog-digital converters is instrumental to both cost reduction and power consumption reduction. First generation ASIC supports our IEEE 802.11-based FH-GFSK products, with the above-standard capability of delivering 3 Mbps, with automatic fall back to 2 Mbps and 1 Mbps as necessary. Our second generation ASIC is optimized for OFDM modulation, as used by the IEEE 802.11a/g standards and the recently approved IEEE 802.16a standard. This ASIC is based on proprietary programmable “very long instruction word” DSP architecture. The programmable architecture allows us to implement numerous beyond-standard capabilities, such as OFDMA extensions to the baseline OFDM mode. This system-on-a-chip ASIC will serve as a key component of our BreezeACCESS-OFDM products. An additional ASIC developed in-house supports our WALKair products, with a full duplex point-to-multipoint single carrier trellis-coded 64QAM modem. An ASIC was developed for the eMGW product to reduce the product’s costs.
 
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We designed the FWA eMGW system to provide data services to wireless subscribers on top of voice services. The subscriber unit is based on our ASIC implementing functions of the PHY and MAC layers of the air interface. The eMGW base station design includes Voice echo canceling and fax/modem detection algorithm to support high spectrum efficiency while ensuring toll quality voice.
 
Participation in International Standards Committees
 
As part of our strategy to become a technology leader and influence the industry in specific areas, we have, since our inception, been active members in standardization committees.
 
We are a principal founder of the WiMAX Forum™, a non-profit organization whose members work to promote adoption of the IEEE 802.16 OFDM/OFDMA standard and to certify interoperability of compliant equipment. Our representative on the board of directors of the WiMAX Forum™ is Dr. Mohammad Shakouri, Corporate Vice President of Marketing at Alvarion, who holds the position of Vice Chair of the WiMAX Forum™ and chairs the Marketing Working Group. For a more detailed description of the WiMAX Forum™, please see “—Industry Dynamics—Our Existing Market: WiMAX and Wireless Broadband for Primary Broadband Access Services—WiMAX Technology, Applications and Industry Advantages.”
 
The scope of the IEEE 802.16-based standard is the Wireless MAN, supporting larger range fixed/nomadic/mobile broadband access networks with more performance and dedicated high-end services. Our engineers actively participate in the technical group for defining inter-operability profiles and tests. Our representative, Dr. Vladimir Yanover, holds the position of co-chair of WiMAX Forum™’s Technical Working Group (TWG), which is responsible for defining the interoperability profiles and the interoperability and conformance tests for the IEEE802.16e-2005 standard.
 
We actively participate in the IEEE 802.16’s Broadband Wireless Access work group. Similarly, we are part of the WiMAX Forum™’s groups that define and improve the OFDM/OFDMA mode for both fixed and mobile broadband applications and that improve the ability of the IEEE 802.16 standard to increase its market footprint in license-exempt applications.
 
Mariana Goldhamer, Director for Strategic Technologies at Alvarion, is Chair of IEEE 802.16h, which targets Improved Coexistence in License-Exempt deployment. She is also ETSI BRAN (Broadband Radio Access Networks) Vice-Chair and HiperMAN Chair. ETSI HiperMAN has adopted the IEEE 802.16 OFDM mode and has recently embraced the OFDMA mode. Ms. Goldhamer is acting to harmonize the IEEE and ETSI standards to create a worldwide broadband standard for converged Fixed-Mobile applications.
 
We have participated in the IEEE 802.11 wireless LAN work group, which is the driving force behind increasing the data rate of the frequency hopping modem. Naftali Chayat, Alvarion’s Chief Scientist, chaired the IEEE 802.11a task group, which is the first OFDM based high-data rate wireless LAN standard.
 
We are also very active in the international regulatory arena, including ITU-R, which aims to promote WiMAX in the regulatory domain and to secure the spectrum for broadband fixed/mobile deployment.
 
41

 
SALES, MARKETING AND SUPPORT OF OUR PRODUCTS
 
We market our products through an extensive network of more than 200 active partners. These include OEMs, global and local system integration and service fulfillment partners in various geographic regions, solution partners, national and local distribution partners, and resellers. Our distribution partners in turn sell to resellers, including value-added resellers and systems integrators, as well as to end users. We also market our solutions and products directly to large operators.
 
We currently sell and distribute our products in more than 150 countries worldwide. The use of different types of marketing channels through our partnership network enables us to market our products to many different markets and to meet the differing needs of our customers.
 
Our products are aimed at the WiMAX, other wireless broadband and wireless broadband combined with wireless voice markets. We sell in these markets through OEM agreements or other strategic partner arrangements with leading telecommunications suppliers, directly as well as indirectly through our distribution channels, which market primarily to smaller ISPs and operators. Additionally, to achieve broad and rapid market penetration, we cultivate direct relationships with communication service providers. By doing so, we believe that we are better able to understand the needs of new operators such as Innovative Challengers, Tier One and global operators, and are better able to identify and anticipate trends in the WiMAX and wireless broadband market.
 
We have established relationships with major telecommunications equipment manufacturers such as Hitachi Communications Technologies, Nokia-Siemens Networks, Alcatel- Lucent, Nera Networks and global system integrators, such as Hewlett-Packard (HP) and IBM. Pursuant to arrangements entered into with these partners, they are permitted to distribute our products on either a regional or worldwide basis under private labels. We are seeking additional strategic relationships with international partners, strong local partners and other key companies to increase our exposure and establish ourselves as a supplier to service providers, telecom markets and end-user markets that are not reached by our present distribution channels.
 
We have strong relationships with leading incumbents and leading telecom operators to whom we sell our solutions directly. Our relationships are primarily based on the following common activities: (i) We are building together the industry and leadership position; (ii) We have a common strategy and participate in world-wide standards bodies and consortia; (iii) We have a positive commercial relationship and share a common vision and joint marketing activities.
 
A distributor of our products is typically a data communications or a telecommunications marketing organization, or both, with the capability to add value with training and first-tier support to resellers and systems integrators.
 
We operate in various regions. Our subsidiaries and representative offices, located throughout North America, South America, Europe, Africa and Asia, support our international marketing network.
 
We derive our revenues from different geographical regions. For a more detailed discussion regarding the geographic allocation of our revenues based on the location of our customers, see “Item 5A—Operating and Financial Review and Prospects—Operating Results.”
 
We conduct a wide range of marketing activities aimed at generating name recognition and awareness of our brands throughout the telecommunications industry, as well as identifying leads for distributors and other resellers. These activities include public relations, participation in trade shows and exhibitions, advertising programs, public speaking at industry forums and maintaining a website.
 
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We maintain a highly trained global technical support team that participates in providing customer support to customers who have purchased our products. This includes local support by distributors’ and systems integrators’ personnel trained by our support team, support through help desks and the provision of detailed technical information on our website, expert technical support for resolution of more difficult problems, as well as participation in pre-sales and post-sales activities conducted by our distribution channels with large customer accounts and key end users.
 
We organize technical seminars covering general technologies, as well as specific products and applications. We also have qualification programs to advance the technical knowledge of our distributors and their ability to sell and support our products. The seminars are held in various countries and in different languages as needed.
 
MANUFACTURING OPERATIONS AND SUPPLIERS
 
We currently subcontract most of the manufacturing of our products. We have a pre-qualification process for our contract manufacturers, which includes the examination of the technological skills, production capacity and quality assurance ability of each contract manufacturer. Our manufacturing capacity planning is based on rolling marketing forecasts done on a monthly basis. The forecasts provided to the sub-contractors are based on internal company forecasts, and are up to six months. We purchase our raw materials from several suppliers.
 
Our products are currently manufactured primarily by several contract manufacturers located in Israel, the Philippines and Taiwan. We perform our quality assurance, final assembly and testing operations of our products at our facilities in Tel Aviv, Omer, and in our leased premises at some of our subcontractors’ facilities in Israel. We have processes in place for the ongoing performance of quality assurance at our own facilities and at our subcontractors’ facilities. Equipment owned by us and used for final assembly and testing is located at our facilities in Tel Aviv, Omer and in our leased premises at the facilities of some of our subcontractors in Israel as part of our Approved Enterprise programs.
 
We monitor quality with respect to each major stage of the production process, including the selection of components and subassembly suppliers, warehouse procedures, assembly of goods, final testing and packaging and shipping.
 
All our manufacturing locations in Israel and in the Philippines are ISO 9001 certified, which verifies that our manufacturing processes adhere to established standards. We require that our Israel-based contract manufacturers be ISO 9002 certified. Our contract manufacturers are ISO 9002 certified. Our Tel Aviv and Omer locations are ISO9001, ISO 14000 and ISO18000 certified.
 
PROPRIETARY RIGHTS
 
In order to protect our proprietary rights in our products and technologies, we rely primarily upon a combination of patents, trademarks, trade secrets, and copyrights, as well as confidentiality, non-disclosure and assignment of inventions agreements. We have 47 patents issued by patent offices in several countries, with 56 pending patent applications. The proprietary rights described above are material to our business and profitability. Because our proprietary rights are diversified and independence of each other, we believe that we are not dependent on any one patent.
 
We have trademark registrations in Israel, the United States, the European Union and many other countries. In addition, we have typically entered into nondisclosure, confidentiality and assignment of inventions agreements with our employees, consultants and with some of our suppliers and customers who have access to sensitive information. We cannot assure you that the steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of our technology or independent development and/or the sale by others of products with features based upon, or otherwise similar to, those of our products.
 
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Given the rapid pace of technological development in the communications industry, we also cannot assure you that our products may not be adjudicated as infringing on existing or future proprietary rights of others. Although we believe that our technology has been independently developed and that none of our intellectual property infringes on the rights of others, from time to time, we receive letters alleging we have infringed upon a patent, trademark, license or other proprietary right. We have no assurance that any such allegation will not have a material adverse effect on our business, financial condition or results of operations.
 
We license certain technologies from others for use in connection with some of our technologies. The loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost.
 
THE COMPETITIVE ENVIRONMENT IN WHICH WE OPERATE
 
The markets for our products are very competitive, and we expect that competition will increase in the future as WiMAX technology is further adopted by major network equipment providers and when the Personal Broadband WiMAX market matures, both with respect to products that we are currently offering and with respect to products that we are developing. We also expect more competition in this market in light of announcements by large telecom equipment vendors that they intend to serve this market. We believe the principal competitive factors in the markets for our products include:
 
 
·
price and price/performance ratio;
     
 
·
technology;
     
 
·
service and spectrum regulation and product certifications;
     
 
·
ability to support new industry standards;
     
 
·
product time to market;
     
 
·
brand strength, go-to market capabilities and sales channels;
     
 
·
systems integration and financing capabilities; and
     
 
·
quality of service.
 
Companies that are engaged in the manufacture and sale or the development of products that compete with our wireless broadband products include Airspan Inc., Alcatel-Lucent, Aperto Networks, Cisco Systems, Ericsson, Huawei Technologies, Motorola, Nextwave Wireless, Nokia-Siemens Networks, Nortel Networks, Redline Communications, Samsung, , SR Telecom, and ZTE. Other vendor members of the WiMAX Forum™ may become our competitors in the future.
 
Our products use wireless media, which also compete with alternative telecommunications transmission media, including leased lines, copper wire, fiber-optic cable, cable modems and television modems. Our products compete with other wireless media technologies, including (i) 3rd Generation cellular technologies (3G) and (ii) 4th generation cellular technologies ("4G"), such as 3G Long Term Evolution ("3G-LTE") and UMB ; our products also compete with satellite technologies.
 
Some of our existing and potential competitors, including some large companies arising from the continued consolidation in the telecommunications equipment market, have substantially greater resources including financial, technological, manufacturing, marketing and distribution capabilities, and enjoy greater recognition than we do.
 
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Increased competition in our market results in price reductions, new business alliances, shorter product life cycles, reduced gross margins, longer sales cycles and loss of market shares, which could harm the results of our operations. We have designed and engineered our products to minimize costs, maximize margins and improve competitiveness. However, we cannot assure you that we will be able to compete successfully against current or future competitors.
 
GOVERNMENT REGULATION
 
Our business is premised on the availability of certain radio frequencies for two-way broadband communications. Radio frequencies are subject to extensive regulation under the laws of each country and international treaties. Each country has different regulation and regulatory processes for wireless communications equipment and uses of radio frequencies. In the United States, our products are subject to FCC rules and regulations. In other countries, our products are subject to national or regional radio authority rules and regulations. Current FCC regulations permit license-free operation in FCC-certified bands in the radio spectrum in the United States. In other countries the situation varies as to the spectrum, if any, that may be used without a license and as to the permitted purposes of such use. Some of our products operate in license-exempt bands, while others operate in licensed bands. The regulatory environment in which we operate is subject to significant change, the results and timing of which are uncertain.
 
In many countries, the unavailability of radio frequencies for two-way broadband communications has inhibited the growth of these networks. The process of establishing new regulations for wireless broadband frequencies and allocating these frequencies to operators is complex and lengthy. The regulation of frequency licensing began during 1999 in many countries in Europe and South America and continues in many countries in these and other regions. Licensed blocks in 2.3, 2.5, 3.3, 3.5, 3.6 GHz were released in some countries. However, this frequency licensing regulation process may suffer from delays that may postpone commercial deployment of products that operate in licensed bands in any country that experiences this delay. In Europe, the European Civil Code (the “ECC”) has recently assigned the spectrum in 3.4-3.8GHz to broadband applications, in a flexible and technology-neutral mode. However the implementation of the ECC decisions in individual countries may suffer delays or may be limited to relatively small amounts of spectrum. In addition to the above, in some countries, particular frequency bands were allocated for licensing; for example, in 2007, the AWS band was auctioned by the FCC in the United States. Our current customers that commercially deploy our licensed band products have already been granted appropriate frequency licenses for their network operation. In some cases, the continued validity of these licenses may be conditional on the licensee complying with various conditions. In October 2007, the Radio-communication Sector of the International Telecommunication Union (ITU-R) made a decision that effectively includes WiMAX technology in the IMT-2000 set of standards. There are some that interpret this inclusion of WiMAX in IMT-2000 as placing WiMAX on equal footing with the legacy-based technologies ITU-R already endorses. We note though that establishing new regulations in individual countries for wireless broadband frequencies and allocating frequencies to operators is complex and lengthy. The European Commission started a process to revise the 2.5-2.69GHz regime to provide more flexibility in the spectrum usage and a more balanced protection of the TDD operation. A change in the European regulation may imply a need for revised type approval norms; such revisions would be a lengthy process.
 
There is a trend to release more license-exempt bands. For example, in the United States, FCC rules were modified to include an additional 255MHz of spectrum, though actual use of this allocation is not permitted until a technical issue is resolved between the NTIA (which manages government-used spectrum) and the FCC (which manages commercial and public spectrum). In Europe, the process is slower. We see potential for new markets in rural areas and developing countries, created by the availability of licensed-exempt spectrum in the 5GHz band. The FCC has recently enforced the 3.65-3.7GHz spectrum to be used in a shared mode; the upper 25MHz require a special coexistence protocol. Such a protocol is defined for the WiMAX systems in 802.16 and this process might be lengthy.
 
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An additional trend affecting our business involves allowing TDD operation in frequency bands allocated in the past for FDD operation. Generally, TDD operation allows for lower cost equipment and is currently the preferred mode of operations, according to the adopted WiMAX Forum’s profiles. However, the operation of TDD networks in proximity to FDD networks creates a mutual interference hazard that may postpone customer decisions, impede network deployment or require higher cost solutions to address such issues.
 
In addition to regulation of available frequencies, our products must conform to a variety of national and international regulations that require compliance with administrative and technical requirements as a condition to marketing devices that emit radio frequency energy. These requirements were established, among other things, to avoid interference among users of radio frequencies and to permit the interconnection of equipment.
 
We are subject to export control laws and regulations with respect to all of our products and technology. In addition, Israeli law requires us to obtain a government license to engage in research and development, and export, of the encryption technology incorporated in some of our products. We currently have the required licenses to utilize the encryption technology in our products.
 
C. ORGANIZATIONAL STRUCTURE
 
The following is a list of our significant subsidiaries, each of which is wholly-owned:
 
 
·
Alvarion, Inc., incorporated under the laws of Delaware, United States;
 
 
·
Alvarion Mobile, Inc., incorporated under the laws of Delaware, United States, is a wholly owned subsidiary of Alvarion Inc.;
 
 
·
interWAVE Communications Inc., incorporated under the laws of Delaware, United States, is a wholly owned subsidiary of Alvarion Mobile, Inc.;
 
 
·
Alvarion UK LTD., incorporated under the laws of England;
 
 
·
Alvarion SARL*, incorporated under the laws of France;
 
 
·
Alvarion SRL, incorporated under the laws of Romania;
 
 
·
Alvarion Asia Pacific Ltd., incorporated under the laws of Hong Kong;
 
 
·
Alvarion do Brasil LTDA, incorporated under the laws of Brazil;
 
 
·
Alvarion Uruguay SA, incorporated under the laws of Uruguay;
 
 
·
Alvarion Japan KK, incorporated under the laws of Japan;
 
 
·
Alvarion Israel (2003) Ltd., incorporated under the laws the State of Israel;
 
 
·
Alvarion Spain, S.L., incorporated under the laws of Spain;
 
 
·
Tadipol-ECI Sp.z o.o.,** incorporated under the laws of Poland;
 
 
·
Alvarion Telsiz Sistemleri Ticaret A.Ş.**, incorporated under the laws of Turkey;
 
 
·
Alvarion de Mexico S.A. de C.V., incorporated under the laws of Mexico;
 
 
·
interWAVE Communications International SA, incorporated under the laws of France;
 
 
·
Alvarion Philippines incorporated under the laws of Philippines;
 
 
·
Kermadec Telecom B.V. incorporated under the laws of Holland;
 
 
·
Alvarion South Africa (Pty) Ltd., incorporated under the laws of South Africa; 
 
 
·
Alvarion Italy SRL incorporated under the laws of Italy;  
 
 
·
Alvarion GmbH incorporated under the laws of Germany; and
 
 
·
Alvarion Singapore PTE LTD., incorporated under the laws of Singapore.
 
*Alvarion SARL is a wholly-owned subsidiary of Alvarion UK LTD.
 
** Alvarion Telsiz Sistemleri Ticaret A. S. and Alvarion - Tadipol - ECI Sp.zoo are wholly owned subsidiaries of Kermadec Telecom B.V.
 
In addition, we have representative offices in China, Italy and Russia.
 
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D. PROPERTY, PLANTS AND EQUIPMENT
 
We do not own any real estate. As of December 31, 2007, we leased an aggregate of approximately 270,000 square feet in Israel for annual lease payments (including management fees) of approximately $4.1 million and incurred annual parking expenses in connection with these leases of approximately $0.4 million. These premises consist mainly of our corporate headquarters in Tel-Aviv, Israel, and two separate warehouses located in Israel as well as at our subcontractors’ facilities in Israel. We have been occupying our main premises since April 2001, these premises serve as our corporate headquarters, as well as the site at which we conduct our main research and development activities and some quality assurance, final assembly and testing operations. Our main lease expires in the year 2011. We also lease approximately 17,250 square feet of office facilities in Mountain View, California, at an annual rent of approximately $0.2 million. These premises serve as the corporate headquarters of our U.S. subsidiary, Alvarion Inc, and as our principal sales and marketing office in North America. In addition, we lease office space for the operation of our facilities in France, Romania, China, Uruguay, Japan, Brazil, Mexico, Philippines, Poland, Russia, Singapore, Italy, South-Africa and Spain.
 
We believe that the facilities we currently lease are adequate for our current requirements.
 
ITEM 4A. UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 
 
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in “Item 3—Key Information—Risk Factors.”
 
A.
OPERATING RESULTS
 
Overview
 
We are a leading provider of WiMAX and non-WiMAX wireless broadband systems. We supply carriers, ISPs and private network operators with WiMAX and other wireless broadband solutions. Our solutions are designed to cover the full range of frequency bands with fixed, portable and mobile applications, to enable the delivery of Personal Broadband services and Primary Broadband services such as business and residential broadband access, corporate VPNs, toll quality telephony, mobile base station feeding, hotspot coverage extension, community interconnection and public safety communications.
 
We believe we will see demand in the consumer and business/government segments for bandwidth-intensive applications (video, data and voice) in the anticipated mobile environment. Our vision is to deliver Personal Broadband networks, which will combine broadband and mobility to subscribers by being at the forefront of exploiting the benefits of OPEN architecture characteristics of WiMAX.
 
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We believe that one of our key challenges is to successfully manage the transition from our non-WiMAX to WiMAX products and from one WiMAX solution to another. This challenge also includes leveraging our experience and leadership in both non-standard BWA and current WiMAX markets, combined with our brand strength, broad customer base and innovative technology in order to play an important role in the WiMAX-based mobile broadband market as well. Other key challenges are to become a major player in the Personal Broadband equipment market and establish our OPEN WiMAX strategy as a new strategy, which enables communication service providers to choose the combination of vendors and partners that best fit their specific requirements.
 
As a wireless broadband pioneer, we have been driving and delivering innovations for more than 10 years from core technology development to creating and promoting industry standards. Leveraging our key roles in the IEEE and HiperMAN standards committees and experience in deploying OFDM-based systems, we have been in the forefront of the WiMAX Forum™ in its focus on increasing the widespread adoption of standards-based products in the wireless broadband market and leading the entire industry to mobile WiMAX solutions.
 
Our solutions are usually used in a point-to-multipoint architecture and address a wide scope of end-user profiles, from the consumers, residential and SOHO markets, through SMEs and multi-tenant units/multi-dwelling units.
 
Our products operate in licensed and license-free bands, ranging from 450 MHz to 28 GHz and comply with various industry standards. Our core technologies include spread spectrum radio, linear radio, digital signal processing, modems, MAC, IP-based mobile switches, compact mobile networks, networking protocols and VLSI. We have intellectual property in these technologies.
 
On August 1, 2001 we acquired Floware Wireless Communication Ltd. Upon the closing of the acquisition, we changed our name from BreezeCOM Ltd. to Alvarion Ltd. We have consolidated the results of Floware’s business in our financial statements from August 1, 2001.
 
On April 1, 2003, we acquired certain assets and assumed liabilities of InnoWave Ltd. We have consolidated the results of InnoWave’s business in our financial statements from April 1, 2003.
 
On December 9, 2004, we acquired, through a cash merger, interWAVE, a provider of compact mobile network equipment and services, which strengthened our know-how in mobility and expanded our served market to include the mobile equipment market. Most of interWAVE’s operations were reported under the CMU business.
 
On November 21, 2006, we sold substantially all of the assets and certain liabilities related to our CMU business to LGC , a privately held U.S. company, in exchange for promissory notes and convertible notes of LGC. In September 2007, LGC converted our convertible notes into LGC shares and thus we became a shareholder of LGC. In November 2007, ADC acquired all of LGC shares in a cash transaction. The CMU business is classified as discontinued operations.
 
2007 Highlights
 
In 2007, we continued to focus strategically on our main businesses, broadband wireless access and WiMAX solutions and exceeded our expectations regarding revenues and net income.

During 2007, our revenues grew 30% over 2006 to $236.6 million primarily due to strong execution by our team. Our BreezeMAX revenues reached $124 million. This revenue strength allowed us to continue to invest in our Open WiMAX initiatives, remain profitable and cash flow positive, and to meet our objective of balancing the need for investment with the need to remain profitable.
 
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We experienced strong growth from our Primary Broadband access business in emerging markets, such as Central and Eastern Europe and Latin America, and in rural areas of developed countries such as Western Europe. This wireless DSL market is and is expected to continue to be an important growing market for us, in addition to Personal Broadband. Both Primary and Personal Broadband applications will continue to be important strategic markets for us, and we expect to serve both with our evolving IEEE 802.16e platform.

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

During 2007, we continued to grow mainly due to our existing customer base. In addition, we were successful in the following areas:
 
 
·
We built an ecosystem with strategic partners.

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

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

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

 
·
We continued to develop relationships with strong local partners in key geographies and expanded our already extensive network of distributors both geographically and within key vertical markets.
 
We believe that our achievements in 2007 will enable us to continue to improve our long-term performance and to meet our Broadband Wireless and WiMAX technical, financial and strategic objectives.
 
In the past two years and going forward, one of our key challenges has been and will be to successfully manage the transition from our non-WiMAX to WiMAX products and from one WiMAX solution to the other. During 2007, we increased our revenues by approximately 30% in comparison to 2006; although we experienced low revenue growth of our non-WiMAX products (approximately 2% over 2006) due primarily to the continuing market transition to WiMAX-based products. This trend may continue as customers may delay orders for our products until the release of our additional new WiMAX products.
 
In addition, during 2007, we continued to increase our investments in our WiMAX solutions, in particular mobile WiMAX products, and as a result, we increased our overall operating expenses by approximately 25% while keeping our gross margin level at approximately 50% of our revenues. We maintained the level of our gross margins mainly due to the continued implementation of operational efficiency measures and cost reduction programs, including improvement in manufacturing processes and in the contractual terms with our subcontractors, due to the utilization of previously written-off inventory, as well as the mix of products in our revenues.   
 
Periods of economic slowdown or recession in the United States or other relevant regions or countries or the public perception that these periods of economic slowdown or recession may occur, may reduce corporate and consumer spending and that may create new challenges for us if these general economic conditions fail to improve or worsen.
 
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We became profitable in 2007, as our net income amounted to $12.5 million compared with a net loss of $(40.8) million in 2006. This net income was primarily a result of our growth in revenue from $181.6 million in 2006 to $236.6 million in 2007, together with an increase in our financial and other income from $3.8 million in 2006 to $14.7 million in 2007, and our income from discontinued operations, which was $5.4 million, compared to a loss of $(36.2) million in 2006, partially offset by the increase of our operating expenses, which were $125.3 million in 2007, compared to $100.1 million in 2006.
 
Critical Accounting Principles
 
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, and audited in accordance with standards of the Public Company Accounting Oversight Board (United States). A discussion of the significant accounting policies that we follow in preparing our financial statements is set forth in Note 2 to our consolidated financial statements included in Part III of this annual report. In preparing our financial statements, we must make estimates and assumptions as to certain matters, including, for example, the amount of new materials and components that we will require to satisfy the demand for our products based on our sales estimates and the period of time that will elapse before our products become obsolete. While we endeavor diligently to assure that our estimates and assumptions have a reasonable basis and reflect our best assessment as to the future circumstances in which we anticipate, actual results may differ from the results estimated or assumed and the differences may be substantial as to require subsequent write-offs, write-downs or other adjustments to past results or current valuations.
 
The following is a summary of certain critical principles, which have a substantial impact upon our financial statements and which we believe are most important to keep in mind in assessing our financial condition and operating results:
 
Discontinued Operations. On November 21, 2006, we signed an agreement to sell substantially all of the assets and assign certain liabilities related to the Cellular Mobile Unit (“CMU”) reporting unit. At closing in 2006, we recognized such transaction as a divestiture of operations, and therefore, the results of the CMU activities for all reported periods were reclassified into one-line item in the statement of operations below the results from continuing operations under "Income (loss) from discontinued operations". The assets and liabilities related to the CMU as at December 31, 2006 were reclassified in our balance sheet as assets and liabilities from discontinued operations. As of December 31, 2007 we had no assets and liabilities from discontinued operations.
 
  In addition, the cash flow of the CMU was also disclosed separately in our statements of cash flows for 2005, 2006 and 2007.  
 
Revenue Recognition. We generate revenues from selling our products indirectly through distributors and OEMs, as well as selling them directly to end users.
 
Revenues are recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” and Emerging Issues Task Force (EITF) No. 00-21, “Revenue Arrangements with Multiple Deliverables” when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price to the buyer is fixed or determinable, no further obligation exists and collection is reasonably assured.
 
We generally do not grant a right of return on our products. However, we have granted to certain distributors limited rights of return on unsold products. Product revenues on shipments to these distributors are deferred until the distributors resell our products to their customers, provided that all other revenue recognition criteria are met.
 
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In cases in which we are obligated to perform post delivery installation services, revenues are recognized upon completion of the installation.
 
In transactions, where a customer’s contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or the acceptance provision has lapsed.
 
Accounts Receivable. We are required to assess the collectability of our accounts receivable balances. Generally, we do not require collateral; however, under certain circumstances we require letters of credit, other collateral, additional guarantees or advance payments. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including, but not limited to, the current credit-worthiness of each customer. We regularly review the amounts due and related allowance by considering factors, such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. For certain accounts receivable balances, we are also covered by foreign trade risk insurance. To date, we have not experienced material losses on the ongoing credit evaluations of our customers. Should we consider it necessary to increase the level of provision for doubtful accounts, required for a particular customer, then additional charges will be recorded in the future.
 
Inventory Valuation. Our policy for valuation of inventory and commitments to purchase inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed assessment of inventory at each balance sheet date which includes a review of, among other factors, an estimate of future demand for products within specific time frames, valuation of existing inventory, as well as product lifecycle and product development plans. The business environment in which we operate the wide range of products that we offer and the sales-cycles we experience all contribute to the exercise of judgment relating to maintaining, utilizing and writing-off inventory. The estimates of future demand that we use in the valuation of inventory are the basis for our revenue forecast, which is also consistent with our short-term manufacturing plan. Inventory reserves are also provided to cover risks arising from non-moving items. We write-down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. We may be required to record additional inventory write-downs if actual market conditions are less favorable than those projected by our management.
 
Note 2g to our financial statements describes the write-offs and provisions that we made and recorded in 2005, 2006 and 2007 to reflect the decline from our expectations in the value of inventory, which had become excessive, unmarketable or otherwise obsolete or the inventory of new materials and components that we had purchased or committed to purchase in anticipation of forecasted sales which we did not consummate. In addition, changes in demand, which result in increased demand for our products, may lead to utilization of our previously written-off products. Note 2g to our financial statements describes the effect of the utilization of the related products of our prior years’ written-off components, which are reflected in our revenues without additional cost in the cost of sales in the period the inventory was utilized.
 
If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to increase our inventory allowances and our gross margin could be adversely affected. In addition, if the demand for our products increases beyond our expectations following a write-off of inventory, we may need to further utilize our previously written-down inventory. Such utilization may contribute to our gross margin in future periods. Inventory management remains an area of management focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.
 
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Intangible assets. As a result of the acquisition of interWAVE in 2004, InnoWave in 2003 and our merger with Floware in 2001, our balance sheet as of December 31, 2007 and 2006 includes acquired intangible assets, such as goodwill and current technology, which totaled approximately $58.7 million and $61.2 million, respectively. In the course of the analysis and valuation of intangible assets, we use financial and other information, including financial projections and valuations provided by third parties. Although we evaluate our intangible assets when there is an indication of impairment, our projections are based on the information available at the respective valuation dates, and may differ from actual results. As a result of the sale of substantially all of the assets and the assignment of certain liabilities of the CMU, the intangible assets related to the acquisition of interWAVE that were allocated to the CMU activity in 2005, were classified in our balance sheet as assets from discontinued operations prior to its sale.
 
Goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) goodwill acquired in a business combination that closes on or after July 1, 2001 is deemed to have indefinite life and will not be amortized. SFAS 142 requires goodwill to be tested for impairment on adoption and at least annually thereafter or between annual tests in certain circumstances, and impaired, rather than being amortized as previous accounting standards required. As of December 31, 2007, we had total goodwill of $57.1 million on our balance sheet. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. The fair value was determined based on our management’s future operations projections, using discounted cash flows and market approach and market multiples valuation methods. During 2006, before the sale of the CMU business, we identified indications of impairment of goodwill of $23.4 million related to this unit. This charge is included in the results of discontinued operations. There was no indication of impairment related to our continuing operations. In assessing the recoverability of our goodwill and other intangible assets, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.
 
Warranties. We provide for the estimated cost of product warranties at the time the product is shipped. Our products sold are covered by a warranty for periods ranging from one year to three years. We accrue a warranty reserve for estimated costs to provide warranty services. Our estimate of costs to service the warranty obligations is based on historical experience and expectation of future conditions. We accrue for warranty costs as part of our cost of sales based on associated material costs and technical support labor costs. Material cost is primarily estimated based upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment. Technical support labor cost is primarily estimated based upon historical trends in the rate of customer calls and the cost to support the customer calls within the warranty period. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross profit.
 
Stock-Based Compensation Expense.  On January 1, 2006, we adopted FASB Statement No. 123 (Revised 2004), Share-Based Payment (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options, which are based on estimated fair values. Stock-based compensation expense recognized under SFAS 123(R) for 2006 and 2007 was $6.9 million and $7.4 million, respectively. For fiscal 2005, stock-based compensation expense of $563,000 had been recognized under previous accounting standards. See Note 2m to our Consolidated Financial Statements for additional information.
 
Upon adoption of SFAS 123(R), we began estimating the value of employee stock options on the date of grant using a Black-Scholes model. Prior to the adoption of SFAS 123(R), the value of each employee stock option was estimated on the date of grant using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (“APB 25”) and the Black-Scholes model for the purpose of the pro forma financial information provided in the notes to the financial statement in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (“SFAS 123”).
 
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The determination of fair value of stock options awards on the date of grant is affected by several factors including our stock price, our stock price volatility, risk-free interest rate, exercise price, expected dividends and employee stock option exercise behaviors. If such factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period.
 
Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Our estimates for estimated future tax rates could be adversely affected by earnings being lower than anticipated in countries where we have different statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or interpretations thereof. In addition, we are subject to the continuous examination of our tax returns by the local tax authorities in each country that we have established corporations. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for deferred taxes. In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized under SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as de-recognition, interest and penalties, and disclosure. On January 1, 2007, we adopted FIN 48. The initial application of FIN 48 to our tax positions had no effect on our Shareholders’ Equity.
 
Contingencies and Other Accrued Expenses

We are from time to time involved in legal proceedings and other claims. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. We have not made any material changes in the accounting methodology used to establish our self-insured liabilities during the past three fiscal years. A determination of the amount of reserves required, if any, for any contingencies and accruals is made after careful analysis of each individual issue. The required reserves may change due to future developments, such as a change in the settlement strategy in dealing with any contingencies, which may result in higher net loss. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.
 
Results of Operations
 
The following tables present our total revenues attributed to the geographical regions based on the location of our customers for the years ended December 31, 2005, 2006 and 2007:
 
   
2005
 
2006
 
2007
 
   
Total
     
Total
     
Total
     
   
revenues
 
Percentage
 
revenues
 
Percentage
 
revenues
 
Percentage
 
   
In thousands
 
Of sales
 
In thousands
 
Of sales
 
In thousands
 
Of sales
 
Israel
 
$
1,271
   
0.7%
 
$
863
   
0.5%
 
$
861
   
0.4%
 
North America (including the United States and Canada)
   
29,564
   
16.7%
 
 
25,047
   
13.8%
 
 
32,767
   
13.9%
 
Europe (excluding Russia, Romania, Italy and Spain)(1)
   
40,341
   
22.8%
 
 
39,903
   
22.0%
 
 
57,985
   
24.5%
 
Russia
   
11,278
   
6.4%
 
 
9,517
   
5.2%
 
 
10,277
   
4.3%
 
Romania
   
6,628
   
3.7%
 
 
13,438
   
7.4%
 
 
10,114
   
4.3%
 
Italy
   
6,565
   
3.7%
 
 
10,771
   
5.9%
 
 
13,269
   
5.6%
 
Spain
   
10,678
   
6.0%
 
 
14,563
   
8.0%
 
 
13,767
   
5.8%
 
Africa
   
25,924
   
14.7%
 
 
22,904
   
12.6%
 
 
26,609
   
11.3%
 
Asia
   
11,732
   
6.6%
 
 
13,731
   
7.6%
 
 
19,942
   
8.4%
 
Latin America (excluding Mexico)(1)
   
18,156
   
10.3%
 
 
22,834
   
12.6%
 
 
42,325
   
17.9%
 
Mexico
   
14,790
   
8.4%
 
 
8,023
   
4.4%
 
 
8,657
   
3.6%
 
   
$
176,927
   
100.0%
 
$
181,594
   
100%
 
$
236,573
   
100%
 
 
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(1) We have listed Russia, Romania, Italy, Spain and Mexico separately within this table because they were each above 5% of our total revenues during at least one of the last 3 years. The following tables set forth, for the periods indicated, selected items from our consolidated statement of operations in U.S. dollars in thousands and as a percentage of total sales:

   
Year Ended December 31,
 
   
2005
 
2006
 
2007
 
   
(In thousands)
 
Sales
 
$
176,927
 
$
181,594
 
$
236,573
 
Cost of sales
   
85,817
   
80,410
   
114,099
 
Write-off of excess inventory and provision for inventory purchase commitments
   
7,338
   
9,472
   
4,762
 
Gross profit
   
83,772
   
91,712
   
117,712