KEY POINTS:

We reduce our 12-month price target from $12 to $11, based on a target market cap of $715M, assuming soon-to-be 65M shares. Net of $148M cash, that equates to an enterprise value of $567M, or a 1.5x multiple to our 2009 revenue estimate of $377M. It is also an 18x multiple to our 2009 pre-tax profit estimate of $32M, plus the $148M cash.

At 3GSM (Mobile World Congress) in Barcelona in February, ALVR was at the center of showing off the impressive WiMax ecosystem. Our global WiMax deployment thesis continues to play out with clarity and conviction in almost every country, held back only by insufficient privatization of spectrum and restrictive regulations surrounding its use, in our view. WiMax is rapidly starting to compete with DSL and other wired technologies as the primary access method to rich Internet experiences. In our opinion, ALVR is the leading pure play on this global WiMax "tsunami."

One of the most impressive things we saw at 3GSM was how well built-out the WiMax ecosystem is, especially on the CPE (Consumer Premise Equipment) side-this means modems and PC cards. We believe that Alvarion and Intel have been at the center of this standardization and consumerization process for the last couple of years and that it is now bearing fruit, with CPE costing almost as little as WiFi gear. It is not as cheap as WiFi, of course, but close enough and significantly less than previous broadband wireless gear based on proprietary technologies or GSM/HSPA and CDMA/EV-DO. Of course, we believe LTE is years away from a meaningful existence.

Many other chip- and system-level companies have worked to enable this level of consumer readiness for WiMax recently. The list of WiMax chip companies, base station companies, and CPE gear makers is very long, and we will not attempt to list all of them here. The point is that WiMax is now at a level of consumer readiness that we believe is very impressive and can scale to millions of users in 2008 and beyond with very inexpensive equipment, requiring no operator subsidies, and not so economically burdensome if subsidized. There are many public and private WiMax plays out there on the chip, systems, and other levels, and we like many of them because they are exposed to what we consider to be an underestimated market in terms of its global impact with probably billions of users in coming years as it becomes the "Mobile DSL" for the next few billion people.

DISCUSSION:

WiMax has become the dominant 4G technology globally, serving many diverse needs from backhaul to enterprise access, residential access, and soon laptops and, by 2009-10, in large volume, handsets. We believe that WiMax is an ideal complementary technology to WiFi and that these two technologies will prosper in concert, assuming a balanced availability of spectrum on both the licensed and the unlicensed sides. We believe the most significant limitation on WiMax (and WiFi) potential over the long run continues to be insufficient privatization of spectrum and restrictive regulations on its use.

For WiMax to achieve its potential, our opinion is that governments in all geographies need to read their Adam Smiths and Milton Friedmans and learn a thing or two from the playbooks of Margaret Thatcher and Boris Yeltsin-privatize! We believe WiMax cannot reach its full potential when operating in thin slices of spectrum, when companies such as Verizon are pulling fiber to the premises, promising dedicated gigabit speeds to each home over time. In addition, just as WiMax needs more spectrum allocated to it-such as 3.5 GHz in the United States-WiFi also ought to be allocated more spectrum because it is taking on a most-important task with WiFi telephony based on UMA in the near term. We believe that the UMA-enabled dual-mode GSM/WiFi BlackBerry 8320, 8820, and 8120 are the critical transformative products for this market.

We believe Alvarion is well positioned to benefit from numerous drivers in wireless broadband: WiMax, WiFi, backhaul, fixed-mobile convergence (FMC), and with innovative carriers on multiple continents. Thus far, we believe it is clear that Alvarion has executed the best on these WiMax-centric opportunities among the world's system-level equipment suppliers.

We believe the global WiMax opportunity is substantial. We believe there are probably close to 1,000 operators who will spend anywhere from $10M to well over $100M each, rolling out WiMax-again, perhaps in many cases in conjunction with WiFi-over the next two to four years. That is therefore a market opportunity of $10B-100B+, in our opinion. If Alvarion plays its cards right, and there is no extreme overinvestment in this area, we believe it could achieve 5% or more share in this timeframe. That could mean revenue of $500M- 5B for Alvarion. Alvarion already has 225 commercial WiMax deployments, and if each of them spends only $10M; this alone implies $2.25B. In other words, we believe the macro market size opportunity suggests that Alvarion could see upside to our estimates a couple of years into the future and beyond.

We believe Alvarion is a key thematic investment in our industry thesis, focusing on the joint WiFi-WiMax deployment model and with FMC as a key driver when cell phone companies and others punctuate the inefficient wireless telephony architectures for a majority of all calls made and received.

When Sprint and Clearwire launch their WiMax network, expected this year, we believe it will be initially a competitor to DSL, cable modems, and T-1 lines, with the added benefit of having limited local mobility.

We believe the laptop makers will be embedding WiMax chips in late June, preceding Clearwire's first market launch in Portland, Oregon, in 3Q.

Because of the 2.5-2.7 GHz spectrum depth, in combination with the flat-IP, wide-channel, low-latency properties of WiMax, we believe the combined joint Sprint/Clearwire assault on the combined wired and wireless access markets, represents arguably the most important outdoor infrastructure build in many years, from a competitive landscape perspective.

Sprint is set to launch WiMax in its first three markets this summer:

Washington, D.C., Baltimore, and Chicago. We believe it will do so utilizing three different CPE devices: PC card, indoor modem, and indoor modem/router/ WiFi combo. We now believe that in late June, the major laptop makers, such as Dell, Lenovo, and HP, will make embedded WiMax modules available in many laptop models. These laptops will have three antennas built into the display lids, serving not only WiMax, but also 802.11n WiFi and either EV-DO or (more common over time) HSPA which evolves into LTE in the next decade.

We believe the largest misunderstanding with WiMax is with respect to its competitive positioning. We are under the impression that most market observers seem to think that WiMax has as its primary goal to be the replacement for GSM and CDMA cell phones. If this were indeed true, we would have to agree with the skeptics, pessimists, and naysayers in that such a goal would be difficult to achieve and take a long time to pursue at that.

We believe WiMax will succeed for different reasons, and it is all about sequencing the competitive market positioning. As we wrote originally in June 2006, it is all about viewing WiMax as a four-stage rocket:

1. Enterprise and backhaul.
2. Residential self-install.
3. Laptops (cards and embedded).
4. Handhelds.

Stage 1 already happened with broadband wireless in recent years, and Clearwire largely skipped it. Sprint also looks to be skipping it.

Still, we believe there is much more potential to this stage. In particular, we view WiFi backhaul and T-1 replacement and redundancy as major high-margin markets that companies such as Sprint and Clearwire ought to pursue. Depending on the spectrum acquisition cost, we believe there is a business case to be made for WiMax solely on these particular kinds of markets, and we believe many operators are or will be pursuing variants of this in the unlicensed 3.65 GHz band.

Stage 2 has been pursued by Clearwire and others in pre-WiMax form for at least a couple of years. With the standardization and the low-cost ecosystem it provides, as well as the coverage potential of Sprint/Clearwire assuming additional multibillion-dollar funding from Google/Intel/Comcast et. al., this now takes on a whole new dimension. WiMax's main mission in the very near term (2008-2009) will be to take on DSL and cable modem service for residential broadband. It would essentially offer limited/local mobility as a key competitive weapon, serving real estate agents, other local-oriented businesses, students, and other individuals who simply appreciate the flexibility associated with portability. In addition, many households simply do not like the incumbent DSL and cable TV providers, being willing to try any alternative even though the price may be higher and the performance lower.

Stage 3 will, in the standardized mobile WiMax (802.16e) world, occur essentially simultaneously as stage 2, as is evident from the discussion above. Frankly, we are not convinced that apart from various funding efforts (Clearwire et. al.), Intel is even that instrumental in making this happen, from a technological and standards perspective. Amazing as it may have sounded two or even one year ago, the Taiwan-centric WiMax chip and box/device makers have already achieved a broad ecosystem of low-cost PC cards and similar devices suitable for laptop users. In our estimation, the cost of these PC cards and similar forms of CPE are already below half that of the equivalent HSPA and EV-DO devices, perhaps as little as one-third-and that is before mass production has started. We believe this presents an attractive contrast in particular to Sprint, which operates its current EV-DO network based on expensive QUALCOMM-based gear, but now can buy far cheaper WiMax equipment and make it available to far broader groups of users.

Stage 4, we believe, will take some time, probably late 2009 at the earliest. This stage requires several difficult-to-achieve characteristics where we believe WiMax will have an uphill battle for some time, but which can be achieved at some point- we guess in 2010. First is coverage. This can be obtained by either an amazingly complete WiMax build-out, which is unlikely to happen until late 2009 at best, or through dual-mode chip handsets, with GSM or CDMA for voice. Such dual-mode devices are certain to be bigger, costlier, and more expensive to operate, compared to the GSM/HSPA evolution devices and, therefore, unattractive. This leads us to the second problem with WiMax handsets, and that is that these devices are now hyper-competitive fashion statements, with the bar for the speed and sophistication of development being increasingly high. Only a few companies-Nokia, Research In Motion, Samsung, LG, HTC, Sony Ericsson, and Motorola-come immediately to mind in terms of being able to pull this off across a broad range of devices today, and even many of them are, in turn, struggling because of an inability to keep up with the cutting-edge fashion. Only if WiMax obtains first-class support in those brands in terms of being designed into the "sexiest" handsets and released as early as the GSM versions, do we believe WiMax will "have a prayer" in this category. We do not look for this to be achieved in 2009, but potentially in 2010.

It should be evident from our discussion, that we believe the full case for WiMax needs to be made for stages 1-3, and that achieving stage 4 would be gravy if and when it happens. The good news here is that we believe stages 1-3 will be highly successful for WiMax carriers. We believe it is essentially the DSL for the next few billion people, with a potential to be competitive for the handheld as well.

Recently, people have been asking: What about LTE? Isn't LTE going to win and WiMax lose? Our answer is NO! We believe there is a role for LTE as the natural evolution of GSM/HSPA-and probably also CDMA/EV-DO-but we believe it is years away. As such, it contrasts sharply with WiMax, which is being deployed today and for which spectrum has already been made available. WiMax already has an ecosystem which looks a lot like WiFi in terms of cost and diversity, whereas LTE simply is not even defined yet, much less available.

Numerous technical claims are being made about LTE (vs. WiMax), but we view them all as fantasy until real product has been field tested and deployed. We believe 2010 could see initial LTE deployments. In our view, we could see the first 100 million WiMax customers worldwide, before the first commercial LTE customers are brought on board.

RISKS TO PRICE TARGET:

Alvarion faces stiff competition from BWA (including WiMAX) companies, 3G (EV- DO and HSDPA) companies, and landline broadband companies.

Dramatic price reductions from any of these markets could hurt Alvarion and its customers enough to dry up some of the BWA market. Furthermore, failure to achieve product or sales goals, possibly due to delays in the standardization/ certification process, may impact the stock price. The company also faces equity market risk with the potential for an increase in U.S. corporate taxes, capital gains taxes, and personal income taxes that may apply in 2009 and beyond. Continued increases in government spending could also force further tax increases, printing of money yielding inflation, in turn inducing more regulations, which would disturb the free-market economy, lowering equity values. This is an example of the high level of political risk associated with doing business in the United States in an election year where candidates for the highest offices of the land are also proposing increases to corporate income taxes, capital gains taxes, and income taxes for the owners of corporations. Additional political risk comes from the potential for more regulations, more power to the trial lawyers, and a generally anti-business climate coming from political candidates for office who are hostile to free- market capitalism.

COMPANY DESCRIPTION:

With more than two million units deployed in 130 countries, Alvarion is the worldwide leader in wireless broadband, providing systems to carriers, ISPs, and private network operators, and in full GSM and CDMA specialized network solutions and cost-efficient cellular mobile network extensions. We believe that Alvarion is driving the broadband wireless market to the widespread adoption of standards-based, fixed, and mobile solutions. With over a decade of standards leadership and the industry's most-extensive product portfolio covering the full range of frequency bands, in our view, Alvarion provides solutions primarily for last-mile access. Other applications include voice and data backhauling, cellular feeding, cellular network extensions, community interconnection, public safety communications, and private network connectivity.

We believe that with the launch of its WiMAX-ready BreezeMAX™ platform in June 2004, Alvarion secured its position in the next generation of broadband wireless access. As a charter board member of the WiMAX Forum™, and with top seats in other technology organizations, Alvarion appears to be at the forefront of the evolution in the wireless broadband market. Alvarion provides solutions in the widest range of licensed and unlicensed frequency bands and addresses many end-user profiles, large and small, residential and corporate. In all of these markets, Alvarion has engineered industry-leading products such as BreezeACCESS(r), with its superior NLOS (non line-of-sight) and OFDM capabilities, and the WiMAX-ready BreezeMAX product line, based on IEEE 802.16/ ETSI HiperMAN standards, to create carrier-class and standards-based solutions. Alvarion is a global organization, with a local presence in 23 countries, and is headquartered in Tel Aviv, Israel.

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