CERAGON NETWORKS, LTD. & CASTELLE

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Hello Readers and 2006,

Since the last Newsletter, we have closed four more positions, two for gains and two for losses.

NEON SYSTEMS (11/20/05). Closed position 12/29/05 at $6.16 for a 58% GAIN.

IBIS TECHNOLOGY (8/20/05). Closed position 12/28/05 at $3.00 for a 56% GAIN.

GOREMOTE (5/5/04). Closed position 12/28/05 at $1.65 for a 45% LOSS.

NET2PHONE (11/5/04). Closed position 12/28/05 at $2.05 for a 41% LOSS.

In the last Newsletter we didn’t think much would happen with our Current Portfolio, but we did receive several nice gifts over the holiday. Once again, acquisition contagion struck another one of our picks as Progress Software launched a takeover of Neon Systems at $6.20 a share. Ibis Technology was at $1.31 two weeks ago and roared to $3.00 for reasons that seem unforeseen at this time, so, we’ll take the 56% gain. Both GoRemote and Net2Phone appear to be almost acquired by their respective buyers, so, it is time to let them go, also.

If there is one word to describe the 2005 markets, that word would be “sluggish”. The Dow finished about even, NASDAQ was up only a few percentage points, and small stocks, which outperformed most others, only grew to about the size of a toad’s wart. The last two weeks of trading was a microcosm of the last year with wild swings in the markets and a final nose-dive during the end week of December, which was dominated by, what else, oil price and interest rate fears. This mood spilled over into our own Current Portfolio.

What about 2006? Answer that one with a question: Has oil spiked and have interest rates almost leveled out? If yes, we should have a pretty good year, barring global disturbances.

Here are the headlines since the last Newsletter about companies in the Current Portfolio. Dates in parentheses are when we first recommended them.

Napster (NAPS) (11/20/05). Mentioned in several articles at various sites.

Memory Pharmaceuticals (MEMY) (11/5/05). Releases pretty good results from the Phase 1b trial on MEM 1003 in Alzheimer’s patients; and Stanley Medical will help further development of the drug for bipolar disorder.

Dyadic (DIL) (9/20/05). Restructures agreement with TNO Quality of Life.

EntreMed (ENMD) (9/5/05). Company plans to acquire Miikana Therapeutics for $21.2 million, which, of course, may depress stock value for bipolar disorder.

Zi Corp (ZICA) (8/5/05). Sells Oztime subsidiary to Archer Education Group. Virgin Mobile trail data shows boost in mobile usage with ZICA’s Qix software.

N.A. Scientific (NASI) (8/5/05). Slates earnings call for January 9.

CDC Corp (CHINA) (7/20/05). Makes unsolicited offer to buy a majority interest in Onyx Software, which Onyx said it would consider. Since CDC’s stock hasn’t tanked on the news, investors seem to be greeting this positively.

Innodata (INOD) (7/5/05). Names new CFO.

Telecommunication Systems (TSYS) (6/20/05) Deploys VoIP E9-1-1 in Maryland, Virginia, and Pennsylvania.

Sirenza Microdevices (SMDI) (6/5/05). Stock price gets a nice lift as company boosts 4th QT sales outlook.

Exact Sciences (EXAS) (5/20/05). Gets a real nice plug in an article at the Motley Fool site.

Verticalnet (VERT) (4/5/05). Announces newest reseller partner relationship, Management Toolbox of New Zealand.

AEHR Test Systems (AEHR) (3/20/05). Schedules earnings call for January 5.

Applied Micro Circuits (AMCC) (11/20/04). Joins wi-fi alliance. Several releases about products.

Aviza Technology (AVZA) (10/5/04). Slates FY2006 outlook call for January 5.

Management Network Group (TMNG) (4/20/04). Teams with S3 to migrate enterprises to Internet protocol networks.

Palatin (PTN) (4/5/05). Finally recalls NeutroSpec, but stock hasn’t plunged on this setback, which seems strange.

NexMed (NEXM) (4/5/04). We’re placing this on the “Endangered List” as a brokerage firm downgrades the stock and the CEO departs.

OpenTV (OPTV) (3/20/04). Company’s Core Middleware to be deployed by Vestel, a set-top box manufacturer.

Actuate (ACTU) (1/5/04). Sets earnings call for January 31. Inks partnership with Quantum Secure.

Active Power (ACPW) (11/20/03). Announces first CoolAir DC sale.

Art Technology (ARTG) (8/5/03). Selected by Clarke American to power new e-commerce site.

Tripath (TRPH) (8/5/04). Moved from the Pink Sheet to the Bulletin Board. Whoop! This one’s on the “Endangered List”.

Our picks for the beginning of 2006 area equipment provider to the wireless market and a maker of networking devices; both trade on the NASDAQ.

CERAGON NETWORKS LTD. (NASDAQ: CRNT) – $3.80. Twelve-month hi-low has been $6.90 – $3.40. Based in Tel Aviv, Israel, with about 260 employees, this equipment maker has 26.3 million shares outstanding, $55.33 million in total current assets, $74.43 million in total assets, and $18.9 million in total liabilities. Institutional ownership is around 24%. Two analysts give the stock a “strong buy” and one a “moderate buy”. www.ceragon.com

Over the years, we’ve had pretty good successes with Israeli companies. Although the stock price of Ceragon Networks Ltd. is pricier than we would like, the balance sheet looks good and the company actually has been making money.

Founded in 1996, and formerly known as Giganet, Ceragon, which bills itself as a leader in the global wireless infrastructure market, develops and sells broadband wireless network equipment for cellular operators, fixed operators, and private networks and enterprises such as universities, financial institutions, corporate campuses, governments, and hospitals. The company’s products include a compact antenna, an outdoor unit, and network management protocol (SNMP)-based network management software. These products operate over multiple frequency bands of up to 60 gigahertz, including frequencies licensed by various countries for use by end customers.

Ceragon claims its FiberAir product family is a breakthrough in the wireless point-to-point market, combining spectral and hardware efficiency, modularity, flexibility, and upgrades in a single compact 1U system. CRNT’s network elements operate across multiple frequencies, support integrated ultra high-capacity services over ATM, IP, and SDH/SONET networks, and offer built-in add/drop multiplexing and encryption functionality. The FiberAir product family is installed with 150 customers in more than 60 countries.

In early December, Ceragon announced that the Netherlands’ Veratel has deployed the company’s radios to expand and enhance its Ethernet data network and provide triple play broadband services. In late November, CRNT released its FiberAir 1500HP, a next generation long haul wireless system.

For FY2004, ending 12/31/04, revenue was $54.8 million with $1.61 million in net income. During the first nine months of FY2005, ending 9/30/05, revenue was $53.66 million with $2.62 million in net income. A major drag on current stock price may be from the company recent announcing that it will take a $6.7 million to $7.2 million inventory write-down charge in the 4thQT of FY2005.

The write-down appears to be a minor speed bump. Ceragon’s revenue growth over the last few years seems to indicate where the company is headed.

Our 24-month target for the stock is $7.00 to $8.00.

For more information, contact CRNT’s Verad Shaked at +972-3-6455733; ir@ceragon.com

CASTELLE (CSTL) – $3.10. Twelve-month hi-low has been $5.04 – $2.57. Located in Morgan Hill, CA, with about 45 employees, this maker of networking devices has 4 million shares outstanding, $9.02 million in total current assets, $10.64 million in total assets, little debt, and $2.5 million in total liabilities. Institutional ownership is around 9%.www.castelle.com

Sometimes we happen upon a small company that has both a nice-looking balance sheet and has been making money quarter after quarter. So, we add to the Current Portfolio, Castelle (no Inc. or Corp. after it, just Castelle).

Founded in 1987 and public for about ten years, Castelle makes and sells office automation systems that allow faxing over local area networks (LAN) and the Internet. The company’s two fax server product lines are FaxPress and FaxPress Premier, which the company says offer every possible computer-based network fax option such as desktop PC faxing, production faxing, fax and email integration, workflow application integration and tools for developing customer fax applications. FaxPress Premier, which is the newest addition, is an advanced network fax solution with enterprise-level capabilities.

Castelle sells its products through a worldwide network of distributors, value-added resellers, systems integrators, and ecommerce retailers. Some of their corporate partners include 3Com, Adtran, Cisco, Intel, HP, IBM, Microsoft, Novell, Ricoh, Xerox, Minolta, and Inter-Tel.

In October, Catch Curve granted Castelle a license to its AudioFax patent portfolio; while non-exclusive, the license is perpetual. At the end of September, the company introduced its FaxPress Premier 4.0 software. Also, a recent industry report from Davidson Consulting said that Castelle is now seventh in the overall global fax market; it was tenth the previous year. Around this time, CSTL was named to the FORTUNE Small Business 100 List of America’s Fastest Growing Small Companies; it was ranked 50th.

For FY2004, ending 12/31/04, revenue was $10.45 million with net income of $2.11 million. During the first nine months of FY2005, ending 9/30/05, revenue was $8.14 million with $699,000 in net income.

To be blunt, there isn’t too much that is overly sexy about Castelle except that it has consistently been making money over the last year, and we have to think that FORTUNE doesn’t take its list too lightly.

Our 24-month target for the stock is $5.00 to $5.50.

For more information, contact CSTL’s Karin Smith at 408-852-8100; ksmith@castelle.com

Look for the January 20, 2006 Newsletter to be posted on 1/16 or 1/17.

Happy New Year,

George

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